Rise of the Shadow Economy: Second Largest Economy in the World
The fact that the shadow economy, or the black market or underground economy, is on the rise in the middle of a global financial crisis should be no surprise to economists.
A recent post on Steven Levitt and Stephen Dubner's Freakonomics blog discussed the growth of the shadow economy across the world. The post claims that the shadow economy is the second largest in the world. Freakonomics: "In 2009, the OECD concluded that half the world's workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world's workers. This new economy even has a name: 'System D'."
In a recent article for Foreign Policy magazine, Robert Neuwirth argues that "the $10 trillion global black market is the world's fastest growing economy -- and its future". Neuwirth discusses that the phrase "System D" comes from a slang phrase used in French-speaking Africa and the Caribbean. The "D" stands for the French word "debrouillard". Neuwirth: "To say a man is a debrouillard is to tell people how resourceful and ingenious he is." Thus, self-starting entrepreneurs who go out on their own for business purposes without being regulated by bureaucracy and/or without paying taxes are part of "l'economie de la debrouillardise", or "Systeme D" on the street.
According to Neuwirth, System D was once small with simple street merchants. In time, trade within System D has globalized and expanded. Neuwirth claims that System D is now where the jobs are.
Though being the black market, System D is not limited to the likes of Tony Soprano, Michael Corleone, and Rico Bandello. In comparing System D to the US market, Neuwirth claims that "kids selling lemonade from the sidewalk in front of their houses are part of System D". As are vendors at flea markets, roadside farm stands, and swap meets. Neuwirth writes that System D is a global phenomenon, transporting products across the planet ranging from machinery to computers to mobile phones.
According to Neuwirth, "System D is growing faster than any other part of the economy, and it is an increasing force in world trade". As such, System D "will be crucial for the development of cities in the 21st century". What is the total value of System D? Neuwirth explains that based on estimates, the total value of System D globally is close to $10 trillion. In comparison, the US has a GDP of $14 trillion. Thus, were System D a sovereign nation, it would be an economic superpower -- the second largest economy in the world.
Neuwirth contends that System D is the wave of the future for the global economy. From street selling to unlicensed trade to compensation under-the-table, many workers are off the grid. According to Neuwirth, System D is opening up the economy and providing new opportunities for those seeking income through labor.
Though the black market has historically been cast in a negative light, Neuwirth believes that System D is giving workers an avenue to embrace their entrepreneurial spirit. Neuwirth: "Even in the most difficult and degraded situation, System D merchants are seeking to better their lives."
Aside from the legal aspects of the black market, the shadow economy has negative implications in terms of tax revenue. In a July 2010 article from Bloomberg Businessweek, Chris Prentice discussed how the rise of the shadow economy affects tax revenue for nations.
Based on estimates, Prentice notes that "given US GDP of $14.26 trillion, the world's largest, that could still be as much as $1.2 trillion in taxable income that slips through Uncle Sam's fingers each year". Prentice quotes Austrian economist Friedrich Schneider, "Taxation and regulation increased in most countries over the past 10 years...reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation."
Governments must therefore make the official economy more attractive and reduce incentives that lead citizens to participate in the shadow economy. Prentice concludes, "At a time when official economies around the globe are dealing with high unemployment, it might be some time before shadow economies lose their appeal".
The issues behind the growth of the shadow economy seem to center more around actions of governments rather than inherent flaws and disparities within an economic system. As a government needlessly intervenes in an economy with asinine regulations and bureaucracy, it makes sense that the populace should embrace the shadow economy. Far from flaws and frailties in the capitalist system or the marketplace, the shadow economy tells us more about the futility and asininity of bureaucracy and red tape.
Nobel Prize-winning economist Milton Friedman once commented, "The black market was a way of getting around government controls. It was a way of enabling the free market to work. It was a way of opening up, enabling people." Friedman criticized government intervention, price-controls, and occupational licensure. Such government involvement in the market is what creates the black market in the first place. In some ways, the black market is the free market. Understanding this principle helps us to put into focus the proper role of government as discussed by philosopher Ayn Rand. Governments around the world that want to prosper should take heed.
Of course, the black market extends to illegal activities fitting the characteristics of classical crimes such as burglary, murder, robbery, drug dealing, but much of the shadow economy is made up of individuals who are not what average Americans would consider criminals. Take, for instance, children setting up a lemonade stand or parents having a bake sale to raise money or a simple laborer being paid under the table for services or repairs.
As the official economy deteriorates and unemployment continues to be high, some individuals will naturally seek opportunities in the shadow economy. And the shadow economy goes beyond reflecting the fact that asinine bureaucracy does not work; rather, the shadow economy reflects the fact that the bureaucracy is decaying as citizens reject bureaucratic requisites and processes. This is akin to the "great refusal" discussed by philosopher Herbert Marcuse.
Even aside from environmental regulations that conservatives oft criticize, asinine bureaucracy permeates through American society from everything to driving your car to paying your taxes to getting a loan to enrolling in school. Many do not understand the bureaucratic regulations & processes, and many become turned off from the system. In light of perceivably inequitable tax policies, the shadow economy becomes that much more appealing. Where one can understand some level of red tape in vital professions like medicine and nursing, I believe American society needs to start taking another look at how bureaucratic processes and tax policies need to be reformed -- in particular, in the areas of law and politics.
In light of the current financial crisis and how attorneys contributed to the mess, the legal profession today is ripe for some serious reform and the government would do well in radically restructuring and reinventing professions such as those in law and finance. Even in light of criticism of deregulation (as discussed by economists like Paul Krugman), competition in capitalism is a powerful force -- and many times competition brings things into balance with appropriate value.
In light of the proper role of government, the free market with fewer regulations and less asinine bureaucracy is able to function smoothly with free competition, wealth-creation, and entrepreneurship thereby reducing the attractiveness and appeal of the shadow economy. More government intervention seems to create more black market participation; freer markets thus make for less need of black markets.
In short, far from telling us what is wrong with markets or economic actors, the shadow economy tells us more about what is wrong with government policies. If nations seek to deter black markets while still growing, succeeding, and creating wealth, governments should reassess and reform the bureaucratic regulations, bureaucratic processes, and all other forms of red tape in light of the proper role of government -- thereby benefiting citizens, firms, and the rest of the world as well.
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