Submerged economy

economic-dictionary

The black economy is the total volume of black money that circulates in a country, that is, the set of monetary transactions not declared in a corresponding way to the competent fiscal or monetary authorities.

Normally, the underground economy tends to have serious consequences for a state, since it reduces tax collection and makes it difficult to fight illicit economic activities.

The legal economy of a country is measured by gross domestic product (GDP), which is what a country produces in one year. The underground economy does not fall within this calculation, since it is an illegal economy that has not been declared and, therefore, is not officially accounted for by the government. However, it should be noted that some countries do estimate it in their GDP.

The parts of the black economy

We must not confuse the black market with the underground economy. Although they are closely related concepts, they are not the same. For this reason, we make the following distinction:

  • Illegal economy: It is formed by those transactions whose commerce is prohibited. For example, drug or weapons trafficking is illegal. This is what is traded on the black market.
  • Informal economy: These are those transactions that, being legal, are not declared. And in the non-declaration of taxes for the transaction is where the crime is. For example, a worker who does not contribute for all working hours. That is, he works 8 hours, and contributes 7. But he does charge 8 hours. The remaining hour is charged in black. From a strictly conceptual point of view, this would not be part of the black market per se.

What are the effects of the black economy?

This type of economy is especially dangerous for countries as it prevents states from collecting fairly and proportionally with respect to their real GDP. Therefore, at times, the authorities seek to solve this problem by increasing the tax burden on the non-submerged economy.

However, measures of this type tend to achieve the opposite effect, since excessive fiscal pressure encourages the growth of the underground economy and thus creates a vicious circle where tax increases progressively reduce collection.

The existence of large submerged economies with respect to GDP tends to show that a state is lagging behind in fiscal matters. This constitutes one of the main problems of underdeveloped countries, since their tax resources are reduced and sometimes they must resort to solutions such as indebtedness with foreign creditors. Instead, of course, of drawing on your country's income if it is legally declared.

Instead, money from the black economy instead of going to the government and citizens, goes to the hands of the people who generate it illegally. This motivates them to continue engaging in illegal activities.

The problem of excessive indebtedness calls into question the ability of the authorities to face their debts in the future, which is why on many occasions large loans to underdeveloped countries have been conditioned on the implementation of plans against the shadow economy.

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