Underground economy

Unreported income and business activities
Development of parallel economies
Black market economy
Shadow economy
Black market trading
Unreported financial transactions
Underground and illicit business
Black-markets
Second economy
Illegal private profit
Black marketeers
Underground trade
Undeclared income
Unofficial earnings
Informal markets

Nature

The underground economy, also known as the shadow or informal economy, refers to economic activities that are not regulated, recorded, or taxed by government authorities. This includes unreported income from legal work, illegal trade, and unregistered businesses. As a problem, the underground economy undermines government revenue, distorts official economic statistics, and can foster criminal activity. It also creates unfair competition for legitimate businesses and often results in poor working conditions and lack of social protections for workers. Addressing the underground economy is crucial for economic stability, effective governance, and social equity.

Background

The significance of the underground economy emerged in the 1970s, as economists and policymakers observed substantial unreported financial activity undermining tax systems and official statistics worldwide. Globalization and technological advances in the late 20th century further complicated detection, prompting international organizations such as the OECD and IMF to study its scale and impact. Growing awareness has since led to coordinated efforts to quantify and address the phenomenon across both developed and developing nations.

Incidence

Unreported business activities and cash transactions occur in most countries and are the continuing subject of investigation by tax authorities. These activities include drug trafficking, gambling, prostitution, loan-sharking, bribery, use of state property for private gain, employment of workers without a permit and without paying social costs and misappropriation of public funds. In 1994 in the UK it was estimated by government tax authorities that the underground economy had reached a volume of £50 billion per year, namely more than twice the annual defence budget.

As its name implies, the second economy refers to all unlawful activities taking place outside the state-controlled economic system. It is centred primarily around the illegal production and distribution of goods and services for private profit. This illegal system has persevered and has even played a useful role in filling the gap resulting from the inefficient performance of the 'first' economy. However, one of its disadvantages is that it has given birth to a new privileged class that enjoys many amenities and luxuries not available to the majority of the population.