Proxy (Indirect) Methods to Measure Informal Economy of Pakistan (2001–2025): A Comparative Study
DOI:
https://doi.org/10.54536/ajase.v5i2.7979Keywords:
Currency Demand, DGE Model, Electricity Consumption, Informal Economy, MIMIC Model, Pakistan, Proxy Methods, Shadow Economy, Trade Mis-InvoicingAbstract
Measuring Pakistan’s informal economy is intractable without direct data. This study is the first to systematically integrate, implement, and validate ten indirect proxy methods; non-monetary (electricity consumption, labor force), monetary (currency demand, cash-to-deposit ratio, large notes), income-expenditure (national accounts), and latent-variable (MIMIC and dynamic general equilibrium models) over the 2001–2025 period. Implementation follows rigorous protocols: electricity consumption is adjusted for non-residential usage and transmission losses via sectoral load factors; currency demand is estimated using a cointegrating ARDL framework that incorporates tax-to-GDP ratios and real interest rates; and the MIMIC model, validated through confirmatory factor analysis and Bayesian robustness checks, incorporates GDP per capita, corruption indices, and institutional quality as causal variables. Triangulation employs a range-bound convergence algorithm, weighting each estimate inversely to its forecast-error variance derived from pseudo-out-of-sample back-casting. Quantitative results reveal pronounced heterogeneity: the electricity-based proxy averages 26–30% (mean 28%); the currency-demand approach yields 38–44% (mean 41%); MIMIC and DGE estimates converge at 32–36% (mean 34%); and national accounts show the highest volatility, ranging 30–45%. The triangulated composite stabilizes at 34–38%, offering a robust baseline. Key limitations monetary proxies’ sensitivity to velocity shifts, electricity estimates’ dependence on stable elasticities amid energy crises, and latent-model endogeneity are bounded via sensitivity corridors. Policy-wise, differentiated estimates provide actionable intelligence: monetary measures inform anti-money laundering efforts, electricity metrics guide tax-gap adjustments, and the composite anchors fiscal consolidation under IMF programs. We conclude by proposing a concrete institutional roadmap to embed a validated, quarterly-updated hybrid weighting framework within Pakistan’s national statistical system, replacing ad-hoc single-metric reliance.
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Copyright (c) 2026 Khuram Shahzad, Arbab Muhammad Jehandad, Kaneez Fatima
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