Share this story
Close X
Switch to Desktop Site

Argentina's underground economy may dig deeper

Argentina's underground economy, already one of the largest in the world, will become even larger with a tax increase recently approved by the Argentine Congress, analysts here say. The legislation aims at raising $3.5 billion to reduce Argentina's public budget deficit from about 8 percent of gross domestic product (GDP) to 2 percent.

But critics say the measure will raise far less than that, because Argentines will avoid paying the taxes by shifting even more of their business transactions beyond government scrutiny.

About these ads

``If Argentines are evading most taxes that already exist, I don't see how the government can expect people to pay the new taxes,'' a tax lawyer says.

Argentina is only one of many Latin American countries that have massive underground, or informal, economies, where people buy and sell goods without paying taxes or observing government regulations.

In Bolivia, Peru, and Ecuador, the informal economies consist of vendors who clog city streets peddling everything from pencils to fruit.

Drug trafficking has also spawned vast - and illegal - underground economies in Bolivia, Peru, and Colombia.

Paraguay's underground economy is sanctioned by the government, which permits goods from all over the world to pass through Puerto Stroessner without restrictions.

Argentina's informal economy dates back to the colonial era, more than 200 years ago, when Spain required Argentina's goods to be transported to Peru before being exported to other countries. To get around this unwieldy arrangement, Argentine traders became avid smugglers.

Today Argentina's informal economy is far more sophisticated. Like Italy's, it operates side by side with the ``real'' economy, which is represented in the official statistics on GDP, employment, and income.

About these ads

Marcos Victorica, director of the Institute for Contemporary Studies, a business-financed think tank, says Argentina's informal economy grew as the government steadily expanded its control over the economy.

This process began in the 1940s and '50s, when President Juan Per'on nationalized dozens of foreign-owned companies in creating a corporatist economy. With successive governments - military and civilian - building upon Per'on's model, Argentina today has one of the most state-controlled economies in the noncommunist world.

The studies institute, which earlier this year did the first in-depth study of Argentina's informal economy, says that the country's actual GDP of some $70 billion is 40 percent greater if nonofficial business activities are counted.

Only 2 out of 5 Argentines work in the regular economy, the report adds.

Of the 60 percent of the work force in the informal sector, the study estimates, 10 percent have undeclared second jobs, 15 percent work without any formal contract of employment, and 35 percent are self-employed workers who have no registered occupation. Workers in the informal economy pay no taxes.

To keep the government unaware of their activities, Argentines pay for services with cash. Many companies keep two sets of books and pay part of their employees' wages in cash.

Mr. Victorica says Argentines don't register their activities officially so as to avoid paying taxes to a government that most people say provides shoddy public services.

``People don't want to pay taxes because they think their money is going to be wasted or stolen,'' he says. ``People believe that they pay a lot more than they get in return.''

The state oil enterprise, YPF, is believed to be the only oil company in the world that regularly loses money. The state railroad, Ferrocarriles Argentinos, loses an estimated $3 million a day.

Meanwhile, power lines short-circuit when the weather is hot, and heating gas often does not flow in the winter. Telephones regularly don't work, and it can take seven years to obtain a new telephone.

``In the United States, people don't like to pay taxes, but they feel an obligation to do so,'' says a Buenos Aires housewife. ``Here, because government services are so bad, we think that only a fool willingly pays taxes.''

President Ra'ul Alfons'in has lately criticized the services of state companies while lamenting that tax evasion has become a national pastime.

He recently noted that cigarette taxes raise more revenue than income taxes.

But he said the government is beginning to crack down on tax evasion by hiring more revenue agents and computerizing its record-keeping operations.

Victorica and others say, however, that tax evasion and the informal economy will remain pervasive until the government improves public services or deregulates the economy.

President Alfons'in has attempted to privatize state companies and introduce measures to improve efficiency and competitiveness in Argentina's economy. But business groups and the country's powerful labor federation have blocked him.

Businessmen fear that deregulation would increase competition and cut profits, while organized labor worries that any changes would increase unemployment among its membership.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.