Into the Light

What’s the underground economy?

Photo: Melony Candia. Source: Morguefile

The informal economy is the cash economy. It’s the economy of under-the-table transactions, of digital currencies and returning favors. Sometimes it’s unsavory, sometimes not.

If you read a new book that you like and loan it to a friend, that’s informal activity. No money changes hands. This is perfectly legitimate. But sometimes informal activity is sleazy: cash payments for goods or services so sellers can avoid reporting what they do – to avoid paying taxes, or because their activities are criminal, or something even darker.

The more advanced a society is, the smaller the portion of its economy is underground. In the US the informal economy is less than 9% of total GDP; in some countries in South Asia it can be over 80%. This is a problem for the developing world, because jobs in the black market can trap people in cycles of poverty and exploitation. There isn’t enough capital available for successful businesses to get off the ground.

Source: Tes Teach

The simplest way to move people out of the economic shadows and into the light is to ease regulatory and tax burdens and make it simpler for small businesses to compete. People work for cash because the formal alternative costs too much – in time, money, energy, or other resources. Also, property rights need to be protected. Settled property rights give people incentives to invest, innovate, and pool their resources with others for everyone’s benefit.

If governments make formal work more attractive, they’ll get more of it.

Douglas R. Tengdin, CFA

By |2018-01-29T12:51:11+00:00January 29th, 2018|Categories: Global Market Update|Tags: , , |0 Comments

About the Author:

Mr. Tengdin is the Senior Editor for Money Basics. A prolific blogger, Doug is the author of the popular daily market commentary blog “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 26 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings.Mr. Tengdin is the Chief Investment Officer at Charter Trust Company. Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd •

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