Underground economy is a term to describe business deals that do not heed to the laws and regulations of the government, whether they involve fixed pricing, taxation, or legality. Interestingly enough, many people engage in the underground economy, whether they know it or not.
What Industries are in an Underground Economy?
Traditionally, the underground economy is thought to be made up of unsavory industries, such as drug and human trafficking, and prostitution. But any person can be in the underground economy.
A candy shoppe owner who doesn't ring up the register every time someone gives him cash because he does not intend to pay taxes on the income derived from those sales is part of the underground economy. The same can be understood about car dealers, plumbers, electricians, and waitresses.
Any person earning money without claiming it for the sake of not paying income tax is part of the underground economy. Sadly, this includes enterprising teens who rake leaves in the fall, shovel snow in the winter, and cut grass in the spring and summer. Babysitters can be included on this list as well.
How Much of an Economy is Underground?
It is hard to measure just how much of any one country's economy is underground, but it has been estimated and reported on. The Cato Institute's Richard Rahn wrote in the Washington Times December 9, 2009 edition that more freely capitalistic nations have a smaller underground economy with the United States, Japan, and Switzerland having an estimated 13% of their GDPs as unreported activity.
Meanwhile, many European countries have an underground economy engrossing more than one-fifth of their total GDP with Italy being the highest among them as Rahn writes that the Italian Prime Minister estimated nearly 40% of all economic activity was probably unreported.
And as the data would indicate, the least free countries are the most corrupt. Some African nations are believed to have more than half of their economies underground.
The Effects of an Underground Economy
Underground activity is great for the individual, allowing him to utilize more cash to support himself and his family.
However, as a nation's GDP goes further underground, there is less money for the individual by way of government services. With less money in the system, there are less resources for teachers and schools, state run hospitals and care facilities, and police and firemen.
With there being less for those who serve the people, corruption is likely to increase, and those who have the largest circle of illegal activity can have the most influence as opposed to a country like the United States whose influence can be geared by great innovators, such as as Albert Einstein, Warren Buffett, and Nathan Myhrvold.
In an underground economy Nathan Myhrvold's genius might need to focus less on patents and more on arms, human, or drug trafficking.
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