The dynamics of parallel economies: Measuring the informal sector in Uzbekistan

An issue largely ignored in the past: the existence of a large informal economy has lately come to be openly acknowledged by the authorities. Renewed interest in unregulated economic activities is because an increase in the size of the informal economy may hinder economic growth and generate a loss in revenues for the government budget. This study creates a novel dataset for the parallel economy in Uzbekistan from 1990 to 2017 using a two-sector Dynamic General Equilibrium model. The size of the parallel economy is estimated with the help of several macroeconomic variables and parameters calibrated to fit the country profile of Uzbekistan. National accounts data for Uzbekistan is obtained from the Penn World Table of the University of California and the University of Groningen. The model has the edge over other approaches in that it has micro-foundations, for it is constructed on the consuming behavior of the household and its interaction with the government; thus, the adjective ‘two-sector’ is used. In the first stage, the contextual need for this study is presented and informs the reader about the scope of the issue. Secondly, we employ descriptive statistics to illustrate the tendency and movements of the parallel economy; we also deploy sensitivity analyses with calibrating the values of parameters to explore different economic scenarios.