What is Black Economy? Importance and Case Studies

We all understand what the term ‘Economy’ denotes. Something that constitutes a nation’s financial issues and matters are broadly defined as a nation’s economy. However, only a few of us are aware of the term ‘black economy’. So, the question is what is a black economy?

 

To begin with, a black economy is another word for illegal economy or underground economy. Anything that does not belong to the legal or the ‘white’ economy, is termed to be a part of the black economy or illegal economy. 

 

Such a system operates outside the legal system and is attained as an attempt to escape tax submissions or government regulations. 

 

Let us understand this with an example. Have you ever watched a mafia movie that gives you goosebumps because there are many good-looking goons moving around the streets?! 

 

Well, that is natural. Yet, the focus point is that a mafia gang is a typical example of a black economy. Illegal payments, smuggled goods, and everything happening underground are the key characteristics of any black economy. 

 

Despite the fact that such mafia movies might sound unrealistic and simply fictitious, they are existent in real life. That said, a black economy is a real thing and this is why strict government regulations are put in order to watchguard such underground happenings. 

 

This blog will discuss and shed light on the key features of a black economy, why it is important to curb such practices, and what are the most famous or typical case studies of a black economy. In a nutshell, we will be discovering the various aspects of a black economy. 

 

Also Read - Types of Economic Systems

 

Why is Black Economy Important?

 

In all its entirety, a black economy is important because it unfolds all kinds of illegal practices or trade happening underground. While such black markets, a part of the black economy, go majorly undiscovered due to their sharp tactics and trained skills, governments employ several skilled agencies to keep a track of such practices. 

 

It is highly important to know about black economies because they are a major attempt to escape tax regulations. Being one of the biggest causes of the black economy, tax evasion also affects formal economies. 

 

As a result, a lot of countries suffer due to a lack of funds or such funds being invested in other areas. As a citizen, any individual must be aware of the black economy in order to stay away from it and detect if they are being coerced to participate in it. 

 

Ever since the fad of investing in cryptocurrency has risen, a lot of people are being hunted down and forced to invest in cryptocurrency trading platforms, which later turns out to be a black economy. 

 

As we all know, cryptocurrency is not associated with any country’s economy, it goes unauthorized and unregulated. Keeping this in mind, one should know that while cryptocurrency is itself not a part of the black market, it is the biggest source of black money that contributes to the black economy. 

 

If unattended, the participation of black economy can prove to be risky. It can end up promoting a culture that legitimizes this participation, as a result further encouraging its progress. 

 

The biggest downside of any black economy, apart from it being illegal, is that it forces the honest taxpayers of any formal economy to pay more taxes and thus, bear the burden of those who have escaped their responsibility to do so. 

 

This leads to a narrow system of taxpayers and a budding market of cheaters. Other terms used to describe a black economy are shadow economy or cash economy. 

 

Also Read | Examples of Economic Value

 

Case Studies of Black Economy

 

In this segment, we will discover the top 5 black economy examples. From lobbying to drug rackets, black economies are present everywhere. 

 

Even though developing countries are more vulnerable to sheltering black economies, the numbers are equal in the West as well. Thus, developing and developed countries are all budding houses of the black economy that must be kept in check from time to time. 

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Case Studies of Black Economy

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1. Lobbying

 

Even though lobbying is legal in numerous countries, lobbying is still considered to be an illegal practice. Politicians, business tycoons, and influential leaders equally participate in such a practice. 

 

A typical example of lobbying can be understood in this case. Suppose presidential or prime ministerial elections of a country are about to take place. A number of political parties are preparing to contest the same. 

 

Out of all the political parties, one political party is ‘privately’ funded by a corporate leader who wishes to get desired policies executed. Furthermore, lobbying holds an eminent position in the political field of all nations as it fetches many political parties high-end funds for their sustenance. 

 

Even though lobbying seems similar to bribery, it is fairly influential and thus, is a major concern for governments to keep a check and regulate periodically. Separate commissions must be put in order to stop lobbying in countries where it is illegal. 

