1. Shah, Anup. ‘Global Financial Crisis’. Global Issues. December 11, 2010. Web. 10 Dec. 2011. < http://www.globalissues.org/article/768/global-financial-crisis>
2. ‘Will the underground economy increase if official unemployment rises?’. WiseGEEK. Web. 10 Dec. 2011. < http://www.wisegeek.com/will-the-underground-economy-increase-if-official-unemployment-rises.htm >
We are in a financial crisis that is being felt in all countries. Unemployment is rising and its effects can already be seen, as well as other problems that caused the crisis. As I have explained in the introduction, I have chosen the theme of the underground economy because I consider it of general interest and also it is an issue that I want it information.
I have started by defining underground economy. This concept has a lot of synonyms and similar terms can be confusing.
I have also discussed the different types of activities of underground economy that we can found. It can divide in legal and illegal activities.
After, I made reference to percentage of the GDP of certain countries that it represents the underground economy. Although it is difficult to ascertain the exact figures that they representing this type of economy.
Then I have appointed six groups of people engaged in informal economy. Among them we find from criminals to important people in government. I've also included an article on this topic and immigrants.
And finally, I mentioned some solutions that would conduct some economists.
In conclusion we can say that this type of economy has always existed, but that at certain times and certain situations has increased. Lots of activities involve performing underground economy, from hanging a picture in your own home to sell drugs on the street. So every country has a high percentage of underground economy in GDP.
To avoid this type of action the government should impose its own laws. As it shown in this article published in the online newspaper "kyero.com" on January 13, 2010, in Spain have carried out certain inspection activities that they could help to reduce the percentage of underground economy, but not to eliminate it completely. (14)
In my opinion I think that we still have not found the right techniques to deal with this type of economy. The people benefit a lot of to it and therefore they are not interested in removing it. But it's not good for the economy and it leads to a decrease in revenue of the State. So we must find solutions before it can no longer control it.
Schneider writes in his report: "reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation."
But he goes even further. He and his co-authors suggest that the solution is not just more efficient tax collecting and lighter regulation, but also to find a way to make work in the official economy more attractive and reduce the incentives to participate in the shadow world. 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. (10)
The underground economy is present in the day to day and it is increasing more and more. As businesses in Spain have such heavy upfront costs many sole traders will start in the Black economy. Their first months will be cash in hand until they are earning enough for two things.
1) To be able to pay the costs involved in being an autonomo whilst still taking money home at the end of the month after paying their taxes too
2) To be able to understand how to bill in Spain when virtually everyone asks whether they can get away without paying VAT.
Plumbers, electricians, teachers, short courses etc… virtually anything that can be done in a one on one transaction will involve that inevitable question. Is it possible to reduce the bill? This usually means can I pay without VAT?
For the Spanish economy the effect is twofold. Firstly you should never believe official government figures about the economy in terms of size or numbers of employed or unemployed. One of the main effects of the crisis in Spain is that the unemployment figures have been rising hugely. One of the main areas that are rising is in those who were self employed. Now there is no doubt that people are losing jobs as they cannot earn enough to make their work pay for them but there is no real incentive to declare yourself unemployed here as unemployment pay for previously self employed workers was nil until the government put in an emergency 420 Euros per month payment in place last year.
Therefore it is clear that people are signing off the self employed register and signing onto the unemployed register but they are continuing to do the work they did previously. However the government now doesn’t get their social security payment and VAT is not been collected either meaning that central government income goes down. (13)
An example of underground economy in Spain is for example the case of a small town in Andalucia where everyone is officially unemployed now apparently yet spending in the local area has remained constant from 2008 to now. Ie money is still there but it is just not as visible as it used to be.
The knock on effects of this lack of state income are huge as they cannot afford to pay for social programs that might benefit from greater levels of support and recently the government has been forced to suspend the support of 420 Euros for a year to newly unemployed people. (13)
1. Criminals: From fraud to kidnapping, criminals do not inform their governments of their annual incomes.
2. Politicians and Bureaucrats: Bribery is alive and well in the world. The only country that could have saved dishonest individuals from government service is Singapore. When Mobutu Sese Seko left office, he had accumulated a billion dollar fortune. He could have written a check and paid off Zaire's Billion dollar foreign debt. I suspect the same could be stated of most dictators who have been in office for three years or more.
3. Immigrants: If they cannot legally do business in their adopted nation so they are automatically assigned to the underground economy. This is as true of Indonesians fleeing to Malaysia as it is of Mexicans fleeing to the U.S. The best guess is that there are most likely between 18-20 million undocumented workers in the United States. All are members of the underground economy.
