The shadow economy is the concept and essence of the shadow economy

Big taxes, various restrictions and greed cause people to conduct their business in the shadows in order to circumvent laws and obtain superprofits. The shadow business brings substantial losses to the state economy and it is necessary to wage an active struggle with it.

What is the shadow economy?

Activities that develop uncontrollably and without state accounting are called shadow economy. There are a number of reasons that provoke its appearance. The concept and essence of the shadow economy has been studied for many years, and the definition and blocking of illegal activities are an important condition for the full development of society and the country. The term was used in 1970.

The shadow economy has dense and quite legal ties with the real sector of the economy, and it also uses public services, for example, labor or various social factors. Such illegal activity helps to receive huge profits, which are not taxed and are directed solely at own enrichment.

Types of shadow economy

There are several types of shadow economy that form a certain structure:

  1. White-collar . This option implies that officially working people are engaged in prohibited activities, which causes the latent distribution of national income. The concept of the shadow economy, indicates that the subject of such activities are people from the business community who have high positions. "White-collar workers" use their official position and legal flaws in the legislation. To commit crimes, modern technologies are often used.
  2. Gray . The structure of the shadow economy includes an informal type of business, that is, when activity is permitted by law, but it is not registered. It is mainly a small business engaged in the manufacture and sale of various goods and services. This type is the most common.
  3. Black . This is the economy of organized crime, associated with the manufacture and distribution of things prohibited by law (poaching, weapons, drugs).

Pros and cons of the shadow economy

Many people know that illegal and hidden activity from the state negatively affects a person's standard of living and the general situation of the country, but few realize that the shadow economy has its own advantages as a socio-economic phenomenon. If we compare the pros and cons of such an activity, the flaws substantially outweigh the balance.

Disadvantages of the shadow economy

Many countries are actively combating this problem, since it negatively affects many processes and the development of society.

  1. Slows down the growth of the state's economic development, for example, GDP decreases, unemployment grows, and so on.
  2. State revenues are declining, since enterprises that engage in illegal activities do not pay taxes.
  3. Budget expenditures are reduced and workers of the budgetary sector, pensioners and other groups of people receiving social payments suffer from this.
  4. The trap of the shadow economy is connected with the fact that it contributes to the growth of corruption, but corruption itself stimulates the development of illegal activities.

Pros of the shadow economy

As already mentioned, the positive aspects of illegal activities are few, but they are:

  1. The positive consequences of the shadow economy are due to the fact that such activities bring investment to the legal sector.
  2. It is a sort of smoothing mechanism for the existing leaps in the economic conjuncture. This is possible due to the redistribution of resources between the allowed and prohibited sectors.
  3. The shadow economy positively influences the consequences of financial crises when there are massive layoffs of workers who can find a place in the informal sector.

The shadow economy and corruption

It has already been mentioned that these two concepts are interrelated and they are called social and economic twins. The essence of the shadow economy and corruption are similar in causes, objectives and other factors.

  1. Illegal activity can develop only in conditions when all branches of power and government are corrupt.
  2. Activities outside the law contribute to the formation of corruption relations in all areas that affect its prosperous existence.
  3. Corruption causes illegal businesses to be in shadow, and it also creates a basis for organizing new spheres for the shadow business.
  4. The two mentioned concepts are the mutual financial basis of each other.

The causes of the shadow economy

The main factors that provoke the appearance of illegal activities include:

  1. High taxes . Often doing business is formally unprofitable, as all profits go to taxes.
  2. High level of bureaucracy . Describing the causes of the shadow economy, one can not overlook the guilt of bureaucratization of all the processes necessary for processing and conducting business.
  3. Excessive interference of the state . Many people engaged in legal business complain that the tax inspectorate often conducts inspections, sets fines and so on.
  4. Small penalties for uncovering illegal activities . The fine imposed on a person who engages in illegal activities is, in most cases, much less than his profit.
  5. Frequent crisis phenomena . During an economic downturn, legal economic activity becomes unprofitable and then everyone tries to go into the shadows.

The negative consequences of the shadow economy

Illegal business is a devastating phenomenon that adversely affects the entire economic system of the state. To understand why the shadow economy is bad, you need to look at a list of negative consequences.

  1. There is a reduction in the state budget, since there are no tax deductions.
  2. Due to the impact on the credit and financial sector, there are negative changes in the structure of payment turnover and stimulation of inflation .
  3. The consequences of the shadow economy are also related to foreign economic activity, as there is distrust on the part of foreign investors.
  4. Corruption and abuse of power are growing significantly. As a result, the country's economic development slows down and the whole society suffers.
  5. Many underground organizations do not comply with environmental norms to reduce costs and in the absence of financing, which negatively affects the state of the environment.
  6. Because of the shadow economy, working conditions deteriorate, as enterprises ignore labor legislation.

Methods of combating the shadow economy

Coping with informal activities is very difficult, given the scale of the spread. The fight against the shadow economy should be comprehensive and deal with different aspects.

  1. Carrying out reforms of the tax system that will help to withdraw part of the income from the shadow.
  2. Tightening punishment for corrupt officials.
  3. The introduction of measures to return the exported capital from the country and create an attractive investment climate in order to stop the financial outflow.
  4. The definition of industries that work underground, and the cessation of their activities.
  5. Increase control over cash flows, which will not give the opportunity to launder large amounts.
  6. Reducing pressure on business by the state, for example, reducing the number of supervisory authorities and inspections.
  7. The ban on uncontrolled provision and attraction of loans .
  8. Redistribution of power in courts and other authorities. Legislation should be tightened.

The literature on the shadow economy

Illegal businesses are carefully studied by economists, which causes the availability of different literature on this topic.

  1. "The shadow economy" Privalov K.V. The training manual presents a new approach to the interpretation of this concept. The author studies the problem of evolution and various consequences of illegal business.
  2. "Conditions for the effective impact of the state on the shadow economy" L. Zakharova . The author is interested in how the struggle against the shadow economy is going on, the book pays attention to several methods.