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Brazilian Shadow Economy a methodological contribution to the debate

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Brazilian Shadow Economy a methodological contribution to the debate

    Brazilian Shadow Economy: a methodological contribution to the debate

    João Felippe Cury Marinho Mathias (Instituto de Economia/ UFRJ)

Resumo

    Há tempos é sabido que existe no Brasil uma grande parcela da renda que não é captada pelo sistema estatístico do país. São várias as causas desse fenômeno, dentre as quais se destacam a subdeclaração visando à sonegação fiscal, várias modalidades de lavagem de dinheiro e corrupção, contrabando de vários produtos, questões sanitárias, fraudes a previdência social, dentre vários outros fatores. Com efeito, em muitos casos o sistema estatístico do país encontra dificuldades na elaboração das estatísticas econômicas em função da disparidade entre os dados da oferta e demanda o que muitas vezes não permite o equilíbrio e a coerência econômica. O objetivo deste trabalho é apresentar elementos metodológicos que contribuam para a construção de uma abordagem sistêmica para a interpretação da economia subterrânea. Após apresentar os elementos da abordagem sistêmica o objetivo específico é aplicar a abordagem à cadeia produtiva de carne bovina brasileira. A ênfase desse trabalho é centrada nos princípios norteadores do Sistema de Contas Nacionais SNA (1993). O fio condutor do trabalho será a observação dos aspectos metodológicos do manual da ONU levando em conta as estatísticas econômicas diversas geradas pelo órgão oficial de estatísticas do Brasil, o Instituto Brasileiro de Geografia e Estatística. Nesse sentido, para mensurar a economia subterrânea será apresentado um método indireto baseado nas contas nacionais, especificamente nos quadros de oferta e utilização. Para a interpretação das causas e efeitos da economia subterrânea o trabalho sugere a adoção e adaptação dos conceitos referentes à Nova Economia Institucional (NIE).

Palavras-chave: Economia Subterrânea Contas Nacionais Abordagem Sistêmica

Abstract

    It has been known for some time that, in Brazil, a large portion of the income is not captured by the country‟s statistical system. There are several reasons for this phenomenon, among which the

    following stand out: underreporting of income for the purpose of tax evasion, various types of money laundering and corruption, contraband of various products, sanitation issues, social security fraud, among other factors. Indeed, in many cases the country‟s statistical system has encountered difficulties preparing economic statistics given the disparity between the data for supply and demand, which often prevents economic balance and coherence. The objective of the present study is to introduce methodological elements that will contribute to the development of a systemic approach to interpret the shadow economy. After introducing the elements of the systemic approach, the specific objective is to apply the approach to the production chain of Brazilian beef. The emphasis of this study is centered on the guidelines of the System of National Accounts SNA

    (1993). The main thread of the study will be the observation of the methodological aspects of the UN manual taking into account the various economical statistics generated by the official Brazilian statistics agency, Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics). In that sense, to measure the shadow economy, we will present an indirect method based on national accounting, specifically the supply and use tables. To interpret the causes and effects of the shadow economy, the study suggests the adoption and adaptation of the concepts relating to the New Institutional Economy (NIE).

     National Accounts Systemic Approach Key words: Shadow Economy

Área Anpec: Área 4 Economia do Setor Público

Classificação JEL: H Public Economics, H26 Tax Evasion

    Brazilian Shadow Economy: a methodological contribution to the debate

    1. Introduction

    It has been known for some time that, in Brazil, a large portion of the income is not captured by the country‟s statistical system. There are several reasons for this phenomenon, among which the following stand out: underreporting of income for the purpose of tax evasion, various types of money laundering and corruption, contraband of various products, sanitation issues, social security fraud, among other factors. Indeed, in many cases the country‟s statistical system has encountered difficulties preparing economic statistics given the disparity between the data for supply and demand, which often prevents economic balance and coherence.

