The shadows are growing longer

Some call it the ghost economy; others refer to it as the informal sector. Whatever name one chooses to address this booming sector of the national economy, the specter is gaining size every day.
In the past few years, there has been a marked shift of incomes from urban to rural segments. Coupled with rampant corruption and scrupulous dealings in the public and private realms, this income shift has mushroomed the size of the informal economy in recent years.
The need to document this sector cannot be over emphasised and warrants some serious attention from the Government, especially the Federal Bureau of Statistics, the Ministry of Finance and the State Bank of Pakistan. Unfortunately, there has been little progress on this front. The government has not even managed to conduct any research to gather an approximation of the quantum of undocumented economic activity in the country. The only clue comes from a study by SBP conducted some years back, which ball parked the size of the informal economy at half of the formal economy.
At present, the documented economy of Pakistan is worth about $200 billion and is growing at a real pace of 3-4 percent. On the other hand, the informal economy is worth about $120-140 billion. Booming consumerism in the country prompts that the growth rate of this sector is at a much strong 5-6 percent.
Collectively, this implies that the total economy is growing by about 15 billion dollars a year, after being adjusted against inflation. This growth is in spite of the stifling energy deficit and volatile law and order situation in the country.
The double-digit volumetric growth in the consumer segment listed companies augments this argument. Look no further than the fact that there are more people buying cars on cash than those paying through cross-cheques.
The war economy has also played a major role in fueling the informal economy. Foreign exchange dealers reveal that about 10 million dollars change hands on a daily basis in Peshawar alone. The money trail flows up and down GT Road which is used by more than two million, unregistered luxury cars that have been smuggled into the country. The scores of billboards advertising international consumer brands, marriage gardens and food chains also bear testament to the inflow of cash to the region.
This large parallel economy partially explains the dichotomy in macroeconomic variables and endorses the skeptics on the authenticity of officially reported numbers. The answers to quarries like inflation in single digit, sharp depreciation of rupee in contrast to relatively less fall in foreign reserves are to be found in the heap of the black economy.
Low tax collection is matched by high philanthropic activities both by individuals and businesses. Chhipa Welfare Trust alone feeds more than 80,000 people every day in Karachi. There is a strong historic Baradari system running in rural segments. Business communities insure each others personal wealth and businesses. Aarthis, banyas and Pathan lenders run informal lending systems with low delinquencies despite charging exorbitantly high interest rates.
Informal sector has evolved alternatives to Government too. In small villages and towns and in the metropolis of Karachi; elites use their influence to offer their own resolutions to land, water and property disputes. Extortionists in Karachi have grown from small time thugs to brokers between utility companies and their clients who prefer to pay off thugs over paying their dues. Panchayats, Jirgas and Sardars in the villages pass judgments where the legal system appears non-existent.
Summarily put, the parallel economic and social system may be inefficient but it is clear that there is a huge segment of the population that relies solely or predominantly on it.
Documentation of these booming enterprises and establishing the writ of the law of the land over that of fiefdoms is direly needed. However, policy makers have the additional challenge of formulating strategies that bring these sectors into the formal fold, without inciting wide spread social upheaval.