To examine the black economy and strategies for its control, we first need to understand what this concept is and what effects it has on the economic situation of societies. This type of economy, known for being illegal and unauthorized, is also referred to as the underground economy, shadow economy, black market, or informal economy.
What Is the Black Economy?
The shadow or underground economy refers to all economic activities that occur outside the frameworks, rules, and laws of the country, characterized by their defiance and violation of the law. Violating the law means resisting what governments and states have determined and approved, and to avoid punishment and penalties, these activities are conducted secretly and away from public centers.
Typically, the main motivation for these illegal activities includes several factors, as FFMag introduces to you:
- Earning substantial profits from the trade of smuggled goods
- Avoiding tax payments
- Influencing price setting
- Making prohibited products, goods, or services available
Other goals and factors can be added to this list. Black markets form when governments impose laws to ban or restrict certain activities and warn society members against them or make access to them difficult by, for example, imposing heavy taxes, making their execution costly. In these situations, individuals with the intent of profiteering and sometimes with the intent of providing services secretly perform these illegal acts.
Examples of the Black Economy
Identifying illegal activities is not difficult, and some of them are well-known to people and identified as illegal work or crime in all countries of the world or are faced with public abhorrence and condemnation. It wouldn’t hurt to get acquainted with some examples of them when examining the black economy and strategies for its control.
- The sale and, in general, the trade of drugs
- Buying and selling weapons (in some countries, carrying them is also a crime)
- Human trafficking
- Illegal wildlife trade
- Provision of prohibited services, etc.
Types of Black Economy
In the continuation of this article, FFMag introduces you to four categories or levels of the shadow economy:
Illegal Economies
This section encompasses activities that are conducted by breaking and crossing legal boundaries; prominent examples include extorting others, trading smuggled products and drugs, and other similar actions.
Unreported Economic Activities
This category refers to activities motivated by the desire to evade laws and financial restrictions imposed. Circumventing legal clauses under various titles or activities like taking bribes or under-the-table transactions, private economic deals without adhering to legal processes and requirements, can be considered examples of this type.
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Unregistered Economic Occupations
Another manifestation of shadow economies relates to activities that are not registered at all, with the reason being the avoidance of government laws. The prominent feature of these activities is the lack of reporting to authorities, organizations, or governmental bodies responsible for registering economic statistics. For example, illicit operations and criminal activities can be mentioned. Hiding some statistics and information with the motive of concealing illegal activities takes place.
Informal Economies
When we examine the black economy and strategies for its control, we come across another spectrum of underground activities characterized by their informality. These include a set of actions and measures that evade legal and official costs but benefit from privileges, opportunities, formal and legal relations, various commercial and economic licenses, special positions in profitable work contracts, specialized market employments, and a multitude of other opportunities and advantages.
Examining the Black Economy and Strategies for Its Control
While defining and recognizing examples of the black market is necessary, there is a significant gap between this and implementing principled and effective policies to eliminate them. One of the main sources of government revenue is the taxes defined for various activities and operations, and the existence of an underground market endangers these resources.
How Can Taxation Block the Path of the Black Economy?
The formation of shadow markets acts like a powerful dam and a major barrier against taxes; therefore, some strategies for controlling the underground economy are intertwined with this issue. When examining the black economy and strategies for its control, the main question is how taxes can be collected and used as a lever to deter shadow activities? Some common methods are employed in different countries, the most notable of which include:
- Defining ways for easier and simpler tax payments
- Defining and implementing motivational incentives for tax payment
- Officially defining various occupations
Solutions and Strategies for Controlling the Black Economy
Aside from effective actions for tax collection, other strategies must be considered to control underground markets. Some of these strategies are as follows:
Cutting the Connection Between Political Power and Wealth Acquisition
The economic conditions of many countries affected by the expansion of shadow markets report a common situation, which is the relationship between the increase in political power and wealth creation.
In societies where politicians or statesmen gain access to financial resources by being in certain managerial positions and find ways to circumvent laws or avoid paying taxes, the black economy easily forms; therefore, this equation must be fundamentally limited and the path to obtaining illicit wealth through this means must be closed.
Facilitating Conditions for Entrepreneurs
Supporting the position and conditions of entrepreneurs and easing financial transfer channels for them can play a deterrent role against economic corruption. In this case, the necessary motivation for paying taxes and supporting formal businesses naturally and spontaneously flourishes.
Reviewing and Supervising Effective Salary Payment Mechanisms
Satisfaction with salary levels and timely payment is also an important factor for paying taxes and adhering to official laws; therefore, intelligent governments and fair laws will be very effective against the black economy.
Preventing Broad Discretionary Powers
Examining the black economy and strategies for its control shows that the more unregulated powers and authorities are given to individuals or some companies, especially in cases where they gain access to national wealth, like natural resources and similar cases, the likelihood of corruption also increases; therefore, prevention in this regard must also be considered.
Conclusion
Economic activities are defined under various titles and influenced by different factors; however, there is almost always the possibility of them being corrupted in all societies. Some financial corruptions take the form of underground markets. By studying this content on FFMag, you realize that examining the black economy and strategies for its control is essential for preventing these disordered situations.
Also Read: Effects of policy changes on financial markets
By David Taha