    Thus, if the official system of information becomes systematically skewed, it will potentially provide misguided questions, wrong answers, and false information to citizens and policy makers. It becomes necessary, therefore, to search for the veracity of the macroeconomic information within a country‟s statistical system so as to avoid a distortion of information. To that end, it is important to study several aspects of a country‟s unobserved economy. It is in this perspective that the study of shadow economy is inserted.

    As pointed out by Schneider and Enste (2002) and Feige (1989), the “shadow economy” theme has different meanings for labor economists, macroeconomists, criminalists, and national accounting specialists. Additionally, according to the abovementioned authors, it should be taken into consideration that there are considerable differences between developing, transitional, and developed countries (OECD) as concerns the activities associated with the shadow economy.

    There are several methods of estimating the shadow economy, however as pointed out by Schneider and Enste (2000), there is no best method. According to the authors (p. 107-108): “[t]here is no „best‟ or commonly accepted method. Each approach has its strengths and weaknesses and can provide specific insights and results”. Regarding the shadow economy, Schneider and Enste (2002: p. 2) support that: “(...) a comprehensive overview and scientific analysis of this complex phenomenon is necessary”. It is with that perspective that the present study defends the development of sectorial estimation models to analyze the relationships between cause and effect of the shadow economy. When a change from macro- to microanalysis is proposed, the focus can be placed on the institutional environment of an activity sector, with its organizational forms and governmental structures.

    Naturally, a more in-depth knowledge of an activity sector allows better scrutiny of potential problems and difficulties. However, the focus on a single sector is sometimes insufficient for the understanding of statistical incoherences. It is in that sense that a more substantial and detailed analysis of economical phenomena is placed on the study of chains or productive systems and, more specifically, on the systemic focus of the product. Thus, it is possible to obtain a systemic analysis in which the product in question is analyzed from its source, through its transformation and finally to the final consumer. In the conception of National Accounts, such a method is very useful for analyzing and quantifying several production chains with the purpose of maintaining the economic coherence between supply and demand.

    The development of an approach that accounts for the shadow economy must first consider two elements:

    1. A theoretical approach to explain the causes and consequences of the “shadow economy”;

    2. A method of estimation of the “shadow economy”.

    Therefore, “analytical tools” are needed to interpret the shadow economy. In that sense, by reconciling the recommendations of the System of National Accounts (1993), the systemic focus of the product and the analytical tools suggested by the New Institutional Economy, a new systemic

    approach is conceived which allows the measurement of the shadow economy as well as an interpretation of its causes and effects. This reconciliation allows the articulation of the statistician‟s and the economist‟s work, thus permitting a critical analysis of the data and the use of arbitrations to identify the shadow economy.

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    The objective of the present study is to introduce methodological elements that will contribute to the development of a systemic approach to interpret the shadow economy. After

    introducing the elements of the systemic approach, the specific objective is to apply the approach to the production chain of Brazilian beef. The emphasis of this study is centered on the guidelines of the System of National Accounts SNA (1993). The main thread of the study will be the

    observation of the methodological aspects of the UN manual taking into account the various economical statistics generated by the official Brazilian statistics agency, Instituto Brasileiro de

    Geografia e Estatística (Brazilian Institute of Geography and Statistics). In that sense, to measure the shadow economy, we will present an indirect method based on national accounting, specifically the supply and use tables. To interpret the causes and effects of the shadow economy, the study suggests the adoption and adaptation of the concepts relating to the New Institutional Economy (NIE).

    The study is divided into four sections. The following section aims to review the literature on shadow economy, presenting the different terms associated with the theme and introducing the various measurement methods. Section 3 presents the methodological aspects of the system approach presented here, based on three mainstays: the SNA recommendations (1993); the NIS elements; and the commodity system approach. Section 4 aims to apply the systemic approach to the beef production system, with emphasis on identifying the clandestine character of beef slaughter in Brazil. Finally, the final considerations will be made.

