Parallel economy

Parallel economy
See also
Money Repatriable Bankers Bank Finance company Etatism Money emission Interventionism Centrally planned economy Barriers to exit

Parallel economy means the functioning of an unsanctioned sector in the economy whose objectives run parallel, rather in contradiction with the avowed social objectives. It is variously referred to as black economy, unaccounted economy, illegal economy, subterranean economy, or unsanctioned economy. The term parallel economy emphasises a confrontation between the objectives of the legitimate and illegitimate sectors.

The existence of a parallel economy or black money makes the monetary policies less effective. Parallel economy, based on the black money or unaccounted money, causes high circulation of money in the market and thus causes inflation.

Activities of the parallel economy

The popularity of the parallel economy is no surprise, considering the low initial role of legitimate private enterprise, coupled with a high degree of liberalisation, and hindered by the lack of macro-stability in the absence of a sufficiently developed legal framework. The parallel economy may be informal; internal; covert; or fictitious:

Category	Examples
Informal Economic Activity (with business transaction)	Barter, street vending, unrecorded cash sales
Internal Economic Activity (with no business transactions)	Subsistence agriculture, hunting, fishing
Covert Economic Activity (with illegal business transaction)	Smuggling, trade in illegal drugs
Fictitious Economic Activity	Foreign devil company

Impact of black income on the economic and social System

The creation of a parallel economy, as a consequence of the growing proliferation of black money in every sector of the economy, has a very serious and, in a number of ways, pernicious influences on the working of the Indian economy.:

• First of all, the direct effect of black income is the loss of revenue to the state exchequer as a consequence of tax evasion, both from direct and indirect taxes. Moreover, tax evasion does not include loss of revenue resulting from unreported production or illegal economic activity.
• Secondly, the availability of black income with businessmen and capitalists and the consequent inequalities of income place a large amount of funds at their disposal. As a result, the consumption pattern is tilted in favour of the rich and the elite classes, at the cost of encouraging the production of articles of mass consumption.
• Thirdly, black money encourages investment n precious stones, jewellery, bullion, and so on. This has an adverse effect on growth via its demonstration effect.
• Fourthly, black money has encouraged diversion of resources in the purchase of real estate and investment in luxury housing. There is large-scale under-valuation of property and, in this way, lots of black money is made white.

Examples of Parallel economy

• Tax avoidance or Tax Havens: Tax avoidance is a form of parallel economy. It is a legal practice of utilizing tax laws to one’s advantage to reduce the amount of tax liability. It involves investing in offshore tax havens to avoid paying taxes. For example, Apple Inc. has been accused of using complex structures to shelter its profits in Ireland, thereby avoiding taxes.
• Money Laundering: Money laundering is a form of parallel economy, where illegal and unaccounted money is made to appear as legitimate money. It is usually done by transferring money through various financial institutions, thereby making it hard to trace the source. For example, Shell companies are often used to launder money from illegal activities like drug trafficking, arms trafficking, and even terrorism.
• Hawala System: Hawala is an informal parallel economy which is often used to transfer money without any identification or paperwork. This system is based on trust and is used by people in different countries to transfer money without any banking charges. For example, Hawala is widely used to transfer money in the Middle East, where banks charge high fees for international transactions.
• Black Market: Black market is a form of parallel economy where goods and services are exchanged without any legal or financial regulations. It is a market where goods are traded illegally and without paying any taxes. For example, the black market for drugs and weapons is a major source of income for organized crime syndicates.
• Smuggling: Smuggling is another form of parallel economy, where goods are illegally imported or exported for sale. This is usually done to avoid taxes or to evade trade sanctions. For example, cigarettes are smuggled from countries with high taxes to countries with low taxes, thus avoiding paying the higher taxes.

Advantages of Parallel economy

The parallel economy offers certain advantages, such as:

• Increased Employment Opportunities: The parallel economy provides employment opportunities for people who are not able to find jobs in the formal sector. This provides them with an income to support themselves and their families.
• Lower Tax Rates: As the parallel economy does not pay taxes, prices of goods and services in this sector are generally lower than those in the formal economy. This makes it attractive to those who want to save money on certain purchases.
• Easier Access to Credit: The parallel economy offers easier access to credit and loans than the formal economy. This can be beneficial for those who need to borrow money quickly and can't get it from a bank.
• Flexible Working Conditions: The parallel economy often offers more flexible working conditions than the formal sector. This is attractive to those who need to work around other commitments or who need flexible hours.
• Reduced Regulations: The parallel economy is not subject to the same regulations and laws as the formal economy. This can be beneficial for those who feel that the regulations in the formal economy are too restrictive or difficult to comply with.

Limitations of Parallel economy

Parallel economy has several limitations which include:

• It deprives the government of the revenue due to it. This is because the parallel economy operates outside the purview of the government and the government does not receive taxes from it.
• It adversely affects the economic development of a nation as the resources of the nation are not channelized to the right places or used for the benefit of the society.
• It leads to an increase in inequality and injustice in the society as the rich and powerful can easily manipulate the system to their advantage.
• It is also associated with criminal activities such as money laundering, smuggling and tax evasion.
• It distorts the market and leads to unfair competition.
• It leads to a loss of trust in the government and its institutions as the parallel economy operates without the rules and regulations of the government.

Other approaches related to Parallel economy

Parallel economy is also referred to with other terms such as black economy, unaccounted economy, illegal economy, subterranean economy or unsanctioned economy. Each of these terms has a slightly different meaning and connotation.

• Black economy refers to an economy that is based on illegal activities such as money laundering and tax evasion.
• Unaccounted economy is an economy that is not reported in official statistics or accounts. It is often used to refer to illegal activities or to refer to legitimate activities that are not reported for tax or other reasons.
• Illegal economy refers to activities that are illegal under the laws of a particular country or jurisdiction. This could include activities such as drug trafficking, smuggling, and corruption.
• Subterranean economy refers to activities that are hidden from the public eye. This could include activities such as illegal gambling, prostitution, and human trafficking.
• Unsanctioned economy refers to activities that are not officially sanctioned by a government or other authority. This could include activities such as the sale of counterfeit goods and pirated software.

In conclusion, Parallel economy is a term used to refer to a sector of the economy that is not officially sanctioned or recognized. Other terms used to refer to this sector of the economy include black economy, unaccounted economy, illegal economy, subterranean economy, and unsanctioned economy.

References

• Dana L.P., (2002), Economies Change Paths, World Scientific, New Jersey.
• Experts D., (2018), Explanatory Notes For Economy, Disha Publications, London.
• Shaikh S., (2006), Business Environment, Pearson Education, New Delhi.
• Shaikh S., (2010), Business Environment, 2/E, Pearson Education, Chennai.

Author: Natalia Hajduk