**MONGOLIA'S INFORMAL SECTOR** -

**Notes**

_58_ borrowed to supplement the household budget. It should be noted that the categories used for the analysis of trends were chosen according to the breakdowns presented by the SSO, and are different from the groupings of informal and formal income used later in the report.

36.There is no doubt that the increase in the importance of individual activities is attributable in part to the privatization of herds and the income generation that animals have brought to rural households. But since the herds were largely privatized by 1993, the trend apparent in Figure 3 is more than just an artifact of reclassification of types of income. Household survey data, disaggregated to the level of Ulaanbaatar, are not available prior to 1995. During 1995 and 1996, there is no discemable trend in the imnportance of any category of income. However, for Mongolia as a whole, virtually all of the decline in the importance of wages and salaries transpired before 1995, so the lack of a recent trend for Ulaanbaatar implies nothing about the overall trends during the transition period. See Centre for Social Development, 1996, for a discussion of micro enterprise in rural areas.

37.The results in this paragraph are nearly identical for both October (22% and 32%) and November (23% and 32%), 1996.

38.See Porter and Bayer (1984), Gutmann (1977, 1979), and Feige (1979). This approach has also been employed by Suarez and Agastin, as cited in Alonzo (1991).

39."On Some Measures of Currency Regulation and Payment Discipline Enhancement," Resolution by the Ministry of Finance and Mongolbank, October 1, 1993.

40.The survey included 15 street informals representing the relative low-end of the informal spectrum, and 15 kiosks representing the relative high end of the informal spectrum. See also note 66.

41.See, especially, IMF (1996), pages 31-32, which argues that the share of demand deposits fell as deposits were shifted into higher-paying time and foreign currency deposits.

42.Indeed, a more elaborate variant of the currency ratio method employs an explicit econometric model of currency demand. (See Schneider 1997 for a description.) The lack of long time series data for Mongolia has motivated the use of the simpler currency-ratio method in this study.

43.Using MI, as in the traditional currency-ratio method, results in much higher estimates. Using MI, Mongolia's underground economy was equal to about 56% of the "above ground" economy at the end of 1996.

44.Kauftnann and Kaliberda cite the Berkeley-Duke research project on the USSR Second Economy conducted during the late 1980s, as well as Janine Braithwaite "From Second Economy to Informal Sector: The Russian Labor Market in Transition," World Bank mimeo 1994, for providing the estimates of 10-15% for 1989. They then used the mid-point of 12% for their baseline for applying the "macro-electric" approach to estimating the size of Ukraine's "unofficial' economy.

45.Although this technique is usually motivated by the belief that participants in the "underground" economy prefer cash over bank deposits specifically so that they may hide income and avoid taxation, it is important to note that such motivation is not required. Informals may prefer cash simply because the level of activity does not warrant the transactions costs of dealing with banks. The simple currency-ratio technique can not discem the reasons that people use cash for transaction, it can only ascertain the degree to which such preferences, in the aggregate, have changed over time.

46.The surveys of kiosks and taxicabs, undertaken as part of this study, support the contention that the informal sector is large in Ulaanbaatar. Utilizing extremely conservative assumptions, the contribution to value added of