Laos and Cambodia do not include fraud in their GDP data. Should they? – Diplomat

In 1987, Italy decided to include the proceeds of criminal activity in its national accounts. Overnight, its economy grew by 18 percent, allowing Italy to overtake Britain to become the West’s fourth-largest economy. This event became known as sorpasso (overtaking). Should Cambodia and Laos follow suit?

A report released this year by the United States Institute of Peace (USIP) estimated that the value of Cambodia’s illegal fraud industry is likely to be around $12.5 billion a year, or half of the country’s formal GDP. Although the report does not provide specific data for Laos, calculations can be made. USIP calculated Cambodia’s number by multiplying a conservative estimate of people working in the industry (100,000) by their average daily earnings ($350) and then by the number of days in the year. USIP estimates that 85,000 people work in Laos fraud, representing approximately $10.8 billion, or more than two-thirds of Laos’ formal GDP.

If true, including these numbers in the national accounts would mean Cambodia’s GDP would increase overnight from about $32 billion to $44.5 billion. Laos’ GDP would increase from $14.1 billion to about $25 billion, enabling it to overtake Brunei, meaning it is no longer the smallest economy in ASEAN.

This, of course, raises a moral dilemma. Including the fraud industry in GDP figures would seemingly condone criminal activity. However, this does not stop other countries from doing the same. In fact, the internationally agreed guidelines for national economic accounts, known as the System of National Accounts 2008, recommend the inclusion of illicit market activities in the measured economy. “Activities that may be illegal but economically productive include the production and distribution of drugs, illegal transportation in the form of smuggling goods and peopleand services such as prostitution,” the guidelines state.

Moreover, GDP data for Laos and Cambodia already record many illegal practices. Forced evictions of people from their homes are illegal under Lao law, but many of the country’s largest dams involve land rights violations and their production is included in formal GDP. How much of the mining, brickmaking, construction or manufacturing industry in Cambodia and Laos engages in illegal practices and yet their earnings still end up in the national accounts?

Another argument is that most of the money generated by fraud conglomerates does not go into the national economy; it is laundered around the world and directed back to China. This is true, but the Lao government recently stated that only about one-third of export earnings make their way back into the country through the banking system. Moreover, the local economy continues to benefit from the fraud industry. Many workers are held in servile conditions and are rarely allowed to leave the premises, yet they still have to be fed, probably at local restaurants and markets. Unions pay rent and utilities, and mid-level members of the fraud industry spend their money at local bars.

In fact, the strongest argument for including the fraud industry in GDP figures is that a large part of it must already be included in national accounts. Many of these companies are affiliated with legitimate companies. Just last month, one of Cambodia’s leading tycoons, Ly Yong Phat, and several of his companies were punished by Washington for links to the fraud industry.

I’m a bit joking about including criminal activity in national registries. In many ways, this debate highlights the absurdity of the obsession with GDP and growth. Adding the fraud industry to the national accounts would be a paper exercise; it would change perception, but not reality.

For example, we constantly read that Laos is on the verge of default, as its public debt currently stands at around 130 percent of GDP. In fact, Laos is facing the possibility of default, as I estimate its public debt is approximately 900 percent of government revenues. Laos’ problem is not that its economy is too small; the point is that the government is collecting too little in taxes to pay off its debts – something the IMF and World Bank have repeatedly emphasized, even as they frown on the debt-to-GDP ratio.

If Vientiane increased its tax collection by 30 percent tomorrow, its ability to repay its debts would improve significantly, and yet it would still maintain a debt-to-GDP ratio of 130 percent. Alternatively, Laos could include an $11 billion fraud industry in its GDP figures and suddenly the debt-to-GDP ratio would be 70 percent, which would mean that Laos would be less in debt, and yet nothing would change in terms of its ability to Vientiane to repay the loan.

Phnom Penh may decide tomorrow to include its fraud industry in its GDP. Already in January, he could boast that the economy had grown by over 70 percent this year. This would make Cambodia the fastest growing economy in the world. Perhaps the ruling Cambodian People’s Party would be happy with the optics, but probably not.

Let’s assume USIP is right and Cambodia’s fraud industry is worth $12.5 billion a year. Phnom Penh may already be counting on this, raising unwelcome questions about how much the shadow economy is actually worth. If, say, one third of the fraud proceeds Already included in the national accounts because formal enterprises are paid by fraudsters or launder their money, wouldn’t this mean that Cambodia’s non-crime economy is actually a third smaller than currently believed? Counting the remaining two-thirds would mean that fraud is the largest industry in Cambodia, far exceeding clothing production and tourism. Phnom Penh is therefore encouraged not to look too closely at this issue, even if it means deliberately underestimating the true size of the overall economy.