Size of underground economy estimated at 11.3 percent of GDP

The size of the Korean underground economy including the curb money market was estimated at 59 trillion won last year, or some 11.3 percent of gross domestic product (GDP). According to the LG Economic Research Institute Thursday, the size of the underground economy has steadily decreased since 1997, when Korea was hit by a foreign exchange crisis, along with the expanded use of credit cards; however, there are fears that it will grow again as an increasing number of people are looking to the private market for loans amid an economic slump.

The institute said that it had tracked underground business activities for 30 years since 1970 and discovered that the underground economy had reached 59 trillion won or 11.3 percent of GDP last year.

This level is higher than the 10 percent found in leading economies such as Switzerland and the United States, but it is similar to the level in Japan, Britain and Canada, among others. Also it is lower than the 13 percent level for Hong Kong and Singapore, the institute said.

Researchers said that the size of the underground economy, composed of the curb money market and false income statement reports by self-employed persons, reached 27.7 percent in the 1970s, but it fell to 18.3 percent in the 1980s and 15 percent in the 1990s. In 1993, when the real-name financial system was implemented, the percentage briefly shot up to 18.4 percent as people unwilling to make real-name transactions flocked to the curb money market, but it slid again to 15.5 percent in 1996, the institute said.

It attributed the decline to the government`s strengthening of tax investigations, the requirement of global income statements for business firms and the expanded use of credit cards. However, it warned that the size of the underground economy could grow again owing to a corporate financial crunch and the reckless use of credit cards amid an economic downturn.

Park Won-Jae parkwj@donga.com