Black economy

From CEOpedia | Management online

Black economy, shadow economy or black market is the type of market, which is operating non-compliant with the regulations breaking them and potentially involving the transfer of illegal goods between parties. Black economy is not controlled by any government, and that is why it is called black or shadow. Governments of different countries fight with black economies, as they directly impact policymaking, macroeconomic growth of the country, quality of life, investments in the country and many other factors (A. Kumar, 2016). Depending on the size of the black economy, it will affect differently live in the country. If the shadow economy is large, the impact of this economy will be enormous and it will be impacting the whole population. For instance, in countries, where the size of the black market is small, it is almost neglectable and these countries tend to be more developed, as the shadow economy has no real power (A. Kumar, 2016).

Defining black economy

There are many examples of black economy activities, some of them are drug and human trafficking, prostitution, illegal currency transactions and weapon trading (A. Horning, C. Thomas, A. Marcus and J. Striken, 2018). All of these activities are prohibited and they are strictly prosecuted by governments of many countries. The shadow economy is damaging the real economy of the country, as it is uncontrollable and there are no regulations. There are no limits on the prices of goods, and the taxes from such transactions are not paid to the tax office. This is the reason, why many countries try to estimate the size of the black market in their countries, to understand how much money and illegal activity is going unnoticed (A. Kumar, 2016). Because the black economy is not being regulated by the government it is breaking other people's freedom and rights very often. For instance, in cases of human trafficking and prostitution, the rights of individuals can be severely broken and neglected.

There are cases, when money earned on the black market may potentially end up in the official economy. Such cases are called money laundering and they are prosecuted by financial authorities of all countries. Money laundering is the process when an individual who obtained money in an illegal way tries to legalise such funds by changing their origination to a legal source. For instance, an individual, who sells drugs and has a small grocery shop without a cash register can add money earned on illegal transactions to the daily revenue of that shop. In this way, the money is laundered as now such individual can claim that the source of this money is grocery shop revenue. Money laundering is one of the reasons, why governments of different countries look forward to digitalising their economies. If the individual from the example would have a cashier register and the grocery store did not accept cash payments, it would be almost impossible for this illegal money to enter the economy.

The black economy is being run by its market participants, which are very often organised crime syndicates. These syndicates try to take advantage of different loopholes in the law to operate on a high scale. For instance, many crime syndicates may even sponsor legal companies that are earning money and applying for official government programs (S. Canappele, M. Riccardi and P. Standridge, 2013).

Characteristics of black economy

Below listed are the characteristics that can be assigned to the black economy:

  • Not controlled by government officials or country representatives.
  • Includes illegal transactions, such as the exchange of prohibited goods, tax evasion, and violent activities.
  • The most common payment method on the black market is cash. However, with the popularity of Bitcoin and other cryptocurrencies, they become more usable for illegal activities. This is partially caused by the anonymity of transaction participants and the decentralisation of the system.
  • Black market participants prefer to be anonymous as it is common for them to be wanted.
  • Real economy of the country is impacted by the black economy depending on its size.

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Author: Nikita Shtemenko