    2. Review of the literature on shadow economy

2.1) Concepts and harmonization of terms

    According to Feige (1989: p. 16): “The literature produced by “underground economists” has generated a plethora of terms (underground, subterranean, shadow, informal, hidden, parallel, black, clandestine, second, household, etc.) to describe various aspects of the unobserved sector of the economy”. In the literature regarding shadow economy, there is a generalized difficulty in providing a formal definition, given that the shadow economy encompasses numerous economic activities. The term “underground economy”, for example, has been used to cover a wide range of economic activities not necessarily limited to drug trafficking, prostitution, pornography, gambling, at-will employment or tax evasion. In other words, it does not include only black market transactions.

    According to Schneider and Enste (2002: p. 6): “A harmonization of terms is needed and should be attained by integrating the shadow economy into the gross national product (GNP). Although this is generally regarded as necessary, a global definition has not been yet found”. The same authors suggest the separation of economy (dual economy) into official (primary economy) and unofficial economy (secondary economy) and suggest the consideration of the “hidden GNP”.

    In their words (p. 9): “By way of contrast, the shadow economy should be included in the added value, according to the convention of the National Income Accounts”.

    Figure 1: The dual economy

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Source: Schneider and Enste (2002: p. 8)

    The chart suggested by the abovementioned authors does not seem to differ from the 1. The SNA (2009: p. 409) describes recommendations of the System of National Accounts (1993)

    the unobserved economy:

    “National accountants are particularly concerned about ensuring that the whole of

    economic activity within the SNA production boundary is measured comprehensively.

    This is often referred to as the “exhaustiveness” of the coverage of the national accounts.

    In practice, it means ensuring that the value of production activities that are illegal or

    hidden (that is, the “underground economy” or the “hidden economy”) as well as those

    that are simply described as informal is included in the accounts”.

    According to the SNA (2009: p. 100-101), certain activities can be productive in the economic sense and also legal (as long as they satisfy certain rules and regulations), but deliberately hidden from public authorities for the following reasons: (a) To avoid taxes on income, on added value and others; (b) To avoid social security contributions; (c) To avoid certain legal requirements such as minimum wage, maximum work hours, safety or health principles, etc.; (d) To avoid particular administrative procedures such as statistical surveys or other administrative forms. All of these activities are included in the System‟s frontier production, as long as they are genuine production processes. The producers dedicated to this type of production can consider themselves to be included in the “shadow economy”. Shadow economy can represent a substantial part of the

    production of certain activities, for example, construction or certain services in which small businesses predominate.

    Figure 2 shows a chart that illustrates the intersection between the non-observed economy in the formal and informal sectors.

    Figure 2: The non-observed economy and the informal sector

     1 In the present study, the reference to the SNA 1993 is related to the 2008 update published in 2009.

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    Source: SNA (2009: p. 474)

    The recommendation by the SNA (2009: p. 471) about the non-observed economy is expressed in the following words: “Exercises to measure the non-observed economy should also, in

    principle, cover such illegal activity. How far this is pursued in practice will depend on assessments of the importance of illegal activities, how it might be done and the resources available”. Thus, the scope of the valuation models of the SNA (1993) is broad enough to include “clandestine” or “underreported” production. This scope allows a better compatibility between the data in quantity of supply and demand.

    Still regarding illegal activities, the SNA (2009: p. 100) recommends: “Of course, it may

    be difficult, or even impossible, to obtain data on illegal operations, but in principle they should be included in the accounts, at least to reduce errors in the other items, including the balances”. The 2production and consumption of certain goods and services such as narcotics may be illegal, but the

    market operations of such goods and services must be recorded in the accounts. If the expenditure of households in the acquisition of illegal goods or services is ignored on principle, the household savings will seem overestimated and it will be assumed that the households acquire assets which in fact they do not. It is certain that the overall accounts are susceptible to severe distortion if true monetary operations are excluded.

