[THE INVESTOR] The size of South Korea’s underground economy in 2014 is estimated at 161 trillion won ($143 billion), or nearly 11 percent of the nation‘s gross domestic product, a report showed Monday.

According to a research paper which analyzed the underground economy and tax evasion in 26 Organization for Economic and Cooperation Development countries, Korea’s shadow economy is, on average, bigger than 25 of its OECD peers.

Between 1995 and 2014, Korea’s underground economy, on average, made up 10.89 percent of the country’s GDP. In 2014 Korea’s GDP stood at 1.4 trillion won. 




This far exceeds the underground economy average of 6.65 percent for the Group of Seven countries and 8.06 percent for the remaining 18 OECD members.

The underground economy refers to business and economic activities that are not covered by official economic statistics. In Korea, the scale of tax evasion amounts to 55 trillion won, or 3.72 percent of the GDP, the paper said. This compares to 2.27 percent for G7 countries and 3.06 percent for the 18 other OECD countries between 1995 and 2014.

“Underground economic activities induce tax dodging, leading to fiscal deficits and tax hikes for key economic actors to make up for the uncollected taxes,” Professor Kim Jong-hee of Chonbuk National University, who conducted the research, said in the paper. “It also raises the social cost because the government has to take action against such activities.”

The scale of the underground economy and tax evasion was estimated based on indices including taxation, employment rate, the number of self-employed people, money circulation and the GDP, he added.

Experts say the country‘s shadow economy is bigger than others in the OECD due to a large portion of self-employed business entities.

“The number of the country‘s self-employed takes up a big portion to begin with and data from tax authorities shows that tax-dodging by the self-employed with high income is quite high,” Cho Young-moo, a research fellow of LG Economic Research Institute told the Korea Herald on Monday.

According to the National Tax Service and the Bank of Korea, self-employed South Koreans filed tax returns for only 72.8 percent of their total income, estimated at 120.4 trillion won, in 2014 while the ratio stood at 93.4 percent for wage earners. This means that the tax authorities cannot track down 27 percent of self-employed people‘s income. 

Regulating the underground economy is one of President Park Geun-hye‘s core policies. During her campaign, she promised to fund welfare policies by shedding light on the shadow economy rather than raising taxes.

By Park Ga-young/The Korea Herald (gypark@heraldcorp.com)