Black Economy

The black economy refers to a portion of business activities that are conducted without considering the formal economic rules of a nation. These activities are not necessarily illegal, but informal in nature. Some examples include tax evasion, money laundering, human trafficking, etc.

A black economy is encouraged by participants who desire to get rid of some of their financial liabilities without coming to notice. Black money and the black economy are interrelated, given the former being generated from the black market, which mostly comprises illegal business dealings.

• A black economy is a collection of all the segments of a society that undertake informal business activities and remain undetected. Some aspects of them are illegal.
• An important example is black markets selling illicit products such as banned medicines at cheaper rates.
• Depending on the size of the economy, it can have a huge impact on a state or nation’s economy since millions of lost tax dollars are involved in black-market transactions. A nation’s progress is often plagued when it has thriving black markets.
• The black economy benefits some slum-dwellers and oppressed segments of society by helping them purchase essential commodities and services at cheaper rates.

The black economy works within a jurisdiction such as a state, but without following the laid down protocols for doing business in that jurisdiction. As a result, it is known by many names, like shadow economy, grey economy, hidden economy, and informal economy, among others.

An essential component here is that black markets are a hub of activities where people escape tax payments on their jobs. An easy way to save taxes is to have cash dealings that are difficult to track compared to banks that offer banking statements for clarification. A wide web of activities prospers and thrives within a shadow economy based on the parties' needs.

A simple example can be when a business employs child labor or forces the workers to work in conditions that do not adhere to the labor laws of the land. The CSR experts dedicate a good deal of their time to ensuring legal adherence to the working conditions of the parent and outsourced firm.

Another method to avoid regulations on quality is through the sale and purchase of products in black markets that are either banned in a country or are available at higher rates. That attracts people to transact in black markets to save money. The rise of e-commerce has flourished black markets, and innumerable cases are hard to track for law enforcement. The trade-in in the shadow economies is typically considered illegal, though there are instances where the transactions’ legality is grey. The study above found that amongst the 158 countries, from 1991 to 2015, the shadow economy consisted of around 31.9% of the GDP. Zimbabwe had a substantial share, with the shadow economy being 60.6% of its GDP. Bolivia was close on its heels with 62.3%. The lowest occurrence was seen in Austria with 8.9% and Switzerland with 7.2%.

The International Monetary Fund (IMF) conducted a study that detailed the black economy meaning and defined the black economy as the shadow economy that contains all the economic activities hidden from the officials for monetary, regulatory, and institutional reasons. It further mentioned the reasons behind the black economy getting established. The study classified the causes into three categories – financial, regulatory, and institutional.

• The financial reasons revolve around tax avoidance and escaping contributions made towards social security.

• The regulatory reasons hover around avoiding rules and regulations.

• The institutional reasons stem from corruption in the legal and political domain and a less stringent rule of law.

Let us consider the following black economy examples to understand the concept even better:

Globalization has given a deeper meaning to the instances of the black economy as it is a contributing factor to its rise. Some examples of black economy activities include the following:

• There are regions where one can purchase counterfeit goods in some countries, including school and university certificates, company seals, medical letters, and even identity cards.
• A constructor could employ many undocumented immigrants and later pay them less than what labor union professionals normally demand. Moreover, people pay this money in cash. As a result, it goes off the records, becoming non-taxable.
• Firearm dealings follow strict regulations, and each person buying them must possess valid registration. However, there is a thriving market in many places where one can buy arms without going through these processes. The buyer only needs to carry the money, and the seller provides them with the firearms.
• While several online sites harbor the US black economy, the most popular was a now-defunct website - the Silk Road. In 2013, the US government shut down the Silk Road as it was an underground website harboring illegal drug deals. It was also a marketplace for money laundering. The authorities had seized over $1 billion in bitcoin after the crackdown.
• It is easier to have a thriving shadow economy in a state where the institutions such as law enforcement, health delivery, and others are not functioning appropriately. People would turn to the black economy in these countries to meet their needs.
• Otherwise, it becomes harder to set up or use a shadow economy in the face of strong leadership and well-run institutions. Even if the shadow economy is based online, enacting cybersecurity laws can ban most such websites.
• The black economy in India has a long history with the country fighting a long battle against it. As per the reports generated by the governmental bodies, the black economy in India recorded approximately 71%-79% of the GDP from 2009 to 2011. Tax evasion was the heaviest contributor to black income with 65% of contributions. Demonetization and GST have been some methods rolled out by the government to battle black money and tax evasion.

• This type of economy draws income away from the real economy. If there is easy access to the shadow economy to buy goods without taxes, this becomes a vastly cheaper alternative. It attracts many to make purchases in this manner, rather than in legitimate shops.

• It encourages people to involve in extortion, tax evasion, smuggling, and human trafficking. Involvement in such an economy usually consists of the oppression of one group of people. For instance, the sale of weapons in the black market may lead to a rise in terrorism.

• It can sometimes make solving crimes harder. Moreover, in politically unstable economies, a shadow economy can increase the burden on governance. Finally, it grants easier access to anti-social elements and criminals, threatening citizens’ safety.

• Some of these countries face embargo, which often lead to adversity. Moreover, in countries battling economic instability and corruption, the cost of essential goods and services in legal institutions is usually high, depriving the oppressed and impoverished of affording them. In such cases, a black market helps the underprivileged access the essentials lower.

This article has been a Guide to what is Black Economy. Here we explain its examples to show how it works in the real economy along with the causes. You can learn more from the following articles: -

• Capitalist Economy
• Circular Economy
• Command Economy
• Shared Economy