What might the presence of a black or shadow economy in a country mean to that countrys economy
|
July 06, 2022/ Steven Bragg
A black economy is that portion of a country's economy that is undocumented. Individuals prefer to operate within the black economy so that they can avoid making tax payments to the government, or to avoid price controls or rationing. The black economy operates by using cash
payments or barter to settle transactions. The transactions occurring within the black economy are not included in a country's gross domestic product (GDP) calculation, since there is no way to measure it. The black economy constitutes a large part of the total economy of a country in the developing world, because
these nations have a large proportion of low-income citizens who cannot afford to pay taxes. Consequently, the GDP figures for many developing nations are probably severely under-reported. There also tends to be a thriving black economy when a government imposes excessively high taxes, or when the government restricts certain types of activities, such as the sale of drugs or weapons. A black economy is also present
when the government imposes an excessive amount of regulation. Examples of black economy transactions are: The sale of illegal drugs The provision of unauthorized transportation services Smuggling heavily-taxed goods over the border for sale within the country Paying cash to a housekeeper Unauthorized currency conversions Similar TermsThe black economy is also known as the underground economy or shadow economy. The Shadow EconomyHidden beneath the formal economy (economic activity that is taxed and monitored by government and used for national calculations of gross national product [GNP]) are a mass of transactions both monetary and otherwise which go unaccounted for. As a whole, these untaxed and unregulated activities are large enough to be considered an economy of their own, albeit an illegal one. This is generally referred to as the shadow/underground economy. The transactions that make up the shadow/underground (or hidden) economy range from untaxed babysitting to drug smuggling, human trafficking and murder for hire and so on. The unreported funds support benign activities (e.g., household livings expenses) to illegal and dangerous ones (e.g., organizations enabling terrorist attacks). Within this general term there are subcategories of activities. These transactions are under-researched and the terms that describe them are often confused and even misconstrued. Part of the reason these terms are so often confusing is because organizations/academics differ on how to define or even use them. For the purposes of this Gist, the shadow/underground economy is made up of the hidden/informal sectorFootnote 1 which refers primarily to the same activities as covered off in the formal economy, but performed without taxation (or under-reported income) or regulation (e.g., construction, other fee for services that are available in the formal economy). The grey/gray market (unlicensed operations) involves the importing/sale of genuine commodities through channels unintended by the manufacturer and lacking proper control or authorization (e.g., an unauthorized dealer of Coach bags). The black market/economy involves illegal activities. This is a vast and highly organized market which consists of the trade of items including: weapons, currency, counterfeit goods, human trafficking, murder for hire etc. One aspect of the shadow economy as a whole is the difficulty in discovering and measuring its activities. Delineating each activity can be difficult, but doing so is becoming increasingly critical. While the underground economy stunts the formal economy during bullish times, it can also support the formal economy during recessions. There is a continuing interest in Canada in measuring the activity in the underground economy. A recent release by Statistics Canada indicates that in 2012 the underground economy (not including some grey market activities as well as any black market) was estimated at $42.4 B or 2.3% of Gross Domestic Product (GDP)Footnote 2. In November 2014 Canada Revenue Agency announced a Strategy to bring activities from the underground economy (the informal and hidden sector) in to the formal economy.
InformalThe informal sector is essentially a mirror image of the formal economy without regulation or taxation and can include everyone from waiters who do not declare their entire earnings to vendors who sell homemade wares and temporary visitors who work short-term jobs.
Sharing EconomyThe sharing economy is often considered part of the informal economy. It has a broad and changing definition that includes any sharing of information or goods to improve the status of a whole community (e.g. open source software, peer-to-peer file sharing). Collaborative consumption is a subcategory that refers specifically to the sharing of ownership of goods (e.g. a neighbourhood tool chest where any member can borrow a tool much like borrowing books from a library), but often the term sharing economy is used in place of this or any other subcategory term. Ultimately, the sharing aspect means that goods and services are exchanged without taxation. Initially, the sharing economy grew out of a movement relying largely on the internet and based on several idealistic values such as fairness, openness, trust, collaboration, etc. However, the mainstream use of the term has devolved to mean peer-to-peer renting as seen with AirBnB (a website enabling individuals to rent out rooms or whole houses), Uber (a crowd-sourced taxi service), and Amazon’s Mechanical Turk (a platform for temporary employment that is often informal). These applications are little more than informal business, but some participants do pay the taxes. Since the sharing economy relies on the internet, it could be used to formalize much of the activity that occurs in this category. If the platforms are regulated to report each transaction, these transactions that would normally be hidden could be brought to light. However, any transactions technically part of the sharing economy which occur offline with cash exchanging hands could still evade taxation.
