The Underground Economy

Prof E. Bijoykumar Singh *

A Housie / Tambola ticket

There is a widespread feeling that a substantial and increasing share of activities takes place outside the official economy. This holds not only, in particular, for developing and transition countries but also for high income economies. The phenomenon has been discussed in the literature, under many different names: informal, unofficial, irregular, parallel, underground, subterranean, hidden, invisible, unrecorded and shadow economy or moonlighting. The term most often used is black economy.

Nigeria, Egypt, Thailand are estimated to have an underground sector nearly three quarters the size of officially recorded GNP. In many countries, the size is one quarter to one third of GNP. Activities associated with shadow economies are facts of life around the world. Most societies attempt to control these activities through various measures such as punishment, prosecution, economic growth or education.

A country bent on transcending the barriers of the underground economy has to gather information about the extent of the shadow economy, its magnitude, who is engaged in underground activities, and the frequency of these activities. Unfortunately, it is very difficult to get accurate information about shadow economy activities, including the goods and labour involved, because individuals engaged in these activities do not wish to be identified. Hence, doing research in this area can be considered a scientific passion for "knowing the unknown."

The existence and increase of an underground economy gives rise to three major sets of concerns. The economic and social conditions of individuals, household and countries are evaluated in a biased way if one relies on the official statistics. Thus, the official number of unemployed persons may hide that many of them actually work and receive wage income. As a consequence, the macro economic policies are likely to be too expansionary and social policy too excessive. Such a dichotomy is a characteristic of the labour market of Manipur.

A second concern is the loss of tax revenue as underground activities escape taxation.

A third concern is that the underground economy is an indicator of an unhealthy state between citizens and government. The taxpayers are dissatisfied with what public services they get for their contributions in the form of tax and seek to restore the balance by evading to the underground economy. This makes government unable to finance the public goods necessary for an economy and society.

Underground economy has a negative impact upon tax revenues, gross domestic product and, implicitly, upon the economic growth. Evidently, the bigger the underground economy size, the stronger the impact. In other words, the underground economy is characterized by tax evasion, illegal employment, relationships with organized crime and terrorism, and involvement in almost all areas of economic crime.

In fact, the underground economy is universally widespread; it is present in developing as well as in advanced economies. In particular, there exists evidence of a growing trend for irregular economies due to the combined effects of international competition and the high fragmentation of working organizations.

Furthermore, legal activities conducted underground to escape taxation appear to be the faster growing component of the irregular economy, largely because of the structure of the tax systems. The underground Economy includes activities which may be legal or illegal, but are unreported so as to evade tax liabilities. These activates may include money laundering, smuggling, unreported cash payment, prostitution, drugs etc.

There are many economic activities which should have been recorded but never recorded. Estimates vary as we are looking at the unmeasurable. There are many activities which we ignore by consensus, e.g. women's household activities, sale of second hand goods, etc. A black economy can subvert all economic policies. Currently we are heading towards a fuel crisis due to the impending blockade.

Because of the huge profit margin there is a temptation to enter the black market in petrol. Big money is involved. That explains how shortage develops overnight. I will never buy petrol for Rs 10,000. If people continue buying as usual, scarcity cannot develop overnight. Petrol pumps go dry a day after the blockade is announced because speculators enter with better information and huge money.

One can engineer a scarcity by creating a problem along the national highways. There are so many ways of creating such a problem. I don't know whether there is collusion but the possibility is there. There is a hue and cry and everything becomes scarce overnight. The operators in the black market have their way. After sometime everything becomes normal without any solution to the problem. How many times transporters have stopped operating on the highways because of atrocities on the drivers? Bandhs and atrocities go hand in hand.

Housie or tambola and Digital film industry are beautiful means of converting black money into white. Tambola has already attracted the attention of social activists. There was a time when Imphal valley sounded like a casino. People were gambling throughout the day. The beauty of tambolas is that you can easily launder your black money. You can always say that your money is from the sale of tickets. There are so many inexplicable activities which are thriving now.

Digital film industry has been thriving in Manipur. Black money can also be laundered by showing as proceeds from sales of tickets. Lotteries are considered activities involving huge amount of black money. The shadow economy includes all market-based legal production of goods and services that are deliberately concealed from public authorities some examples of underground use of labour are: a second job after (or even during) regular working hours, illegal immigrants, etc. This is what we see all around.

Doctors and teachers are largely involved in second jobs. That explains what a government employee earns when one works after office hours is black income. Our tuition centres are also prone to such anomalies. They accumulate over time .We find that the competitiveness of enterprises run by people from outside the state is based on illegal immigrants who can be coerced to work for a pittance.

When such bakeries are closed down, the impact on our local shops is very visible. Bread, biscuits and other such eatables have disappeared and empty shelves greet us. Major portion of such black money are used in election and contract work. After all, no business is as profitable as politics-defined in the narrow sense.

When we have such a robust underground economy, economic policies have very little chance of success. It is difficult to get a proper picture of the economy when the unmeasurable is so active and growing so fast.