Parallel economy is based on black money or unaccounted money which are not reported to legitimate authorities. The term parallel economy can be referred to underground economy, black economy, unaccounted economy, illegal economy, unsanctioned economy or shadow economy.
There has a lot of terms that can be used for parallel economy. Let's use the term "underground economy" where most people would more likely to acknowledge and fathom. The underground economy is not necessarily a bad thing always. There are advantages and disadvantages between underground and official, depends on which angle you're standing at.
According to the underground data (World Bank Document) of all countries investigated has reached a remarkably large size computed with a weighted average value of 17.2 (33.1)% of official GDP. However, equally important is the clear negative trend of the size of the shadow economy over time. The unweighted average size of the 162 countries decreased from 34.0% of official GDP in 1999 to 31.0% in 2007; for the 21 transition countries from 36.9% in 1999 to 32.6% in 2007. For Malaysia, click here to view The RM300bil shadow economy | The Star.
People engage in underground economic monetary activities for a variety of reasons, especially in response to government actions, most notably, taxation and regulation. We can split the underground economy into different sectors such as the criminal side and other is not involved in criminality, it's just the income is not reported to the official government and tax authorities. Giving an example, there was an auto repair shop, the owner no longer had a cash register. His customer would come in, they might pay him with a cell phone or they might pay him with the promise of painting his house. He would take that note and he would exchange it for someone else. They just simply did not have the cash to make payments. And you would have never seen that if you just walked in and made a purchase.
Types of Underground Activities
Monetary Transactions
Drugs dealing
Black market of currency exchange
Money laundering
Unlicensed money lending
Smuggling
Gambling
Prostitution and Pornography
Fraud
Trade with stolen goods
Trafficking
Non-Monetary Transactions
Barter drugs
Stolen goods
Smuggling
Usually, non-monetary activities are for their own use.
Transnational Crime
A report from Global Financial Integrity found the transnational crime is valued at an average of $1.6trillion to $2.2 trillion annually. Can you imagine the $2.2 trillion flow back to the official economy? It definitely gives a huge impact on the economy, environment, health, and well-being in general.
Counterfeiting: $1.13 trillion
Drug Trafficking: $652 billion
Illegal Logging: $157 billion
Illegal Mining: $48 billion
Illegal Fishing: $36.4 billion
Illegal Wildlife Trade: $23 billion
Crude Oil Theft: $11.9 billion.
Light Weapons Trafficking: $3.5 billion.
Organ Trafficking: $1.7 billion.
Trafficking in Cultural Property: $1.6 billion.
Besides $2.2 trillion costs of activities, we haven't involved perpetrators that are in the digital black market and cybercrime such as stolen personal and financial information. It's used to gain access to bank accounts and credit cards. Europol estimates it costs corporations 750 billion euros annually.
Disadvantages
The underground economy punishing legitimate industries difficulty competing with the low costs of underground operations and goods. Sometimes underground organizations create shortages in legitimate goods intentionally to increase their revenue by forcing people to make purchases from them.
Tax-free is the nature of the underground market, which caused government losses on its revenue. The amount could have been used to serve the country's citizens better in terms of benefits such as social welfare. When government evaluate the GDP of its economy and generate statistics from different divisions, it doesn't include the underground market economic activity. The same goes for the underground labour force, they don't pay taxes with unemployment status from the government perspective.
When the underground economy is unregulated, it enables perpetrators or criminals to push illegal and dangerous drugs or goods out there which causing millions of lives and can lead to social problems and safety problems domestically. Prostitutes working underground may carry health issues such as HIV and STDs and spread it to the general public. Underground regulations in certain areas, the government should put them into consideration. As we can see most of the Scandinavian countries enforced certain regulations and policies such as legalize lighter drugs (eg. marijuana) and prostitution. So far the countries' safety and health issues have remained constant whereas these divisions require strict supervision.
Motivation
Recession spurs growth in the underground economy according to the article by Elisabeth Eaves, Forbes and many other economists as well. As the economy moved into recession, businesses lay off workers and consumers cut back on spending. Many people forced out of their jobs wound up working in the underground economy and hoping for better times ahead.
Tax avoidance. Nowadays, most of the wealthy individuals or families would try their very best to run away from taxes by hiring professional tax consultants or they would avoid taxes by using underground money exchange techniques to transfer the funds to offshore accounts.
The decline in police enforcement. If a person feels that he can get away with working in the underground economy, he is more likely to enter naturally. If it is very risky with heavy penalties, this will act as a disincentive.
Changes in the law regulations. The prohibition of alcohol in the U.S led to a surge in the underground economy as people started selling illegal alcohol. Other than that, the government increased taxes on certain industries such as tobacco company, it led people to buy smuggled cigarettes as its cheaper and lower cost to produce. There are more reasons that drive the underground economy such as illegal immigration, increase the national minimum wage, and so on.
Conclusion & Recommendations
Considering these conclusions, it is obvious that one of the big challenges for every government is to have efficient incentive-orientated policy measures in order to make the underground market less attractive and, thus, to make the official economy more attractive. Successful implementation of such policies may lead to a stabilization economy and a significant reduction of the size of the underground economy.
There are multiple solutions for every government that are able to solve the problems of the black market. One of them is to urge the central bank to change the currency in a short period of time, this could give a big hit to the criminals that holding lots of cash on hand but this action may bring negative consequences as well. Before enforcing these currency changes, the government needs to evaluate its opportunity cost to make a trade-off between them. Besides that, the central bank can implement or enhance AI technology to its system to have better supervision and identify suspicious accounts to reduce underground businesses efficiently.
Even though these recommendations have been implemented, still there is another loophole that occurred which is blockchain & cryptocurrency where perpetrators find it helpful to avoid government supervision. I personally acknowledged bitcoin around 6-7 years ago, whereas, I realized bitcoin cryptocurrency usually circulate in the black market probably around 95% all the time. This topic has many sectors to cover. I might need to approach further research and giving out my thoughts on the next post.
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