BarteringBartering is another type of activity undertaken under the informal sector, and has been made more popular and wide-spread by the sharing economy and the internet. In the new economy, we will likely have an abundance of new micro‐enterprises, cottage industries, and even smaller “nano‐enterprises,” many of which could get started by accident. When there’s no money involved, there could be a vast grey area between having a business and not having one. For example, if you lend your car to a friend, you aren’t a car rental company. But if you lend your car frequently in exchange for some goods and services, have you become a car rental company? Money Soup: A Legal Guide to Bartering, Giving, and Getting Stuff without Dollars
Grey MarketThe grey market focuses mainly on legal products that are sold either through channels unintended by the manufacturer and/ or at destinations unintended by the manufacturer. Parallel imports are a prime example where goods can be purchased at a lower price in a foreign market and then imported from that foreign market or never actually exported from the home market. Although not expressly illegal, the grey market muddles up the official market in two specific ways. Parallel importing negatively affects branding, pricing, and even Research and Development (R&D) investment. Second, these goods complicate the identification of counterfeit goods especially if those counterfeit goods are made at the same factory as the brand’s official goods. So counterfeit goods can mix into official channels which intensifies the effects on branding and pricing. Some parallel importers operate legally, but often they will operate without paying taxes.
Black MarketThe black market is easier to outline since legal restrictions have already been defined. The black market has never respected borders any more than it has laws, regulations, or taxes. As globalization and its relevant technologies have intensified, so too the transnational black market has grown less local, operating on a global scale. Havocscope currently estimates the global black market at US$1.81 Tn. Activities in the black market are wide ranging, and have a higher likelihood of being used to support other illegal activities (including terrorism). With the rapid development of the internet, these activities have become more organized and the possibilities for black market activities more varied.
TerrorismTerrorism is a far cry from unreported income for babysitting, but it is still part of the shadow economy – the black market/illegal sector. Afghan terrorists are infamous for using the sale of opium to fund their activities, and terrorists have been shown to meet in the same circles as other types of black market criminals. Indeed, activities performed within the shadow economy could conceivably support terrorist activities. This may affect countries with higher income more strongly (there is more potential for generating vast sums to support terrorist activities). TechnologyTechnology and innovation spur economic growth in the formal economy, and the same happens in the shadow economy. While connecting the informal, grey, and black markets to each other may still be difficult, the technology which helps one often helps the others. Craigslist has helped informal workers find cash jobs or trade goods, and similar sites have also been used to help criminals find customers. Cloud computing has been used to store all manner of digital goods from purchased music to child pornography. Similar issues are arising with the Internet of ThingsFootnote 3 and 3D printing which are bringing the digital into the real world. 3D printing could enable peer-to-peer sharing of physical goods including patented items, drugs, and weapons. Dark net (websites that are not easily found through search engines or other conventional means) websites could hide any shadow transaction at least until law enforcement and revenue agencies can catch up.
Digital currencyDigital currencies such as Bitcoin are a type of alternative currency that are treated much like physical currencies. Since these currencies can be exchanged for cash, using digital currencies is more like using cash than bartering. Digital currencies have been embraced by informal workers and criminals alike because they are difficult to trace. However, they do not offer any real secrecy by themselves because the technology they rely on keeps a record of all transactions. Criminals and informal workers can cover their tracks using other means such as Tor or other dark nets, but even these are vulnerable to attacks that can reveal identities if used by cunning law enforcement. Just as no security system on the visible internet is 100% effective, so security systems attempting covert transactions are vulnerable too if laws and regulations are open enough to allow it.
How does the black market affect a country's economy?How do black markets affect the economy? Underground markets negatively influence legitimate businesses that can't compete with significantly lower prices on goods. As a result, they can even be driven out.
Is the black market a shadow economy?Alternative names for the underground economy include the shadow economy, the black market, and the informal economy. Dealing in illegal drugs, human trafficking, endangered species, human organs, antiquities, and stolen goods are examples of activities in the underground economy.
What is the meaning of black market in economics?black market, trading in violation of publicly imposed regulations such as rationing laws, laws against certain goods, and official rates of exchange among currencies.
What does the term shadow economy mean?shadow economy includes monetary and non-monetary transactions of a legal nature; hence all. productive economic activities that would generally be taxable were they reported to the state. (tax) authorities. Such activities are deliberately concealed from public authorities to avoid.
|
