The shadow economy may be bigger than the economy economy. Like dark matter.
According to Robert Neuwirth, most workers in the world are off the books. I do a fair amount of freelance work off the grid (though I try to report it) and a significant amount of Sri Lankan business is cash. Indeed, this ‘informal’ system predates the formal economy, but it’s still surprising to hear “half the workers of the world — close to 1.8 billion people — were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes,” (Foreign Policy).
Neuwirth goes on to say,
The total value of System D [débrouillards, resourceful people] as a global phenomenon is close to $10 trillion. Which makes for another astonishing revelation. If System D were an independent nation, united in a single political structure — call it the United Street Sellers Republic (USSR) or, perhaps, Bazaaristan — it would be an economic superpower, the second-largest economy in the world (the United States, with a GDP of $14 trillion, is numero uno).
He also links to his sources, but from there it gets confusing. 1.8 billion people is a lot, but it’s really closer to two-thirds (60%) than one-half. The dollar figure is dubious, and I’ve seen estimates that 47% of India’s GDP is off the books (OECD, Excel)… or 20% (World Bank PDF). I think these are due to different metrics, but it still taxes my weary mind.
I tried to make an infographic but I only got two facts in there. Basically, the shadow economy employs a lot of people and it’s worth a lot of money. Neuwirth’s numbers get a bit mixy and I think he highlights the positives of the informal economy a bit too much. Sri Lankan housemaids… wow, this is coincidental. I’m waiting for MasterChef to come on and The Simpsons is on in the background.
Homer is running a nuclear plant in India and he thinks he’s a God, and the Indians are listening to him only because he talks about overtime pay and coffee breaks. That’s stuff you don’t get in the informal sector (unless the boss wills it) and you also don’t get personal benefits like retirement or sick leave, nor do you pay into such social systems via taxes.
I think there’s a broad case or making taxes less onerous and setting up a legit business less taxing, but I don’t think a booming informal sector is necessarily a good thing. For one thing, informal businesses often find it harder to scale, and as people go from making living wages to making a living, some formalization will become a must.
Here are some stats on the informal economy, which is obviously hard to measure