If only its economy was the only thing tainted, Israel's black economy stands at 6.6% of GDP
The OECD estimates Israel's black or shadow economy at 6.6% of GDP in 2012, amounting to NIS 70 billion. Only half of OECD's members, including Israel, provided data, of which there is very little, for the study.
The data puts Israel in good company, with France, Belgium, and Australia, and in far better shape than Eastern European countries where the non-observable economy (NOE) is 10-15% of GDP. The OECD measured Italy's NOE at 17.5% of GDP and Mexico's at 16%. Conversely, the NOE in Norway, Canada, and the UK, was 1-2% of GDP.
"The need to measure the NOE is difficult to overstate. A vast array of economic policy problems critically depend on measuring and understanding the phenomena related to the NOE," says the OECD in the report's introduction. "Just to name the most prevalent: the existence and size of the NOE matters for the analysis of economic growth, employment and productivity; possible abuse of social insurance programs; and erosion of tax revenues. More generally, a large NOE is detrimental to the trust in and integrity of public institutions, and may lead to a suboptimal design of policies and institutions. However, measurement of the NOE is obviously inherently difficult, and it is not just the unobserved nature of the activities that complicates the task, but also the fact that different policy perspectives often warrant different definitions and boundaries for the NOE."
The OECD differentiates between different kinds of NOE. The first classification is "underground production", completely legal activity that is deliberately concealed from the tax authorities and regulators. It found that 32.6% of Israel's NOE belongs to this category. Another 21.8% of Israel's NOE is classified as the "informal sector", defined as "productive activities conducted by unincorporated enterprises in the household sector or other units that are unregistered and/or less than a specified size in terms of employment."
Israel provided no data on the illegal production category (drugs, gambling, prostitution, racketeering, etc.), although there is no question that it exists. The absence of data affects the reliability of the data on Israel, and explains part of the difference between the current OECD data and previous data, which estimated Israel's black economy at 20% of GDP, or almost NIS 200 billion.
The OECD says that the bulk of Israel's NOE - 45.6% - is due to the "statistical underground" - productive activities that should be accounted for in basic data collection, but are missed due to deficiencies in the statistical system.
The review also answers the question where the black economy exists: two-thirds is in real estate, followed by construction and garages. Other sectors are services, education, electricians and air conditioner technicians, and catering. Comparatively, most of the reporting OECD members did not list garages and construction, but the NOE of Israel's real estate industry is extraordinary by any measure. Judging by the breakdown of NOE by sector in terms of the highest added value to the economy, the NOE of garages and construction should be the most worrisome.