Meaning of Black Economy
Black Economy refers to the sections of a society that indulge in commercial activities, some aspects of which are illegal. Some examples include tax evasion, money laundering, human trafficking, etc.
- A Black Economic is a collection of all the segments of a society that undertake activities with a focus to remain undetected. Some aspects of them are illegal in nature. An important example is the black markets selling illegal products such as banned medicines at cheaper rates.
- Depending on the size of the economy, it can have a huge impact on a state’s or nation’s economy since millions of lost tax dollars are involved in the black market transactions. A nation’s progress is often plagued when it has thriving black markets.
- The black economy benefits some slum-dwellers and downtrodden segments of the society by allowing them to purchase essential commodities and services at cheaper rates.
How Does Black Economy Work?
Black Economy works within a jurisdiction such as a state, but without following the laid down protocols for doing business in the jurisdiction. It is known by many names such as shadow economy, grey economy, hidden economy and informal economy, among others.
The International Monetary Fund (IMF) in a study has defined the black economy as the shadow economy that contains all the economic activities hidden from the officials for monetary, regulatory, and institutional reasons. The study further clarifies that monetary reasons could revolve around tax avoidanceTax AvoidanceTax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss. and escaping contributions made towards social security. Regulatory reasons hover around avoiding rules and regulations. Institutional reasons stem from having corruption in the legal and political domain and a less the stringent rule of law.
Black markets, an essential component here are a hub of activities where people escape tax payments on jobs they have taken. One easy way to save taxes is to have cash dealings that are difficult to track down compared to banks that offer banking statements. There is a very exhaustive web of activities that prosper and thrive within a shadow economy based on the parties’ needs.
A simple example could be when a business employs child labor or forces the workers to work in the conditions which do not adhere the labor laws of the land. CSR experts of business giants dedicate a good deal of their time ensuring legal adherence in 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. This attracts people to transact in black markets to save money. The rise of e-commerce has flourished black markets, and many cases are hard to track for law enforcement.
The trade in the shadow economies is typically considered illegal, though there are instances where the transactions’ legality is in a grey area. The study above found that from amongst the 158 countries, in 1991-2015, 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 in Switzerland with 7.2%.
Examples of Black Economy
Globalization has given a deeper meaning to the instances of the black economy as it is a contributing factor towards its rise. Several examples of black economy activities are listed below.
- In some countries, there are regions where one can buy counterfeit goods, including school and university certificates, company seals, medical letters and even identity cards.
- A constructor could employ many undocumented immigrants, and then pay them for less than what labor union professionals would demand. This money is usually paid in cash and away from the law’s eyes, which ensures that no tax is paid on it.
- The purchase of firearms is strictly controlled, and it is required that each person who does so is registered. However, there is a thriving market in many places where arms can be bought without going through these processes. The buyer only needs to come up with the money, and the seller provides them with the firearms.
- Online, several sites have been known to be harboring shadow economy activities. The most popular of which was a now-defunct website known as the Silk Road. In 2013, Silk Road was shut down by the United States government for being 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 properly. In these countries, people would turn to the black economy to meet their needs.
- Otherwise, in the face of strong leadership and well-run institutions, it becomes harder to set up or use a shadow economy. This is true even if the shadow economy is based online since the enactment of cybersecurity laws can lead to a banning of most of such websites.
- Many developing countries have fallen prey to shadow economic activities. Black economy in India has a long history and it is one such country that is fighting a long battle against it. As per the reports generated by the governmental bodies, the black economy in India during 2009-2011 had been approximately 71-79% of the GDP. Tax evasion was the heaviest contributor to the black income with 65% contributions. DemonetizationDemonetizationDemonetization is the eviction of a particular currency/tender present in the economy from circulation and replacing it with a new currency aiming for several outcomes like the corruption-free economy, black money removal, controlling inflation, stop funding of illegal activity. and GST have been some methods rolled out by the government to battle black money and tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. .
Impact of Black Economy
- The black economy’s major impact is that it draws income away from the real economy. If there is easy access to the shadow economy where goods can be bought without any of the involved taxes, this becomes a vastly cheaper alternative. Many would be attracted to making purchases in this manner, rather than legitimate shops.
- It encourages people to get involved in crime including extortion, tax evasion, smuggling and human trafficking. Involvement in the black economy usually involves some form of oppression in 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. It grants easier access to anti-social elements and criminals which can threaten citizens’ safety.
- Some of these countries face embargoEmbargoAn embargo is a political decision taken by countries where the government passes an order to restrict the free trade of goods & services between two nations for a specified period and may include restricting all types of goods & services or trading of particular interest like oil., which often leads to further adversity. Moreover, in countries battling economic instability and corruption, the cost of essential goods and services in legal institutions are often high, depriving the downtrodden and impoverished from affording them. In such cases, a black market sometimes helps the underprivileged access the essentials at a cheaper price.
This has been a guide to Black Economy and its meaning. Here we discuss how it works and its impact on the real economy along with some examples. You can learn more from the following articles.