Underground economy

Unreported income and business activities
Development of parallel economies
Black market economy
Shadow economy
Black market trading
Unreported financial transactions
Underground and illicit business
Black-markets
Second economy
Illegal private profit
Black marketeers
Underground trade
Undeclared income
Unofficial earnings
Informal markets

Nature

The underground economy, also known as the shadow or informal economy, refers to economic activities that are not reported to authorities and escape government regulation, taxation, and observation. This includes unregistered businesses, undeclared work, and illegal trade. As a problem, the underground economy undermines public finances by reducing tax revenues, distorts fair competition, and weakens labor protections. It can also facilitate criminal activities and corruption, making it difficult for governments to implement effective economic policies and social programs. Addressing the underground economy is crucial for promoting transparency, economic stability, and social equity.

Background

The significance of the underground economy emerged in the 1970s, as economists and policymakers observed persistent discrepancies between official economic data and actual economic activity worldwide. Growing concern followed the oil crises and global recessions, when unreported transactions and informal labor became more visible. Subsequent research in the 1980s and 1990s, aided by improved statistical methods, revealed the pervasive scale and complexity of underground economies, prompting international organizations to address its implications for governance and development.

Incidence

Unreported business activities and cash transactions occur in most countries and are the continuing subject of investigation by tax authorities. These activities include drug trafficking, gambling, prostitution, loan-sharking, bribery, use of state property for private gain, employment of workers without a permit and without paying social costs and misappropriation of public funds. In 1994 in the UK it was estimated by government tax authorities that the underground economy had reached a volume of £50 billion per year, namely more than twice the annual defence budget.

As its name implies, the second economy refers to all unlawful activities taking place outside the state-controlled economic system. It is centred primarily around the illegal production and distribution of goods and services for private profit. This illegal system has persevered and has even played a useful role in filling the gap resulting from the inefficient performance of the 'first' economy. However, one of its disadvantages is that it has given birth to a new privileged class that enjoys many amenities and luxuries not available to the majority of the population.

Claim

The underground economy is a critical problem that undermines society at every level. It robs governments of essential tax revenue, fuels organized crime, and creates unfair competition for honest businesses. This shadowy sector erodes trust in institutions and perpetuates inequality, making it harder to fund public services and protect vulnerable citizens. Ignoring the underground economy is reckless; urgent action is needed to bring these illicit activities into the light and restore economic justice.

Counter-claim

The so-called "underground economy" is vastly overblown and hardly a pressing issue. Most informal transactions simply help people make ends meet, foster entrepreneurship, and keep local communities vibrant. Instead of demonizing these activities, we should recognize that they often fill gaps left by rigid, inefficient regulations. Worrying about the underground economy distracts from real economic challenges and wastes resources that could be better spent addressing genuine societal needs.