2.2) Methods of measuring the shadow economy

    Efforts have been made in the past few decades to measure the shadow economy and several estimation models have been proposed. A vast literature indicates estimates of the world‟s shadow economy. The work edited by Feige (1989) presents estimates of the shadow economy of several developed countries, particularly: USA; Netherlands; United Kingdom; Germany; Sweden; Italy; Norway; Canada and France. The same work presents estimates for two countries with a planned economy, the Soviet Union and Hungary. Schneider and Enste (2002) show estimates of shadow economy for developing countries, transition countries, and OECD countries.

    There are several methods of estimating the shadow economy and, according to Schneider and Enste (2002), they are divided into three groups: i) direct methods; ii) indirect methods; iii) causal methods.

    The direct methods are based on surveys and questionnaires on tax evasion. According to Schneider and Enste (2002), these are microeconomic approaches, employing either well-designed surveys and samples based on voluntary replies, or tax auditing and other compliance methods.

     2 According to the SNA (2009), many illegal activities are crimes against people or property that could never be interpreted as operations. For example, theft can hardly be considered an action in which both parties participated by mutual agreement. Fundamentally, theft or violence is an extreme form of externality through which harm is inflicted upon another institutional unit in a deliberate manner and not simply in a fortuitous or accidental manner. Thus, theft of family goods for example is not treated as an operation and no corresponding estimated value will be accounted for in the family‟s expenses.

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    The indirect methods are divided into three groups: the first group includes the approaches based on National Accounts. The second group includes the monetary approaches. Finally, the physical input method is presented with the approach of electricity consumption. The first group is presented in items 1 and 2 below, and the others are monetary approaches according to 3: Schneider and Enste (2002)

    1. Discrepancy between national expenditure and income: in national accounting, the

    expenditure must be equal to the national income. In that sense, the gap between expenditure

    and income can be used as an indicator of the extent of the non-observed economy;

    2. Discrepancy between official and actual labor force: the reduction in the participation of

    labor force in the official economy can be seen as an indicator of the increase in shadow

    economy activities.

    3. Monetary methods: in shadow activities, payments are usually made in cash. Thus, when

    the demand for currency increases more than usual in absolute or relative values, it can be

    concluded that activities associated with the shadow economy are increasing;

    4. Transactions approach: assumes a constant relationship between the volume of

    transactions and the official GNP and uses Fisher‟s quantitative equation;

    5. Currency demand approach: assumes that the transactions related to the shadow economy

    are made in cash without traces that can be observed by the authorities. Therefore, an

    increase in the size of the shadow economy will consequently increase the demand for

    currency. Thus, it is necessary to calculate the function of the demand for currency based on

    econometric methods.

    A summary of the methods and approaches used to calculate the shadow economy is presented by Schneider and Enste (2002) and shown in Table 1 below.

Table 1: A summary of all the approaches to estimate the extent of the shadow economy

    Method Approach

    (1) Surveys Direct methods

    (2) Inquiries on tax evasion

     Indirect methods

     Approach via national (3) Discrepancy between the national accounting of

    accounting distribution and application (macroeconomic approach)

    (4) Discrepancy between income and the expenditure of

     the households (microeconomic approach)

    (5) Difference between the official and the actual

     income rate

     Monetary approaches

     (6) Cash velocity

     (7) Cash velocity of major bills

     (8) Transaction method

     (9) Cash demand

     Physical input method (10) Electricity consumption approach

     Causal methods

     (11) Approach of 'soft modelling'

     (12) Model approach (LISREL Technique)

    Source: Schneider and Enste (2002: p. 27).

     3 In line with the previously mentioned authors, Bajada and Schneider (2003) give six estimation methods: 1. Qualitative estimate; 2. Discrepancy between income declared for tax purposes and that measured by selective checks; 3. Discrepancy between statistics of National Expenditure and Income; 4. Discrepancy between the official and the actual labor force; 5. Currency demand approach; and 6. Latent Variable Modelling - Multiple Indicators Multiple Causes (MIMIC) Model.