In this article published in the online newspaper "barcelonareporter.com" we see the situation of immigrants in the underground economy in Spain.
More than half the immigrants in Spain work in the underground economy. Domestic services, construction and agriculture are the sectors hardest hit by this phenomenon. (12)
4. American Citizens: In the USA, you are only considered unemployed as long as you are drawing unemployment checks. After the payments end, you no longer exist at the U.S. Dept of Labor. In the past few years, six million workers have disappeared from the U.S. Dept of Labor unemployment statistics. I suspect that many have joined the underground economy. The U.S. Government estimates there are 25 million underground economy entrepreneurs. Some are homeless collecting aluminum cans and crowding day labor halls. Some are merchants at Ebay, which has 40 million merchants, who make Internet sales that go unreported. The smarter ones take a clue from the Owlhooters of the 1950s and 1960s and go to local Junior Colleges and learn new trades.
5. Employed Americans: Trade-persons, professionals and nearly everyone with a useful skill often does side work for which they are paid in cash. Business owners often don't report all their income. Most regular employees earn some unreported income. These people have one foot in the classic economic system, the other in the underground economy.
6. Sophisticated Traders: These people, from almost every country, realize that putting all of their eggs in any a single economic basket is a poor bet in the long term. They often go offshore to boost investment earnings and minimize taxes. Governments, like the United States, are trying to bring these traders back into their national economies. This group controls trillions of dollars of investment capital. Whether enticed by high taxes, excessive regulations, ineffective law enforcement, corrupt government or poor laws, it is clear that government is the cause for the growth of the underground economy. (11)
Estimating the size of the shadow economy is difficult. After all, people engaged in underground activities do their best to avoid detection. But policymakers and government administrators need information about how many people are active in the shadow economy, how often underground activities occur, and the size of these activities, so that they can make appropriate decisions on resource allocation. (8)
In more than 50 countries around the world, the shadow economy is at least 40 percent the size of documented GDP.
In percentage terms, the biggest shadow economy relative to official economic activity is in the former Soviet republic of Georgia. In 2007, the last year for which data were available, revenue from all Georgia's goods and services generated off the books amounted to 72.5 percent of official GDP. In other words, the government is losing out on billions of taxable dollars it could use to improve the national infrastructure, service debt, build schools and roads, even hire better tax collectors. At the other end of the scale, the U.S. shadow economy equaled only 9 percent of the country's official economy. Given U.S. 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. (10)
At present, the underground economy is expanding more rapidly than the traditional U.S. Economy. In the United States, the IRS estimates that the underground economy may represent as much as 40% of the GDP. In some nations, like North Korea, the estimate is that 80% of the North Korean GDP goes unreported as a portion of their entier economy. The Kyrgyz Republic's economic climate is largely a complete underground economy. (11)
As shown in the ranking of activities found in the online database "Havocscope" a lot of money moving in underground economy activities. Some of these activities in which more money is moving are: (9)
- Illegal Gambling $250.1 Billion
- Counterfeit Drugs $200 Billion
- Prostitution $187.67 Billion
- Marijuana $141.80 Billion
- Counterfeit Electronics $100 Billion
- Cocaine $85 Billion
- Prescription Drugs $72.5 Billion
- Heroin $68 Billion
- Software Piracy $58.8 Billion
- Gas and Oil Smuggling $53.64 Billion
- Cigarette Smuggling $50 Billion
- Counterfeit Foods $49 Billion
- Counterfeit Auto Parts $45 Billion
- Counterfeit Toys $34 Billion
- Wildlife Smuggling $32 Billion
- Human Trafficking $32 Billion
- Amphetamines $28.25 Billion
- Movie Piracy $25 Billion
- Illegal Fishing $23.5 Billion
- Human Smuggling $20 Billion
- Ecstasy $16.07 Billion
- Illegal Logging $15 Billion
- Music Piracy $12.5 Billion
These are illegal activities and the most important is illegal gambling, as we can see in the ranking. In this activity the tax fraud is $250.1 billion, a lot of money. The next activity is counterfeit drugs with also a big quantity of money. More activities are prostitution, commercialization of marijuana, counterfeit electronics…
Some people would rather operate a “legit” business but also make some “underground money”. Some of these other methods of cash income involve “side income” within a legitimate, registered business. Some prime businesses for doing this would include restaurants and bars (classic examples of businesses infused with a great deal of hard-to-track cash transactions) as well as peripheral cash-only businesses such as Laundromats, self-serve car washes, and vending machine routes. These all require some sort of initial investment – including a lease. But if one has a business such as these, there’s a lot of wiggle room in what is reported. A lot of room to stay in the underground economy.
