Sex, drugs and GDP

I am in London again, to watch my beloved Beşiktaş against Spurs this time (that’s Tottenham Hotspur, not San Antonio, Yanks). I am also meeting up, just as I did last time, with fund managers and economists to exchange views on the Turkish economy.

As my flight landed on Sept. 30, the United Kingdom of Great Britain and Northern Ireland’s (I am glad the Scots voted “no” to independence; I could not bear an even longer name) Office for National Statistics (ONS) released revisions to second quarter and other recent Gross Domestic Product (GDP) figures.

Normally, I would have ignored this data, but then I read that drugs and prostitution were included in the GDP, I was immediately suspicious: After all, the Greeks had revised their GDP back in 2006 to include sex and drugs in order to comply with the European Union’s (EU) budget deficit to GDP limits. If you can’t shrink the budget, expand GDP!

It turned out that nothing sinister was going on: The U.K. was just adhering to new EU regulations that required member-states to take illegal activity into consideration when measuring their GDP. In fact, the ONS had already revised its GDP figures up to 2012 a few months ago; this latest release was for more recent statistics.

According to the ONS, Britons spent around 12.3 billion pounds ($20 billion) on narcotics and prostitution last year, more than on beer and wine. Spain’s National Statistics Institute (INE), which went through similar calculations, recently revealed that the drug trade, prostitution, illegal weapon sales and gambling contributed 9 billion euros ($11.5 billion and falling) to the country’s GDP in 2013.

Since Turkey is not an EU member, the Turkish Statistical Institute (TÜİK) is not required to report the contribution of sex and drugs to its GDP. However, Istanbul think tank Betam’s Zümrüt İmamoğlu explained to me that they measure the informal sector by comparing firm and labor force surveys.

I asked her and several other academics if they knew of any study that estimated the size of the sex and drugs economy in Turkey, but no one knew of any. However, Ceyhun Elgin and Oğuz Öztunalı of Boğaziçi University calculated the size of the shadow economy, which is generally used to refer to informal, rather than illegal activities, for 161 countries through time in 2012, improving on Austrian economist Friedrich Schneider’s well-known calculations.

They found that, at two thirds of its official GDP, Turkey had one of the largest shadow economies back in 1950, when Elgin and Öztunalı’s dataset begins. As you would expect, the Turkish informal sector shrank as the country developed, and in 2009, it was just a little bit over one quarter of the country’s GDP.

If you are wondering how Turkey compares to other countries, at around 8 percent, Switzerland and the United States have the smallest shadow economies in the world. At the other end of the spectrum, the shadow economy is as large as 60 percent of the official GDP in Haiti and Panama.

I am off to do my share, before the Spurs game, for beer and wine to overtake sex and drugs this year.

I may even get some help from Galatasaray fans who may want to drown their sorrows after their team was demolished by Arsenal last night. My heart is with them - not! :)