Introduction
Undeniably, each year registers numerous numbers of transactions that take place in the economy without the government knowledge and regulations. This phenomenon is known as Underground Economy. Essentially, it entails unofficially measured national income that becomes generated by non-recorded productive activities that are supposed to be added to the National revenue.
Underground economy constitutes the value-added activities that are not registered by the national statistics and are not detected in the government estimates of total revenue collection. Other terms used to refer to Underground Economy include illegal, unrecorded, unobserved, and shadow economy. Since researchers and experts view this economy from different perspectives, understanding some of its importance aspects is a crucial initial approach.
The continuous expansion of Underground Economy has been influenced mainly by inefficient government policies during revenue collection and through various regulatory measures. Poor government activities that do not satisfy the public preferences, inadequacy while providing various services and incompetent in the government agencies lead to Unrecorded Economy (Duina 49). Other factors include poor legal system characterized by an increase in corruption or bribery, deterioration of cultural and religious values and other economic issues.
Underground Economy leads to severe impacts to the country in every sector. Primarily, the growth of Underground Economy reflects the magnitude of inefficient and inappropriate policies in the economic and government institution. Countries experiencing high levels of this type of economy are characterized by slow economic growth, high cases of criminal activities, high marginal tax rates, rising public debts, and lack of employment opportunities. (Schneider et.al., 89). Worse still, these unfavorable conditions make more people to engage in more unlawful activities as a way of surviving in the terrible life conditions. Notably, once they participate in the world of such economy, there is always a high possibility that they may not engage in National Economy.
The activities of Unrecorded Economy are different from various single perspectives of unlawful and criminal behaviors. It consists of such activities like money laundering, illegal drugs activities, smuggling, prostitution, unlicensed money transactions, illegal gambling, and other illegal activities.
Notably, inappropriate policies can result in the growth of Underground Economy; thus, activities that are not detected by these inefficiencies in their existing system are considered legal. Besides, it also includes income realized from legitimate cash-based or non-cash based activities including the online trade. Apparently, this does not always correlate to illegal or criminal transactions (Feige 22). Ethically speaking, some of these activities link with legal activities and even get supported and approved by the government.
Business activities and transactions that are conducted under Underground Economy are not recorded. Thus, any income statistics and revenue do not reflect the actual situation in the country. Since this information is used to formulate national policies, inaccurate data results to inefficient policies responses. If this economy is highly active, the capital allocation may be wrongly targeted, and the marginally excluded people and sectors are not supported accordingly. For instance, inaccurate national figures can result in overestimation of the levels of the unemployment and other social amenities and benefits. Thus, the growth of such non-trivial activities can distort critical measures.
It is crucial to understand the extent and degree of these activities irrespective of their adverse effect. Though intensified research and resources have been used to assess the degree of this economy, no accurate figures have been generated. The methods employed are, to a large extent, imperfect as they generate contradicting and divergent estimates.
Nevertheless, various methods have been formulated to determine the extent of this economy. Most of these techniques incorporate one or two approaches: by measuring the self-reported involvement cases or by assessing the discrepancies between the targeted demand and receipts levels and the real consumption of the commodities. (Putniņš and Sauka 43).
Alternative discrepancy approaches use measures of the economy by determining discrepancies relating to the recorded and unrecorded activities; these discrepancies are applied to provide overall estimates. For instance, in one of the approaches, audits of the taxpayers are used to determine the number of unrecorded income for individuals, which provide figures of unrecorded to recorded income.
Conclusion
Underground Economy holds different perspectives from researchers, experts and the government. It is argued that the economy is associated with illegality, but a majority of researchers have a different view. According to their argument, there is still a wide deal of legitimate occupations as well as business transactions that contribute significantly to this economy. These activities generate high income, but the income is not recorded according to the government concerns. This issue brings a question of whether these activities are desirable and whether the government ought to formulate policies that incorporate these activities into the National economy. Besides, these activities promote the National economy significantly; research shows that almost 75% of the income realized from Underground Economy gets used in National economy, especially in the developing nations. Most importantly, most informal activities relating to this economy in the some countries are widely recognized as essential and fundamental providers of basic commodities.
Works Cited
Duina, Francesco. “Size, Causes and Consequences of the Underground Economy: An International Perspective.” Comparative Economic Studies 49.1 (2007): 161–163. Print.
Edgar L. Feige, "Defining and Estimating Underground and Informal Economies: The New Institutional Economics Approach," World Development 18.7 (1990): 989-1002. Print.
Feige, Edgar L. “How Big Is the Irregular Economy?” Challenge 22.5 (1979): 5–13. Print.
Putniņš, Tālis J., and Arnis Sauka. “Measuring the Shadow Economy Using Company Managers.” Journal of Comparative Economics 43.2 (2015): 471–490. Print.
Schneider, Friedrich, and Dominik Enste. “Shadow Economies around the World: Size, Causes, and Consequences.” IMF Working Papers 00.26 (2000): pp. 77-114.Print.
