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According to estimates, the size of informal economy (mostly non documented economy) is around 20 to 30 percent of our legal economy. The share of illegal economy in this informal economy was anybody’s guess. The illegal economy includes all injections into the overall economy (both formal and informal) from illegal activities.
SDPI and United Nations Office on Drug and Crime (UNODC) made an attempt to assess the size, nature and dynamics of the illegal economy in Pakistan through a joint study and revealed that the share of illegal economy in Pakistan’s informal economy is around 5-10 percent. The focus of this study is on the dominant forms of transnational organised crime present within the region, specifically (in order of magnitude), drugs and precursors trafficking, migrant smuggling and human trafficking, arms trafficking, illegal timber trade and kidnapping for ransom.
First look at some numbers. Afghanistan is the source of more than 90 percent of the world’s opium and a significant cannabis producer. In 2011, 160 MT of 365 MT (44pc) Afghan heroin was trafficked through Pakistan. The destination value of the heroin transiting Pakistan is around US$ 27 billion and the local value of the illegal drug and precursors trade in Pakistan has an estimated worth between US$ 910 million and US$ 1.2 billion respectively.
Estimating the size of migrant smuggling and human trafficking economy is challenging given the lack of data. Conservative calculations put the size of the proceeds of migrant smuggling and human trafficking from Pakistan at around US$ 107 million.
Regarding arm trafficking, the economic value of production and trade of one single item i.e., AK47 is estimated to be US$ 52 million. It is likely that the actual figure is in excess of this estimate.
Warlords in Afghanistan have been using illegal timber trade as a source of income since the 1980s. Militants in Swat have reportedly benefited from timber trade by levying a 10-20 percent tax on every timber shipment out of the region. From 2007 to 2009, Swat reportedly suffered more deforestation than in the entire decade prior to that.  The proceeds from illegal timber trade are estimated to be US$23 million.
Anecdotal evidence and police data from all major cities of Pakistan indicate that cases of kidnapping for ransom have been on the rise since 2007.  The proceeds from kidnapping are estimated at just over US$ 10 million. This is a conservative estimate because of the absence of reliable data on ransoms paid, as well as the under-reporting of the crime.
The figures reported above are extremely conservative guesstimates. What matters the most is secondary illegal economy which is extremely difficult to be measured. Out of the US$ 27 billion (destination price) worth of heroin a significant amount does come to Pakistan and Afghanistan, either in the form of private investment, black money, arms and ammunition, or in the form of foreign remittances. Interior Minister of Pakistan is on record saying that he has evidences that terrorism in our region is partly being financed through drug money.
Trade of Acetic Anhydride (AH, a precursor used in Heroin production) is another grey area in Pakistan. This is used in paint industry. Against a domestic requirement of 100,000 liters Pakistan imports around 1.3 million liters of AH, some legally through a license from Ministry of Narcotics whereas large quantities are imported using the mislabel of H2O2 . Most of the AH is supplied to Afghanistan.
Migrant smuggling is another major concern not only in destination countries but for us as well. It simply shows the cracks and leakages through which any one can come or leave our borders (here I am not talking about porous borders with Afghanistan). This does not only have implication on international security but on our security too.
The third important aspect that I want to touch upon is proceeds of US$ 52 million that come through sales of AK47. Most of these guns are coming from Afghanistan. The value of US$ 52 million raised does not reflect the hundreds of millions of dollar losses that our economy has to suffer from the users of these guns.
Interestingly, the data reveals that areas in Pakistan most conducive for drug and arms trafficking; emigrant smuggling; and illegal timer trade re also ranked as worst in terms of their food security. These districts, mainly lying around the borders of Afghanistan and Iran, are also hit by militancy and many of these districts were worst hit by floods in 2010. This is a classical case of one form of insecurity breeding other forms of insecurities.
Pakistan’s formal economy has got crippled due to this illegal economy. But the impacts go beyond our borders. These forms of crime have become a threat to governments, civil societies and economies, undercutting the rule of law and hampering the achievement of Millennium Development Goals. Traditionally, these issues have been left at the edge of development discourse but there is now an acknowledgement at the highest levels in the United Nations and by leading institutions like the World Bank and the World Economic Forum that security issues need to be mainstreamed into traditional development paradigms.
In an inter-connected world, countering the illegal economy is a shared responsibility. It is striking that most illicit flows go to major economic powers. In other words, the world’s biggest trading partners are also the world’s biggest markets for illicit goods and services. This reflects the extent to which organized crime has become linked to the global economy, and vice versa, through the illicit trade of banned or legal products (like natural resources), or the use of established banking, trade and communications networks (financial centres, shipping containers and the Internet).
The response requires increased international cooperation within the context of an integrated, comprehensive and cost-effective strategy with a balanced approach between development and security, and respect for national sovereignty and human rights. It is important that awareness is increased and collective action is taken against the threat of organised crime and its resultant illegal economy .
This is shared responsibility between developed and developing world; between Afghanistan and Pakistan; and among various stakeholders of Pakistan. Despite the constraints which hinder research on organised crime and illegal trade it is quite possible to start an effort to understand the dynamics and nature of the illegal economy on a country and its wider impact on that country and beyond.  It is high time that we should devote our attention to this highly crucial topic in Pakistan.
The writer heads SDPI and supervised preparation of SDPI-UNODC joint report, “Examining the dimensions, scale and dynamics of the illegal economy in Pakistan”. He is contactable at

This article was originally published at: The News

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.