A study by Arthur D. Little, a leading international management consulting firm, demonstrates the impact of legitimizing businesses in the shadow economy on enhancing economic growth, financial stability, and social inclusion. These efforts also support sustainable development, a pressing goal for GCC countries that have historically faced substantial disparities.
GCC countries have the advantage of relatively small shadow economies, with their informal businesses accounting for only 15% of GDP. This is notably less than the global average of roughly 31% and aligns with the average in European countries.
The "shadow economy" refers to the informal sectors where income is hidden, tax evasion is common, and illicit transactions slip under government surveillance.
“By implementing key facilitators such as simplified regulations, improved tax supervision, accessible financial services, and fair competition, the GCC region can establish a solid base for the growth and development of the formal economy. These concerted actions not only discourage the appeal of operating within the shadow economy for individuals and businesses but also foster a more inclusive and sustainable economic landscape," says Stephane Ulcakar, a principal at Arthur D. Little.
The GCC shadow economy has been on a steady decline in recent years. This shift towards economic inclusivity has significantly added to the formal economy GDP, fuelling the robust growth seen in the region. A 2020 report disclosed how, by promoting inclusive growth, Saudi Arabia, for instance, could add around 3% to their GDP.
With GCC countries showing outstanding progress, strategic measures will further enable SMEs to act as key drivers of economic growth, innovation, and resilience, ultimately contributing to the region's enduring prosperity.
SMEs frequently play a significant role in the shadow economy. They might participate in cash transactions, underreport income, and avoid taxes to maintain competitiveness or alleviate financial burdens. SMEs' informal operations allow them to function outside the mainstream economy, thereby posing a challenge for governments in terms of revenue collection and regulatory compliance.
The significant role of SMEs in the GCC's economy underscores the urgency for governments to hasten the shift from the dominance of the oil industry. Saudi Arabia, for instance, has acknowledged the value of SMEs in their Vision 2030 plan, an ambitious blueprint to diversify their economy and overhaul their society towards a more sustainable economic structure.