The Irregular Economy in Systemic Transformation

Abstract

Although it already existed in Central and Eastern Europe during Soviet times, the irregular economy has boomed in the last dozen years, while undergoing a dramatic change of structure. This boom has sometimes been used to justify the claim that ‘transitional depression’ has been grossly overestimated and, consequently, that growth rates have been underestimated. This paper presents some quantitative estimates in different countries, including Russia. The data show a remarkable difference in the size of the irregular economy in different countries, which calls for explanation. The paper warns against the easy conclusion that the large size of the irregular economy is a synonym for bad official statistics. This warning is then translated into a statistical exercise applied to Hungarian data that offers an evaluation of statistical underestimation and its consequences for growth rates.