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    In the following section, we will present the systemic approach, which can be classified as an indirect method of estimating the shadow economy based on National Accounts. The difference is the emphasis on the activity sectors and, in that sense, it becomes a different approach from the abovementioned approaches.

    3. The systemic approach to shadow economy

    The objective of this section is to introduce the systemic approach to shadow economy. To that end, we will present the main analytical tools of the approach, which are: i) methodological recommendations of National Accounts; ii) elements of the New Institutional Economy; iii) the systemic focus of the product, which allows the articulation of National Accounts with the New Institutional Economy. Therefore, the aim is to find an integrative approach that allows the analysis of the causes and consequences of the shadow economy, as well as its measurement.

    The systemic approach seeks to link statistics and economics in order to find possible solutions to incoherences in the accounting analysis. In that sense, the statistical data must be subjected to an particularized economic analysis. The objective here is clear: the search for a

    satisfactory economic interpretation of the data.

    Therefore, it is necessary to reconstitute the flows associated with the various economic activities. In that sense, based on the recommendations of the National Accounts, a detailed analysis of the production systems of the various economic activities is needed. The interpretation of the supply and use tables of the National Accounts seems to be the most adequate.

    The systemic approach is based on the consideration of the following elements: i. The methodological recommendations of the SNA (1993) focused on the “product balance”

    and all of the conceptual demarcation derived from it, thus allowing the measurement of the

    shadow economy (methodological approach);

    ii. For the more detailed analysis of the causes of the shadow economy, it is necessary to know

    the institutional environment, therefore the concepts derived from the New Institutional

    Economy are used (theoretical approach);

    iii. For the delimitation of the analytical field and the articulation of the SNA and NIE

    recommendations. The consideration of the systemic analysis, derived from the analysis of the

    Commodity System Approach.

3.1) Shadow Economy and National Accounts

    The development of an estimation method for the shadow economy according to the systemic approach proposed here is subject to the consideration of the shadow economy at the heart of National Accounts. The following subsections will emphasize the use of “product balance” and

    will link the work of the statistician and the economist.

     4 3.1.1) The recommendations of the SNA (1993): “product balance”

    The SNA (2008) suggests an alternative view of the economy focused less on income and more on the processes of production and consumption. Where do products come from and how are they used? According to the SNA (2008: p. 271), supply and use tables are a powerful tool with which to compare and contrast data from various sources and improve the coherence of the economic information system. They permit an analysis of markets and industries and allow productivity to be studied at this level of disaggregation. When, as is usually the case, supply and use tables are built from establishment data, they provide a link to detailed economic statistics outside the scope of the SNA.

     4 The expressions “product balance” and “product flow” methods are used in preference to “commodity balance” and

    “commodity flow method” as reflecting more recent usage of the word product in place of commodity.

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    The amount of a product available for use within the economy must have been supplied either by domestic production or by imports. The same amount of the product entering an economy in an accounting period must be used for intermediate consumption, final consumption, capital formation (including changes in inventories) or exports. These two statements can be combined to give a statement of a product balance:

    Output + imports = intermediate consumption + final consumption + capital formation + exports

    The equation above is obtained from the supply and use table as follows:

    Table 2: Supply and use table

    I. Supply of goods and services table

    Total Supply Production Importation

    Quadrant A= Quadrant A1+ Quadrant A2

    II. Use of goods and services table

    Total Supply Intermediate Consumption Final Demand

    Quadrant A= Quadrant B1 + Quadrant B2

    Added value components

    Quadrant C

    The equation A = B1 + B2 allows the estimation, by product, in value and in physical quantities of the shadow economy, according to the systemic approach.