But for people with little or no assets to begin with, there are still many options. (4)
· TYPE OF ACTIVITY:
- Illegal activities:
· Monetary transactions: Trade in stolen goods; drug dealing and manufacturing; prostitution; gambling; smuggling; fraud.
· Nonmonetary transactions: Barter of drugs, stolen or smuggled goods. Producing or growing drugs for own use. Theft for own use.
- Legal activities:
· Tax evasion: Unreported income from self-employment. Wages, salaries, and assets from unreported work related to legal services and goods. Barter of legal services and goods.
· Tax avoidance: Employee discounts, fringe benefits. All do-it-yourself work and neighbor help. (8) (table 1)
Since the “discovery” of the informal economy in the beginning of the seventies, many observers subscribed to the notion that the informal economy was marginal and peripheral and not linked to the formal sector or to modern capitalist development. Some continued to believe that the informal economy in developing countries would disappear once these countries achieved sufficient levels of economic growth and modern industrial development.
The informal economy can however no longer be considered as a temporary phenomenon. Furthermore, the informal economy has been observed to have more of a fixed character in countries where incomes and assets are not equitably distributed. It seems that if economic growth is not accompanied by improvements in employment levels and income distribution, the informal economy does not shrink. The situation is therefore that the informal economy is continuously increasing in most developing countries, even in rural areas. But I will focus in Spain. (5)
The underground economy is widespread in time and in space. Some causes that have led to the underground economy are:
- History presents us with a large number of prohibition and taxation events that gave rise to contraband in many products: perfumes; coffee; salt; matches...among numerous other examples. At different times and places, pamphlets, newspapers and books were censured. This fostered a black market has grown over the years.
-An answer to the question of causes can be found in Adam Smith’s celebrated Wealth of Nations. Smith saw the foundation of modern society in the division of labour, which itself came from “a certain propensity in human nature… to truck, barter, and exchange one thing for another”. Exchange is a fundamental dimension of human relations, and occupies a central place in economic theory. Every time the propensity to exchange is constrained, individuals try to circumvent the constraints in order to obtain what they perceive as the benefits of exchange. In other words, when impediments prevent exchanges in the official economy, demanders and suppliers will often retreat in the underground economy to pursue their trades.
- The unemployment is one of the more important causes of the underground economy. When the people are unemployed they don’t earn money to feed his family and need to earn money as they can.
Here we have a link where we can find an article about unemployment and underground economy in Spain. (3)
In the article "Recession-hit Spain goes back to black economy" published in the newspaper "The Telegraph" on October 19, 2009 and written by Fiona Maharg Bravo explains the situation in Spain with declining employment and rising the informal economy. This kind of economy increases when unemployment rises because people need money to survive and feed their families. (6)
-Other cause is the reduction of working hours on a mandatory basis. This causes people to earn less money and need other jobs to survive. They can only have a second job in the underground economy because it is illegal. (3)
-These are some causes about underground economy, but it is likely that the sole motivation is by working poor trying to keep up with the rising cost of living in an economy where prices of everything keep climbing while wages remain stagnant. In the end, media reports of government bureaucracy and legislation acting in collusion with the growing power of unbridled corporate greed fuel most of the economic angst of taxpayers. Many workers, quite justifiably so, become indignant when they see legislators creating massive loopholes for big corporations while tightening the legislative noose around the necks of both the middle class and working poor.
There are also many strong arguments made by those participating in the so-called “underground economy“. Some could argue that the types of jobs in an underground economy almost always stay in the local communities, thus strengthening them, while cutting out the middleman - the government. Another argument is that there is, in consequential terms, little difference between an underground economy and the lack of transparency you find in the government and corporate accounting practices. (7)
· What is the underground economy?
The underground economy, which I will also refer to as the “illegal economy” (or “underground markets” or “illegal markets”), is that part of the economy where goods and services are produced, exchanged or consumed illegally. These activities are illegal either because the production or consumption of the goods or services is forbidden by law (recreational drugs or some prostitution services, for example) or because legal goods or services are exchanged under illegal conditions (construction services by unlicensed workers, smuggled goods or illegally-sold goods that would otherwise be legal). (3)
This “shadow” economy is more streamlined and more profitable to the participants while less profitable to the government. And this is has undoubtedly become more commonplace in these hard economic times.
The simple fact of the matter is that while people have less money, they will look for other means to gain income, and those methods of income-generation will often be unconventional and will be done “on the side”. These methods will include barter and trade in addition to cash-payment income. (4)