Italy to add drug trafficking, prostitution to GDP figures

The Italian government will include revenue from drug traffic, prostitution and smuggling while calculating its gross domestic product (GDP) in a bid to boost its shaky economy.

Starting this October, Italy will include revenues from “the illegal activities: drug trafficking, prostitution and smuggling services (cigarettes or alcohol)” to its GDP, the country’s national statistics office said on Thursday.

“The methodology for estimating the economic dimension of these activities will be consistent with the guidelines established by Eurostat," it added.

The move may add up to 2 per cent to Italy's GDP, European Union's statistical service, Eurostat, earlier predicted. This should bring the country’s new government under Prime Minister Matteo Renzi closer to its goal - reaching strong growth and lowering the public debt, which the EU says is now “the major challenge”.

The change in methodology initially comes from the EU, which back in January, set new rules forcing its member-states to track the value of all activities that produce income, including criminal activities like "production and consumption of drugs", prostitution and black market alcohol and cigarette sales.

Eurostat issued its guideline on how to count such “illegal” revenues. Thus, it recommends that the figure for prostitution (to be included under "services") be calculated from approximating the "supply" side and the drug trade from the "demand" side.

Italy’s Istat admits that calculating such income will be “very difficult for the obvious reason as these illegal activities are not reported.”

Last time Italy calculated the size of “grey of businesses” that do not pay taxes was in 2008, when it was said to be worth between 16.3 per cent and 17.5 per cent of the economy.

Spain, where the size of “grey economy” is estimated 19.2 percent, announced the switch to the new method back in January, when Eurostat proposed it. By including illegal activities, Spain expects to add about €10 billion to GDP in 2014.

Among other countries that turned to the EU method is Britain, where drugs and prostitution is expected to add over $13 billion to GDP.

However, experts say the new GDP-boosting method may have an underside.

“While these countries might enjoy having their GDP boosted by a few percentage points from the shadow economy, which is notably huge in the periphery, the impact might be less welcome once it starts factoring into their share of the EU budget,” Raoul Ruparel, head of economic research at the Open Europe think-tank was cited by the Times back in February.

In 2013, Italy’s public debt rose to 2.07 trillion euros ($2.84 trillion) or 132.6 percent of gross domestic product, making it the second-biggest public debt as a percentage of GDP among the 18 euro countries, Istat estimated in March.