3.1.2) The articulation of the work of the statistician and the economist

    Séruzier (1996) states that (p. 49 and 50) the articulation of the work of the statistician and the economist allows the possibility of the identification of incoherences in the data and the possiblity of the use of arbitrations. According to the author, the work of the economist appears when different statistical sources are compared to obtain the numbers that represent the economic phenomena.

    One of the problems faced in the development of National Accounts is the excess or lack of information. Thus, Séruzier (1996) maintains that the analysis of the various sources of data is recommended because the use of a single source of data may expose the work of the National Accounts to severe incoherences in the results. The great challenge, according to the author, occurs when the sources of data are contradictory.

    One of the causes of the contradictory sources is the possibility of tax fraud. Séruzier (1996: p. 236) highlights the possibility of different forms of tax fraud (in all forms of tax), which affect the quality of the preparation of National Accounts particularly the following: 5; ; Underreporting of inflows (inputs)

    ; Overestimation of costs;

    ; Hidden distribution of resources.

    There are also the following types of fraud:

    ; False balance sheets;

    ; Use of the company as a cover for illegal activities (money laundering);

    ; False declarations regarding hiring of staff and non-declaration of employees.

    Thus, the author suggests the calculation of indirect estimates, based on economic analyses. It is a methodical and rigorous task, in which there are key points that can be used to find

     5 In section 4, we will analyze the Brazilian beef system in which this type of tax fraud is very common.

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the convergence between sources, as well as contradictions. According to Séruzier (1996) arbitrage

    means questioning the statistical data, given that sometimes there are differences in the nature of the concepts of economic analysis and the facts examined by the statisticians. In that sense, arbitrage is needed whenever there is a gap between the statistical information and the concept for which this measure is proposed. An example is the hypothesis of tax fraud and underreporting, which cast doubt on the measurement of the production obtained from tax returns.

    Once the investigation is conducted, there is a detailed analysis of the contradictions and, therefore, it is possible to achieve the objective of finding solutions that are compatible with the available data. In that sense, the statistics used can be questioned and the phenomena not observed by the statistics can be considered. For Séruzier (1996), the preparation of the supply and use table is the strategy‟s main element because it allows the articulation of the main part of the available

    information.

3.2) Some elements of the New Institutional Economy

    The New Institutional Economy (NIE) seeks to incorporate the theory of institutions to economic analysis seeking to analyze the role of transaction costs as a link between institutions and the cost of production. Coase (1998: p. 73) synthesizes the importance of the NIE to economists: “But the costs of exchange depend on the institutions of a country: its legal system, its political system, its social system, its educational system, its culture, and so on. In effect it is the institutions that govern the performance of an economy, and it is this that gives the “new institutional economics” its importance for economists”.

    Coase (1998: p. 73) summarizes the importance of the elements of the NIE to the systemic approach presented in the present study:

    “The costs of coordination within a firm and the level of transaction costs that it faces

    are affected by its ability to purchase inputs from other firms, and their ability to supply

    these inputs depends in part on their costs of coordination and the level of transaction

    costs that they face which are similarly affected by what these are in still other firms.

    What we are dealing with is a complex interrelated structure”.

    In effect, it is not only the act of producing but also the act of buying and selling that causes transaction costs, which the economic agents face whenever they scrutinize the market.

    In that sense, we must consider the conditions in which transaction costs stop being insignificant and start being an important element in the decisions of the economic agents, thus determining how resources are allocated in the economy.

    Here, the application is direct: the possibility of avoiding production/transaction costs is a cause of the “shadow economy” in various activity sectors, which is evidenced by the systemic focus of the product. The “shadow economy” is, in that sense, a “fraud” of the organizations (market players) against the institutions or a “break”from them. In a more general manner, an

    organization that cannot compete and innovate in the market adopts an opportunistic behavior, deceiving the institutions.

