Shedding Light on the Shadow Economy

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 In News

The shadow economy is one of many names for it. You might hear it as working ‘off the books’ or ‘under the table’. Officially, it’s the ‘informal economy’, ‘underground economy’ or ‘non-wage sector’.

But the shadow economy’s many names are a tribute to its immensity. It’s everything from babysitting and yard sales to domestic work and the manufacturing of clothing sold in major outlets on the high street.

The shadow economy is made up of the economic activities that operate outside formal structures like the law. Some aspects of it can’t be easily measured because many of the transactions don’t run through official channels, and it’s cash-based, so it’s hard to trace.

According to the International Labour Organisation, the shadow economy makes up one-half to three-quarters of all non-agricultural employment in developing nations. In tough economic climates, however, the shadow economy often grows – all over the world.

The shadow economy was once considered nothing but a drain on economies, but people are starting to recognise that it has positive impacts, too. With unemployment so high, especially among young people, many are turning to the shadow economy to earn money. In developing nations where education may be lacking or formal economy jobs sparse, it can offer vital opportunities for men as well as women.

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Even before the financial downturn, the shadow economies in Asia and Africa were massive. A World Intellectual Property Organization (WIPO) report says the shadow economy’s lack of rules and regulation and its openness to everyone makes it a hotbed of innovation and new ideas.

Now, even developed nations are seeing the financial discrepancies common with a growing shadow economy. For example, according to Bloomberg, US officials are discovering huge amounts of undeclared income – the shadow economy strikes again.

While the shadow economy can function as a safety-net, it also means workers are free from regulation. Having no paperwork is one thing, but no minimum wage guarantee, no limits on hours, no guarantee of benefits and no safety standards are another, as a World Bank report points out. Much like temporary jobs and the UK’s zero-hour contracts, working in the shadow economy is a precarious route to take, and yet it can offer a meaningful path to employment for people denied work in formal structures.

On a larger scale, the shadow economy often fills in the gaps the formal economy leaves behind, and it is more responsive to the needs and changes in the labour market. Its existence, however, makes it difficult for governments to collect revenue that could be used for unemployment payments and other benefits.

Shadow economies are engrained in many countries and have been for centuries, so eliminating them may not be possible or even the best approach to dealing with them. They can be shrunk, but to shrink a shadow economy, notes one economist, you have to fix the formal one. That, as we know, is easier said than done.

The ‘shadow economy’ may operate in the dark and behind closed doors, but its sheer size means that it cannot continue to be ignored. It’s time to shine a light on this elusive sector.


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