Underground Economy
The size of South Korea’s underground economy, which doesn’t include in official statistics of the nation's gross domestic product (GDP), is estimated at 161 trillion won (US$143.62 billion) a year. It is equivalent to 10 percent of the nation’s GDP, much higher than the Organization for Economic Cooperation and Development (OECD) average.
Kim Jong-hee, a professor of Economics at Chonbuk National University, conducted a study about the size of the underground economy and tax evasion of 26 member states of the OECD from 1995 to 2014. According to the study, the average annual scale of the shadow economy in South Korea over the last two decades reached 161 trillion won (US$143.62 billion). The figure is the largest with an average of 10.89 percent of the GDP, among OECD member countries. It far exceeds the average 6.65 percent of G7 countries, such as the U.S. and Germany, as well as the 7.66 percent for the other member states. Only some Eastern Europe countries, including Slovakia and Poland, and Southern Europe countries, such as Italy and Greece, has larger black market than Korea.
The amount of tax evasion stood at an annual average of 55 trillion won (US$49.06 billion) in the last 20 years, 3.72 percent of the GDP. The figure was also higher compared with 2.21 percent for the G7 and 2.82 percent for the average of OECD member states during the period, according to the paper. It means that the equivalent amount of value added taxes, which reached 54.2 trillion won (US$48.35 billion) last year, was evaded every year.
The underground economy was estimated using the multiple indicators multiple causes (MIMIC) model, based on causal variables, including income tax, payroll tax, indirect tax, tax morale, employment rate, the number of self-employed, law observance, and indices, such as cash circulation, per capital real GDP and percentage of labor force.