    There is a vast literature on the NIE that deals with several themes of this research program. For the purposes of the present study, some key points are useful:

    1. The evidence of problems in the functioning of markets when transaction costs are no longer

    insignificant (inefficient markets);

    2. The use of behavioral presuppositions: bounded rationality and self-interest orientation;

    3. The notion of opportunism as the avid quest for self-interest (Williamson, 1985);

    4. The consideration of the fundamental importance of the institutional environment;

    For the systemic approach, it can be considered that there are basically two types of agents: firms and the government. The problem in the relationship between these two agents is in the origin of the shadow economy. The market mechanism is constantly used, but sometimes it is

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“cheated”. In this case, the opportunistic action is on the part of the firms in order to cheat the

    institutional environment, and its effect takes on various forms, but the government is the most penalized agent due to tax evasion. It is as if the government, by granting business licenses and permits, suffers two types of opportunism: adverse selection (ex ante) and moral hazard (ex post), the former because it does not know the reputation of the candidates and the latter because of the unethical action of the firms that cheat the market mechanisms. This problem occurs in both the formal and informal sectors.

    According to Williamson (1985: p. 15): “Firms, markets, and relational contracting are important economic institutions”. Williamson‟s book seeks to advance the proposition that the main 6. purpose and effect of the economic institutions of capitalism is to save on transaction costs

    In effect, transactions occur in a structured institutional environment, and the institutions are not neutral, that is, they interfere in transaction costs. The institutional environment is formed

    by the formal and informal rules that establish the standards of conduct and the boundaries of the interactions between the agents of a society. The institutions are made of laws and guidelines

    responsible for conducting and delimiting human interaction in a society. They seek to minimize uncertainties and guide the interaction of the agents, although they are not perfect. They are also responsible for promoting structure needed for the transactions and, with the applied technology, determine the total costs of production (transaction and transformation).

    In the terms proposed by the systemic approach, the shadow economy seems to be the product of a change in the institutional environment, in this case a violation. Institutional

    changes begin when an agent identifies a source (opportunity) of external change through alterations to the institutional parameters or when the agents acquire knowledge and skill. In most cases, they derive from joining these two factors gradually and following a trajectory (usually past institutions also called institutional inertia).

3.3) The analysis of the Commodity System Approach (CSA)

    The CSA is an approach conceived by Goldberg (1968) that has a theoretical basis with strong influence from National Accounts: one of its foundations is the concept of Leontief‟s input-

    output matrix. This approach laid the basis for the introduction of the question of intersectoral dependence and also expresses concern with the measurement of the intensity of intersectoral connections.

    One of the foundations of the CSA is the systemic analysis that runs through most of the studies, both in studies on specific systems (centered on one product) and in agro-industrial case studies. The consideration of the importance of institutions by the CSA is its link with the elements of the NIE. The analysis of the CSA is useful because it delimits the analytical field to be studied based on a specific product. In that sense, it reconciles and articulates the recommendations of the SNA and allows the use of the NIE‟s analytical tools.

    The main point of the Commodity System Approach is established by the

    interrelationship between activities of production, processing, and food distribution. System is defined as the unification of a group of elements through a network of functional relationships, which culminates in the interdependence between its parts, influencing and being influenced by the external environment so as to reach a particular goal.

    Thus, the CSA‟s approach encompasses all factors involved with a product‟s production, processing and distribution. Such a system includes the crop input market, agricultural production, storage operations, processing, wholesale and retail, delimiting a flow that goes from inputs to final

     6 As pointed out by Zylbersztajn (1995: p. 27), “(...) the Economy of Transaction Costs has a microanalytical orientation, i.e. it is aimed at corporations and firms to obtain from them the raw material for its application. From this point of view, the ETC represents a natural link between Economics and Administration, also based on the Fundamentals of Law and Sociology. Thus, as an integrated and interdisciplinary unit, it has meant a great opportunity for research and for application in various fields, such as business strategy, finance, marketing, industrial organization, public policy, among other things”.

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