 

“However, lobbying can also lead to undue influence, unfair competition and regulatory capture to the detriment of the public interest and effective public policies. A sound framework for transparency in lobbying is therefore crucial to safeguard the integrity of the public decision-making process. “

 

- Black Economy of Lobbying 

 

2. Drug Rackets

 

Another example of an underground economy where emerging black economies can be observed is drug rackets. Drugs are injurious to health and there is nothing hidden in this fact. 

 

However, drug smuggling networks and trading of drugs take place openly which affects the youth, adult population, and even the senior citizens of the world. 

 

Since buying and selling of drugs is an illegal activity, police personnel and special agents are always on the go to expose such practices. This often reveals that drug dealers run a black market that ultimately leads to an underground economy of hefty cash bags and valuables. 

 

When it comes to drugs, it is one of the biggest reasons for the existence of any black economy. From youngsters to adults, this type of black market affects all people across a city, nation, or even the world. 

 

With European countries being home to the biggest black economies, drug rackets are an age-old yet emerging practice that will always have to be checked. 

 

In that case, governments have instead decided to legalize drugs like marijuana which will help them to generate greater tax revenues. 

 

3. Smuggling Goods

 

The most typical instance of any black economy strikes well with smuggling goods. From poached animals to weapons, smuggled goods can range from the most bizarre thing to the most common thing. 

 

Whether online or offline, black markets remain consistent with their practices in smuggling gold, silver, or any other precious ornaments. 

 

What’s more, smuggled weapons are the biggest type of black market component that has benefitted a large number of black traders from all across the world. 

 

Hence, the way black markets operate is equally important to understand how smuggled goods reach from one location to the other. Smuggled goods are transported along with legal trade chains that often relocate goods as ordinary as furniture or other household items. 

 

Packed similarly to the legal goods, such items appear alike and perhaps are very difficult to identify. Major parts of Europe and the West are known for their smuggled goods chain that is famous for transporting illegal goods or stolen goods without getting caught. 

 

In cases where police personnel end up busting such smuggling networks, they attempt to extract information about the same so that they can catch hold of all agents of a particular network. 

 

However, this takes a lot of time, man force, and logistics to smoothly deploy undercover agents, and install check-posts across a town or a city.  

 

4. Illegal Trade Network

 

On the other hand, illegal trade networks are more publicly functional and accepted by the citizens of a society. Suppose you wish to purchase a Gucci handbag that has suddenly become very popular and trendy. 

 

But, it is very costly and it might be almost impossible for you to purchase it. Second-hand or third-hand manufacturers are the key to this solution. 

 

When a premium brand product is unaffordable by a majority of the population, illegal trade networks that are perceived to be legal manufacture similar copies with cheap material. This is fairly affordable and pocket-friendly for lower-income consumers. 

 

Even though all premium brands are aware of such black markets where their product copies are sold openly, there is little that they do or the authorities do to curb them.  

 

5. Tax Evasion

 

The last example of black economies deals with tax evasive practices. Tax evasion is a popular method of creating a black economy wherein people deviate from submitting taxes and instead invest in shell companies or other kinds of practices. 

 

With the help of such evidence, numerous black markets have emerged overseas. One of the most typical tax evasion examples of such a black market is when celebrated individuals invest their money in lesser-known countries in their developing stages. 

 

In addition, a lot many people also submit philanthropic evidence to evade taxation. It is only after years that such controversies come to light. An example of such exposed scams is the Panama Papers which reveals tax evasions on a yearly basis. 

 

“A giant leak of more than 11.5 million financial and legal records exposes a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies.”

 

- Tax Evasive Black Economies 

 

Also Read | Types of Taxes

 

To sum up, black economies consist of black markets that are home to illegal practices in trade, exchange, and trafficking. From human trafficking to drug dealings, the black economy is omnipresent and even more powerful than formal economies that are authorized by the governments. 

 

With more regulations, stricter laws, and regular information leaks, black economies are today under the sight of the law.