Introduction and background information
The underground market is a precise example of free economic activity at work. The markets are entirely unregulated except by the participants themselves. No taxation takes place, and it is possible to pursue activities in the underground market which are illegal. The market can be very popular. Indeed, the smugglers (the earlier form of underground markets) were sometimes, known as ‘free traders ‘in medieval Europe.
The major factor influencing the growth of the underground market is high taxation by governments. The increased tax is because of the ever increasing public expenditure with dwindling resources at the disposal. Reversal is true. Research has shown that in Europe, underground market is about 10% of the GDP, in South America, it is about 30%. The underground market is not only lesser on low taxed economies but also small countries. This is because low tax boosts ‘tax morale' which is the incentive people have to pay tax, higher taxes discourage people to pay tax, and many seek to find ways to evade taxation leading to the development of underground markets. Countries with higher incidences of economic hazards like unemployment, inflation, local currency depreciation also associate with the magnitude of this market. The major motive for participation in this market is for welfare benefits and life sustainability as well as complementing the benefits from the formal markets.
Therefore, the major concern for economists is how to reduce underground economies so as to get a clear picture of the national economy as a whole to enable governments to plan effectively and subjectively.
In addition to that, many people pass their verdict on the underground market as soon as they get to hear of it without necessarily knowing what the market entails. With many countries of the world experiencing economic hazards mentioned above, it is very obvious that there must be some form of underground markets which sprouts to counter the negative effects of the formal market.
I found out that most people would like focusing on the visible market instead of the underground market. I am confident that many people would like to know more about something undiscovered or something unrevealed to the world. Then people can know more about the society they lived in and the nowadays market. Human nature orients people to judge negatively and pass unfair judgments based on their individual perception which is quite unscientific. Economics, being a scientific discipline, requires an understanding of the subject through empirical and scientific approach. This is very crucial so that judgments can be made based on evidence.
As the underground markets are considered harmful in themselves by many people, it would be very beneficial if research on this market is done. With all the information, individuals can then be able to make their judgment and make the decision whether or not they can participate in such. The government can benefit from the knowledge contained in this research and will be able to make the necessary adjustments like boosting tax morale and formalizing many sectors in the economy so as to discourage the existence of these markets. The research will also add to the existing body of knowledge about underground markets by building on the existing body of knowledge using better and more advanced methodologies. All these statements will be justified clearly all along the research project.
The leading Research questions
This section deals with the pros and cons of the underground market from where we can get research questions formulated from the section. The way forward in dealing with the underground market is also highlighted; this information would be beneficial to the government and policy makers.
Pros of the underground market and the subsequent research questions
The first pro is that the underground market provides a means of livelihood to people disadvantaged by the formal economy like the unemployed, uneducated, marginalized or untalented people. These sections of people are economically active, and they are willing and able to engage in the formal markets which unfortunately cannot accommodate them. These disadvantaged people can engage in these activities and may end up living good lives like their counterparts. The result often overrides the question of morality. The research question would be; “What is the role of the underground market in providing an alternative livelihood for the economically disadvantaged?”
The second pro would be; the underground market contributes to the overall economic growth development. The trickle-down effect of the underground market cannot be underestimated. It has been proved that both the formal markets and the underground markets cannot be self-sustaining. They depend on one another, and the success of one market has proportionally positive effects on the other economy. It is often captured by the measurement of discrepancies between the aggregate national income and the aggregate national expenditure. In World Bank figures, countries with high differences between the total nominal GDP and the aggregate GDP concerning the Purchasing power parity have thriving Underground markets; this means that the living standards of citizens in a country are better off. The research question will be, “The contribution of the underground market in improving living standards in a country.”
The third pro regarding the underground market is that there is usually higher profitability of transactions. It has been proved that the underground transactions lead to higher incomes. The high transaction is because the unregulated markets often attract the people who seek to make higher earnings and the absence of government control leaves the forces of supply and demand to be the force in the market. For instance, in the underground market, activities like dealing with smuggled goods do not attract taxation which boosts incomes. Therefore, the research question will be; “The impact of underground economies on aggregate income in the country.”
The fourth pro of the underground market is the fact that the market serves to provide goods and services that established formal institutions cannot be able to provide. Some of these products are necessary for survival. People's preference for these goods can make them go to whatever lengths to acquire them. This can result in people forming cartels that are not linked to any formal institutions to acquire these products. For example, in countries with a shortage of drugs necessary for survival like Antibiotics, some underground cartels can sprout out to provide these goods and services. The research question that this activity raises is; “The role of the underground market in providing necessary goods and services that the formal markets cannot provide.”
