Shadow economies exist in every country and have significant implications for economic development and the allocation of scarce resources
Shadow economies exist in every country and have significant implications for economic development and the allocation of scarce resources. In economic literature, the shadow economy is known by many names such as ‘hidden’, ‘unofficial’, ‘underground’, ‘non-observed’, ‘informal’ or ‘black-market’ economy and more recently ‘System D’. A common misconception about the shadow economy is that it is solely based on illegal activities such as prostitution and drug dealing. However, in reality, the shadow economy is a much more complex phenomenon as it also encompasses legitimate economic activities where reporting standards are not followed. This paper serves as a useful introduction to the concept of shadow economies. First, this report defines the shadow economy and analyses the size and characteristics of the informal sector. Next, the major causes are discussed and how the shadow economy positively and negatively impacts the official economy. The final section reviews the solutions put in place by various governments in order to limit the negative impacts of this hidden sector.