Disadvantages Of Shadow Economy

1 Introduction

Shadow economies exist in every country and have significant implications for economic development and the allocation of scarce resources. Various terms are used in economic literature to describe the shadow economy such as ‘hidden’, ‘unofficial’, ‘underground’, ‘non-observed’, ‘informal’, ‘black-market’ and more recently ‘System D’. A common misconception about the shadow economy is that it is solely based on illegal activities such as prostitution and drug dealing. However, in reality, the shadow economy is a more complex phenomenon as it also encompasses legitimate economic activities where reporting standards are not followed. This paper serves as a brief introduction to the concept of shadow economies. First, we will endeavour

In other words, the deliberate concealment of market-based activities from authorities to evade taxes or to avoid complying with regulations. These activities are not recorded in official government statistics such as gross domestic product (GDP). A common factor for these activities is that they are mainly cash transactions, which leave no trace and so it is easy to avoid reporting them. This paper will focus on the two main categories of legitimate shadow economic activities: undeclared work, which is mainly ‘cash-in-hand’ from activities such as construction, domestic services, and agricultural labour, and the under-reporting of revenue by businesses who deal primarily in cash such as small food establishments, taxi firms, etc. (Schneider,

Economic projections can be distorted (imprecise estimates of GDP and unemployment rates) which can lead to unreliable fiscal and monetary policies along with the ineffective use of scarce resources, such as government spending and human capital.

3.2.5 Positive effects

The shadow economy also has some advantages as it provides millions of people with a source of income especially in poor countries where people who are unemployed receive no financial assistance. It can also help establish new markets and encourage further growth in the official economy. Moreover, income earned in the shadow economy is reinjected into the official economy as it is used to purchase goods and services (Goel, Saunoris and Schneider, 2017).

4 Conclusion

Shadow economies are an integral part of modern-day society. Shadow economies tend to be bigger in developing nations but decrease in size as these emerging countries modernise and government institutions improve. Developed economies, such as countries in the Eurozone, are designing policies to curb shadow economic activity. These measures aim to diminish the adverse effects of the shadow economy and range from improving deterrents and changing attitudes to creating better systems of taxation and regulation. Needless to say, shadow economies have helped shape the world we know