By Econ­Mat­ters

A recent arti­cle at For­eign Pol­icy noted that the $10 tril­lion global black mar­ket is now the world’s fastest grow­ing econ­omy, and that 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’.

Accord­ing to an IMF eco­nomic study, black mar­ket, also called the shadow, under­ground, infor­mal, or par­al­lel econ­omy, "includes not only ille­gal activ­i­ties but also unre­ported income from the pro­duc­tion of legal goods and ser­vices, either from mon­e­tary or barter trans­ac­tions. Hence, the shadow econ­omy com­prises all eco­nomic activ­i­ties that would gen­er­ally be tax­able were they reported to the tax authorities."

The IMF study also out­lined the the poten­tially seri­ous con­se­quences of worlds fastest grow­ing economy:

• The growth of the shadow econ­omy can set off a destruc­tive cycle. Trans­ac­tions in the shadow econ­omy escape tax­a­tion, thus keep­ing tax rev­enues lower than they oth­er­wise would be. If the tax base or tax com­pli­ance is eroded, gov­ern­ments may respond by rais­ing tax rates—encouraging a fur­ther flight into the shadow econ­omy that fur­ther wors­ens the bud­get con­straints on the pub­lic sec­tor. (On the other hand, at least two-thirds of the income earned in the shadow econ­omy is imme­di­ately spent on the offi­cial econ­omy, result­ing in a con­sid­er­able pos­i­tive stim­u­lus effect on the offi­cial economy.)
• A pros­per­ing shadow econ­omy makes offi­cial sta­tis­tics (on unem­ploy­ment, offi­cial labor force, income, con­sump­tion) unre­li­able. Poli­cies and pro­grams that are framed on the basis of unre­li­able sta­tis­tics may be inap­pro­pri­ate and self-defeating.
• A grow­ing shadow econ­omy may pro­vide strong incen­tives to attract domes­tic and for­eign work­ers away from the offi­cial economy.

Based on an esti­mate by Busi­ness­Week, “[G]iven 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."

In fact, shadow econ­omy is part of the con­trib­u­tory fac­tors to the cur­rent Euro cri­sis in the con­text of reduced gov­ern­ment tax rev­enue and dri­ving up con­sumer price lev­els. The IMF study showed in the 21 OECD coun­tries in 1999–2001, Greece and Italy had the largest shadow economies, at 30% and 27% of GDP, respec­tively. In the mid­dle group were the Scan­di­na­vian coun­tries, and at the lower end were the United States and Aus­tria, at 10% of GDP, and Switzer­land, at 9%.

More impor­tantly, the rise of Sys­tem D high­lights the inad­e­quacy of global gov­ern­ments poli­cies, processes, red tapes, and bureau­cra­cies. This info­graphic lays out every­thing about the black mar­ket, how it affects our econ­omy and our culture.

Fur­ther Read­ing — Debt Cri­sis 2012: For­get Europe, Check Out Japan

Read more from the author/contributor here.

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