Cons of the Underground market and the subsequent research questions
The underground market being a situation where there are uncontrolled activities taking place in the country results to tax evasion. The results are that the few registered economic entities are then subjected to heavy taxation as the tax base is very small compared to the government revenue requirements. The tax burden subsequently raises the cost of living in a country due to tax-driven inflation. The research question based on this phenomenon would be, "The impact of the underground market economy on taxation.”
The second con of the underground market manifests itself when the economy supports and gives a lifeline for illegal and harmful activities like prostitution, drug trafficking, and human trafficking. These activities have adverse effects in themselves and can lead to widespread human suffering. For instance, countries with massive drug trades have high instances of drug-related deaths and widespread unproductiveness of the general population. The research problem would be, "the role of the underground market in labor unproductiveness and human sufferings.”
The third con of the underground market is that these underground markets cause a scenario where the governments cannot plan effectively as they do not have all the data about all economic variables in the market. All the government planning can, therefore, be unrewarding as they cannot achieve the intended objectives. Lack of proper planning can lead to political instability as the general population may feel that the governments are underperforming. This clearly answers our question on why countries with high proportions of the underground market like the South American regions, sub-Saharan Africa, and some Middle East countries have been experiencing numerous political activities and government discontentment is high in this countries. The research question would, therefore, be, "the contribution of the underground market to political instability in countries around the world.”
At the very least, it is certainly true that in a world in which the national governments are spending and borrowing more and more, the possibilities of the existence of underground market activity place a constraint on governments as the collection of maximum revenue through taxation is hindered. This is one of the reasons for the ‘Laffer curve' effect; whereby tax revenues can start to fall as tax rates are increased due to the movement of economic activity out of the taxed market and into the underground market.
All these discussed issues will raise some questions that will be answered through research.
Focus
The research will focus on the implications of the underground market based on the secondary and tertiary data from the mid-20th century. Although the general perception that comes to mind when the topic of underground market is under discussion is that there is nothing positive about this market, the research will also highlight the positive aspects of this market. The study will derive conclusions from various case studies from around the world.
Quotes and paraphrases of Underground markets
“Anytime people create a "black market" to avoid government regulation, they are engaged in and promoting free market economics” says Caunic, (2012). -This represents the pros of the underground markets. These underground markets are characterized by trading platforms where the government has no control, and the forces of demand and supply are purely in play. A free market is usually an ideal utopia where the market is expected to improve the welfare of everyone and participants usually gain maximum benefits. It is usually a debatable argument that the government usually distorts the market.
According to an article written by Alvin, Laura & Rouseff, (2006), "governments have an obligation to control shadow markets / (underground markets). The strength of institutions in any country can weaken some informal economic activities in underground markets. Therefore, the governments have a role in developing the necessary institutions such as judicial systems, standards bureaus, law and order enforcement institutions, education facilities and health services. The role of the government is, therefore, simple; building and strengthening national institutions to control the development of underground markets"
The basic function of the government is regulating the economy, and the economy can be regulated by strengthening and empowering national institutions whose mandate is usually objective in formalizing the economy. In summary, Alvin, Laura, and Rouseff are implying that the government is the main tool that can be used to streamline the economic activities to control underground markets
"The underground markets have been on record for supplementing the formal markets through accommodation of some functions and activities that though they are beneficial and have high returns; they have no place in the formal markets. Therefore, macroeconomic hazards like inflation, unemployment, local currency depreciation and low economic activities can be lessened through the underground market activities" as written by Scott & Phoebe, (2014). - The underground markets lead to increased economic activities that are reflected in the aggregate economic performance, the severity of economic hazards in the formal markets are therefore partially reversed by the underground market activities.
Schneider & Enste, (2002) wrote that,“Therefore, it's not surprising that countries with the largest informal economies tend to be emerging markets, as their government regulations are more likely to be loosely enforced or non-existent” - The governance and institutional structures are always responsible for the advancement of underground markets. The informal markets as illustrated earlier are an indication of thriving underground markets that are unregulated and driven by secret demand and supply forces. Therefore, research has shown that the institutional stability in any country is the key to controlling underground markets.
