Laos and Cambodia do not include scam industries in their GDP data. Do they have to?

In 1987, Italy decided that it would include proceeds from criminal activities in its national accounts. Overnight, the economy grew by 18 percent, allowing Italy to overtake Britain to become the West’s fourth-largest economy. This event became known as it’s sorpasso (overtaking). Should Cambodia and Laos follow suit?

A report Published this year by the United States Institute of Peace (USIP), it is estimated that Cambodia’s illegal scam industry is likely worth around US$12.5 billion annually, half of the country’s formal GDP. Although the report does not provide a specific figure for Laos, a calculation can be made. The USIP derived the Cambodian figure by multiplying the conservative estimate of the number of people working in the sector (100,000) by their average daily income ($350) and then by the number of days in a year. The USIP estimates that 85,000 people are employed in Laos’ scam industry, amounting to approximately US$10.8 billion, more than two-thirds of Laos’ formal GDP.

If accurate, including these figures in the national accounts would increase Cambodia’s GDP from about $32 billion to $44.5 billion overnight. Laos’ GDP would rise from $14.1 billion to around $25 billion, allowing the country to overtake Brunei, meaning it is no longer ASEAN’s smallest economy.

Naturally, this poses a moral dilemma. Including the fraud industry in GDP figures would seemingly condone criminal activity. However, this has not stopped other countries from doing so. In fact, the internationally agreed guidelines for national economic accounts, known as the System of National Accounts 2008, recommend that illicit market activities be included in the measured economy. “Activities that may be illegal but productive in an economic sense include the production and distribution of narcotics, illegal transportation in the form of smuggling of goods and peopleand services such as prostitution,” the guidelines state stands.

Moreover, many illegal practices are already included in the GDP figures of Laos and Cambodia. Under Lao law, it is illegal to forcibly evict people from their homes, but many of the country’s largest hydropower dams have been linked to land rights violations, and their production is included in formal GDP. How many of the mining, brick, construction or manufacturing industries in Cambodia and Laos are engaged in illegal practices, while their proceeds still go to the national accounts?

Another argument is that much of the money generated by scam conglomerates does not enter the national economy; it is laundered internationally and funneled back to China. That’s right, but the Laotian government recently declared that only about a third of export earnings enter the country through the banking system. Furthermore, the local economy continues to benefit from the scam industry. Many of the workers are held in slave-like conditions and are rarely allowed to leave the compound, yet they must be fed, presumably by local restaurants and markets. The complexes pay rent and utilities, and middle class members of the scam industry spend money at local bars.

The strongest argument for including the scam industry in the GDP figures is that a large part of it should already be included in the national accounts. Many of these companies are linked to legitimate businesses. Just last month, one of Cambodia’s leading tycoons, Ly Yong Phat, and several of his companies were sanctioned by Washington for its association with the fraud industry.

I’m a bit tongue-in-cheek about the inclusion of criminal activity in the national books. In many ways, this debate highlights the absurdity of obsessions with GDP and growth. Adding the scam industry to the national accounts would be a paper exercise; it would change perception, but not reality.

For example, we constantly read that Laos is on the brink of default because the national debt is now at a standstill all around 130 percent of GDP. In reality, Laos faces the possibility of bankruptcy because, by my estimate, the national debt is about 900 percent of government revenues. Laos’ problem is not that its economy is too small; it is that the government collects too few taxes to repay its debts – a point repeatedly made by the IMF and World Bank, even as they frown on the country’s debt-to-GDP ratio.

If Vientiane were to increase tax collection by 30 percent tomorrow, its ability to repay its debts would significantly improve, but the country would still be stuck with a debt-to-GDP ratio of 130 percent. Alternatively, Laos could choose to include the $11 billion scam industry in its GDP figures, and suddenly the debt ratio becomes 70 percent, meaning Laos appears to be less indebted, but there would be no change in the wealth of Vientiane to pay back. loans.

Phnom Penh could decide tomorrow to include its scam industry in GDP. In January, the country boasted that the economy has grown by more than 70 percent this year. That would make Cambodia the fastest growing economy in the world. Perhaps the ruling Cambodian People’s Party would be happy with the optics, but probably not.

Suppose USIP is right and the Cambodian scam industry is worth $12.5 billion annually. Perhaps Phnom Penh already has a lot of that, raising unwanted questions about how much the non-shadow economy is actually worth. For example, if one third of the proceeds consists of fraud al included in the national accounts because formal businesses are paid by the scammers or launder their money, wouldn’t that mean that Cambodia’s non-criminal economy is actually a third smaller than currently thought? And if we count the remaining two-thirds, that would mean that fraud is the largest industry in Cambodia, far surpassing clothing production and tourism. Phnom Penh is therefore encouraged not to look too closely at this, even if that means deliberately deflating calculations about the true size of the entire economy.