In these troubling economic times, knowing that the second-biggest economy in the world is booming should come as a comfort.But what if that economy is the black market?
All transactions that take place off the books feed into this shadow market. And while it provides a way of life for half of the people in the world, it has an obvious darkside: illicit, dangerous, harmful practices that can kill the environment and ourselves.
'System D' is a slang term from French-speaking Africa and the Caribbean, which stands for 'l'economie de la débrouillardise.'
Any off-the-books, unlicensed activity that makes money is part of System D. This can range from a plumber who gets paid in cash for a quick job to a drug deal. These are part of the 'shadow economy': the illegal, or unreported, or unrecorded, or informal transactions that cannot be taxed.
As put by Robert Neuwirth, System D is 'unfettered entrepreneurialism.' It may be one of the purest forms of capitalism out there, without all the bureaucratic red tape and corruption of the 'developed' world economy.
Prices can be low for many of the goods and services (though some rare or particularly illicit items may be very expensive) because as the population continues to grow, people need to continue consuming. The need for people to eat or clothe themselves is not based on the stock market.
Legal activities -- essentially tax noncompliance -- include not reporting income from self-employment, fringe benefits, bartering for legal goods and services, and helping your neighbour to fix his leaky roof.
What are examples of the kinds of illicit activities that make up a shadow market, and how do they compare to their legal counterparts?
There are some 'more legitimate' shadow sources of income that aren't illegal in the strictest sense of the law. Salvagers picking through the garbage for recycling (an estimated 15 million people make a living this way) is one such example. Things get a bit hazier when it comes to street vending, from food to clothes to cell phones, which also goes unreported by the profiteers, and driving unlicensed taxi cabs.
Strictly illicit examples include:
- Selling bogus pharmaceuticals, which comes to $72.5 billion each year.
- Illegal drugs such as marijuana, cocaine and heroin, the trade of which totals somewhere in the area of $320 billion a year, according to a UN estimate.
- Illegal prostitution, which has a worldwide estimated value of roughly $185 billion.
- Gambling: the illegal variety pulls in over $500 billion annually, compared to just $335 billion legally.
Gambling is the most profitable market in System D, but dealing in various illicit goods -- from drugs to electronics -- make up the majority of this list. Gas and oil smuggling makes an appearance at number 10.
The U.S. leads the pack in estimated black market profits, but for developed countries System D represents a much smaller fraction of their overall GDP.
The most recent survey put Nigeria and Egypt as the largest shadow economy holders, equivalent to 77 per cent and 69 per cent of GDP, respectively. Among transition nations like Georgia in the former USSR, the number is around 64 per cent of GDP. Of the developed, OECD countries, Greece had the largest System D with 27 per cent of GDP. The United States is around 10 per cent.
There are a variety of ways that the environment has suffered due to System D:
- Animal poaching: the capture and sale of endangered species across the globe that includes the recently extinct Western black rhino.
- Illegal trade, transport and dumping of ozone depleting substances and hazardous wastes, such as oil, foam blowing agents and chemical reactants.
- The harvesting and smuggling of timber and fuel, among other lucrative -- but increasingly protected -- goods.
Depending on the growth of the shadow economy, we can see various changes in the official economy, including monetary indicators, participation in the official economy in terms of total hours and percentage rates, and output statistics, which could depress the growth of the official economy.
It could be that a depressed GDP in the United States just means an increased amount of activity in the shadow economy.
Further more, the two feed into each other: a lack of taxed income by the authorities may lead the government to raise individual and corporate tax rates, which gives people a greater incentive to stick with the shadow economy. And an increase in social assistance gives people less incentive to give up their unreported income.
System D continues to expand: by 2020, the shadow economy is predicted to employ over 2/3 of the world's workers. Even though most of these jobs are things like park-time jobs, self-employment, consulting and moonlighting, nobody else can match that kind of job creation.
Going forward we must, at the very least, acknowledge the presence of this shadow economy and how it keeps our world from collapsing altogether.
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