History has seen many industrious people work "off the books" in the "shadow market" - a trend that continues to this day. This illegal market is big business. It's so big, in fact, that some sources claim that roughly half of all jobs worldwide are somehow related to the shadow market. But which nations have the largest shadow markets relative to their respective GDPs?
What is a "Shadow Market?"
The informal economy or shadow market, which is generally defined as economic activities, enterprises and workers that are not regulated or protected by the state. Illegal activities are typically excluded from the definition of the informal economy, as are goods and services produced within the home.
There are several examples of informal economic activity that may be familiar to you, including people who sell produce at a roadside stand or those who perform day labor at a construction site in exchange for cash payments. Informal economic activity is potentially much more complex in emerging markets, which may see entire corporations participating in the informal economy.
What Are the Advantages and Disadvantages of "Shadow Markets?"
One benefit enjoyed by those who participate in informal economies, or shadow markets, is the ability to collect earnings that are not reported to tax authorities. Also, many shadow market employment situations tend to involve work where cash is paid on a daily basis, which allows workers to better fund their lifestyles in instances where employment is not immediately available in the formal economy. Another benefit of informal economic activity relates to the innovations undertaken by informal economy participants. With little regulation and bureaucratic red tape, informal economies offer opportunities to develop products and services cheaply and quickly.
Of course, there are also several disadvantages to economies with a large informal sector, the most obvious of which is the lost tax revenues from businesses operating in the shadow market. In emerging markets, this lost tax revenue may be extremely detrimental to communities, as lower funds are available for investments in infrastructure. Additionally, the social security network loses funding, thereby potentially hindering future economic growth prospects. Shadow market workers may even earn less than equivalent workers in the formal economy earn, when considering the possibility of fines, a prison sentence and the lack of employee benefits.
Which Countries House the Largest Shadow Markets?
Measuring the informal economy is something of a challenge because it is difficult for economists to gather reliable data using traditional data sources, such as tax rosters and scanner data. However, several economists have developed methods that are widely recognized as the means to measure informal economic activity within a country.
Not surprisingly, emerging markets tend to rank highly among nations that have the largest informal economies, whereas developed markets tend to have the least informal economic activity within them. Switzerland and the United States, two countries that are widely regarded as among the most developed, tend to be among the lowest-ranking countries in terms of informal economic activity.
Bolivia, Georgia and Panama are countries that have the largest concentration of informal economic activity, followed by Zimbabwe, Azerbaijan and Peru. The top ten is rounded out by Haiti, Tanzania, Nigeria and Thailand. It comes as no surprise that when 162 countries were ranked by the relative size of their informal economies, the U.S. ranked near the bottom, at 161. Switzerland was the only country to rank lower than the U.S.
The Top 10 Countries with the Largest Informal Economies
This is based on the size and development of the shadow economy of 162 countries between 1999 and 2007.
|Source: "The Shadow Economy and Work in the Shadow: What Do We (Not) Know?" by Friedrich Schneider published March 2012|
The Bottom Line
Although there are several names for informal economic activity, one must remember that the shadow market does exist and that it accounts for a meaningful component of global GDP. While it may be difficult to define and measure, economists define the shadow market as the market whose economic activities, enterprises and workers are not regulated or protected by the state.
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.
Shadow economies may seem advantageous to certain workers because wages are received free of taxes. However, the social cost of these wages manifest themselves in the form of lost tax revenues and social security payments.