“Underground markets may seem to be highly rewarding to laborers as it is free of taxes. Unfortunately, the loss of tax is borne by the whole society as a social cost that come as high taxes and poor public projects” as presented by Schneider, (2011). - This quote means that shadow economies in which underground markets operate seem to be beneficial and rewarding to the participants but ultimately, the wider society bear the brunt of loss of taxes as essential public goods and services cannot be provided for by the government.
Schneider, (2014) built on his earlier work and found out that, “It is important to understand the main determinants of the underground market both because it informs policy concerning dealing with the problem and also because understanding the determinants of the shadow economy is important for the methods of estimation used. The main causes relate to the level of taxes, regulation, public institutions, and deterrence". This quote means that in order to deal with any issue that occurs due to the existence of the underground markets, it is important to, first of all, understand the factors that facilitate the existence of the markets and by so doing initiate strategies to solve each discrepancy.
Methodology
The methods to measure the underground market shall take the following approaches.
Direct approaches
Indirect approaches
Discrepancies between national expenditure statistics and national income statistics
Monetary approaches
Electricity consumption method (Definition + statics)
Direct approaches to measuring underground market primarily rely on the use of voluntary surveys and questionnaires administered to willing respondents. The approach will use both quantitative and qualitative data (Definitions + Statistics). Notably, this surveys and questionnaires audit the amount of people who do not pay taxes, and this is classified as the underground market. The limitation of the method is the propensity of respondents to lie so that they cannot be taxed.
The second method of indirect approaches has three parts. This method relies on discrepancies of macroeconomic parameters of a country.
The discrepancies between aggregate national income and aggregate national expenditure are simply calculated by getting the difference between the Nominal GDP and the national revenue authority’s stated incomes.Theoretically, the national income should equal the expenditure, and discrepancies mean some incomes for some activities are not accounted for.
The monetary approach borrows heavily from the theory of Edgar Feige of 1979. He developed a formula that measures the amount of money in circulation against money used in transactions. The formula MV=PT, where these initials represent money, velocity price and time. Though the method is tedious, a discrepancy between the two statistics means that there is unaccounted activity which is the underground market.
Finally, the electricity consumption approach stipulates that electricity consumption signifies economic activity. Therefore, economists have set a ratio of electricity approach to GDP as 1.8. Any discrepancy is subtracted, and the size of the underground market activities is determined.
The data will be collected from various websites like the World Bank fact sheets, selected national statistics data, various research project findings and any other relevant source. The data will be analyzed by statistical models like linear models and time series analysis through relevant statistical methods like IBM SPSS.
The research project plan
The research will consist of 6 chapters which will serve specific purposes as described below.
The first part will be abstract. This part introduces the reader to the concept of the underground market and explains the relevance of the underground markets to people and economies or any other related incidences.
The second part of the research proposal contains the table of contents that directs the reader where each article, chapter or topic is located.
The third part of the research is the Introduction. In contrast to the abstract, the introduction introduces the underground market as a research topic. The research project is introduced, and the statement of the problem and the objectives of the research are mentioned.
The fourth part of the research is the Literature review that forms chapter 2 which highlights works that have been done by other scholars and researchers on the same topic.
The fifth part is the methodology which constitutes chapter 3. This chapter introduces the methods that will be used to collect, analyze data.
The sixth part of the research will be the data presentation and data analysis and will constitute chapter 4. This section presents the relevant data and further analysis of the data and explains what the trends in the data signify.
The seventh part of the research project will focus on the outcomes of the research, the recommendations, and the conclusions made. This will be chapter 5
The eighth part which will be the bibliography will indicate the sources of the research and the names of the articles together with years of publication.
Finally, the last part of the research will contain acknowledgments and Appendices section.
Conclusion
References
Caunic, I. (2012). Interdisciplinary researches concerning E.U. underground markets.Iaşi: Junimea.
Alvin, H, Laura .F, & Rouseff, M, (2006). Informal economy.Minneapolis: HarthwayCollins Press.
Scott, J,& Phoebe, D.., (2014). The shadow economy. London: Institute of Economic Affairs.
Schneider, F., & Enste, D. (2002). The shadow economy: An international survey. Cambridge: Cambridge University Press.
Schneider, F. (2011). Handbook on the shadow economy. Northampton, MA: Edward Elgar Pub.
Schneider, F. (2014). Outside the state: The shadow economy and shadow economy labor force. Munich: CESifo.
