Big Data and Satellites Reveal the World’s Informal Economies

(Bloomberg) --

Zimbabwe’s economy has absorbed a series of crushing shocks over the past two decades, from land reform and hyperinflation in the 2000s to electricity shortages and a currency crisis in more recent years.

Those massive policy disruptions made the southern African country one of the most informal of all the world’s economies, spanning all sectors, according to International Monetary Fund economist Frederico Lima. It also makes it a promising case study for how to use big data and satellite imagery to get a better read on what’s really happening in the economy beyond what official government statistical data show. He’s also researching payments data such as mobile money transfers and how to capture illegal mining production.

Combining traditional indicators with new data sources including satellite imagery, Lima estimates that official gross domestic product statistics in Zimbabwe somewhat underestimate the level of economic activity, and they overestimate the contraction and recovery cycle of the 2000s. The analysis has helped benchmark official data, including a recent GDP re-basing by the government, he told a gathering of economists and government statistical officials from around the world at the IMF Friday.

The researchers are gathering at the fund’s headquarters in Washington this week to take a harder look at how new sources of data and tools for analysis can better track the shadow economy, from informal jobs to drug trafficking.

The research is important because many governments confront challenges in measuring informal activity, leaving policy makers dependent on unofficial estimates, IMF Managing Director Kristalina Georgieva said in opening remarks to the gathering. She cited fund research showing that the informal economy accounted for about 38% of sub-Saharan Africa’s GDP during 2010–2014 and as many as 90% of jobs in some countries.

“Informality results in lower tax revenues that hinders the government’s ability to spend on social programs and investment,” Georgieva said. “This means the individuals that are most in need of social programs and of public infrastructure may not receive them.”

Erick Rangel-Gonzalez, a researcher at Mexico’s central bank, said one advantage of using satellite data is that it can be used to map economic activity by geography, underscoring the point by showing a map of the country that highlighted how nighttime lights cluster around the sprawling capital and in Monterrey and Guadalajara.

He presented preliminary findings that the size of the non-registered economy in Mexico equals about 25% of GDP -- based on night lights and using the U.S. as a reference -- and 29% when using the state of Nuevo Leon as a benchmark. He said the estimates used data drawn from imagery recorded by the U.S. National Oceanic and Atmospheric Administration, which the agency had cleaned up and processed to show human activity by removing thunderstorms, fires, and reflections on water.

Despite the promise of new forms of measurement, there are hurdles, too, including their lack of history and rapidly-evolving methodologies and changing technologies. The main obstacle, however, is cultural, as some officials have become accustomed to using traditional measures, according to Ricardo Valencia Ramirez of Colombia’s statistics agency.

“People are a little afraid of going out and giving a look to the mobile or street economy as we don’t have a formal statistical framework,” he said. “It’s hard, but that doesn’t mean we don’t have to do that. We have to give a direct look to the informality.” He added that many questions remain and that it’s far too soon to say we have all the answers.

The informal economy consists of those who don’t have formal jobs but engage in some form of monetary economic activity, such as street vendors or rideshare drivers, according to Liu Nan, director of the GDP division at China’s National Bureau of Statistics. Informal doesn’t mean illegal, she said.

In the world’s second-largest economy, she said in a presentation, informal usually means small scale, less capital and technology, unstable employment and lack of social welfare protections, and unregistered with regulators. In accounting for informal activities, she said observable work gets “full consideration in China’s national economic accounting,” but the unobservable will be the subject of “future efforts.”

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