Italy to Include Prostitution and Illegal Drugs in GDP

We have blogged before about the world’s shadow economy, and its estimated worth. Turkish economists Ceyhun Elgin and Oguz Oztunali estimate that off-the-books transactions account for roughly 23 percent of world GDP (short versionfull paper).

Bloomberg reports that Italy will now begin including its shadow economy in the country’s GDP, in an effort to reduce the national deficit:

Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets.

Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said.

Renzi, 39, is committed to narrowing Italy’s deficit to 2.6 percent of GDP this year, a task that’s easier if output is boosted by portions of the underground economy that previously went uncounted. Four recessions in the last 13 years left Italy’s GDP at 1.56 trillion euros ($2.13 trillion) last year, 2 percent lower than in 2001 after adjusting for inflation.

For more on shadow economies, check out our podcast on the subject.

(HT: Van Brenner)


Note that this applies to all European countries, not just Italy:

"The ostensible goal is to make countries' economic data comparable."


This one really has me beat. OK, drugs, prostitution, and so on are part of the economy. I understand that much. But how in the world could you ever come up with an even halfway accurate figure? They really expect every hooker, smuggler, and street-corner drug dealer to fill out reports?

Then of course there's the cheating aspect, as when some drug-war agency claims many-times inflated 'street value' for its seizure in order to make itself look good for the next round of budgeting. This scheme takes it to a whole new level: your bureaucrats in charge figure out the legitmate GDP, compute the deficit, and guess what the size of the shadow economy will turn out to be?


Drug war agencies may make themselves look good by claiming inflated street values, but they don't need to make these claims artificially. Street values are already inflated because of drug prohibition itself, and these values fluctuate wildly thanks to the instability supply and demand, itself a product of the drug war agencies.

So, if a drug war agency makes a major bust on Monday, the bust they make on Tuesday for the same amount of the same drug (by weight) will suddenly be worth a lot more in dollars.

The agencies can spin this both ways: they are capturing more drugs, meaning they are doing a great job and deserve more money. But there are still more drugs to be captured, so the agency needs more money!


So was that 2.6%-of-GDP commitment developed based on the old GDP calculation or the new? And if it was based on the old, shouldn't it, too, be adjusted? It's just a rhetorical question: this is just moving arbitrary goalposts on one figure to meet an arbitrary goal set elsewhere. Politics as usual.

@Andy, that is an interesting point in the article: that this rule change is to account for the fact that prostitution and drug use are legal in some countries (and so counted in their GDP), but illegal in others (and so not counted). To me, this just illustrates the fundamental flaw in trying to form a single economic unit out of multiple political entities.

What's even more humorous is to imagine how this accounting will take place. From the article: "To estimate the drug market, for example, Statistics Netherlands figures out the number of heavy users from data provided by nongovernmental organizations working with addicts. It then accepts sociological data on the number of recreational users, corrects for some overlap between the two groups and literally guesses at the average daily drug dosage."

In other words, its all a pile of nonsense, and that's for a legal market! Imagine the absolute making-up-of-numbers that will go on in the attempts to estimate illegal activities!


William Sjostrom

This is not quite correct. Italy began incorporating estimates of the grey economy (legal goods that are illegally produced) into its GDP accounts back in the 1990s, to help meet maximum debt to GDP ratios. The new effort adds illegal goods.


Yes, those Italians are so known for their strict record keeping and stainless financial reporting that giving them a blank check to write their own made-up figures won't backfire, I'm sure!

Next year, Italy's GDP exceeds the US!


Too bad they don't get to count the Vatican income.


As Andy says, this is actually because drugs and prostitution are legal in Holland and some other European countries.

In order to set EU budgets, countries must all include the same items in GDP. So all EU countries will now have to measure these things.

Vallin SFAS

Su-pah-phreeaks-and-Sex-and-Drugs...NEV-AH' fails!

Francois Sagat CA

I am a Paco user and maker. I have been using Paco in the military for over five years. I recently found out I have Hep C.


Why have they not done this before? According to the there are big street prostitution problem in Rome and in whole Italy where 75% off all estimated 100000 prostitutes are foreign. Most prostitutes in Italy come from Romania and Bulgaria. I think this will also bring more tourist money to Italy. It is also the only way to cut the illegal sex trade. Drugs should just be handled with hard hand and not tolerate, because they are bad. Girls are not bad!