IT is a well-known fact that the “black economy” is a worldwide phenomenon as no country has been able to escape from its tentacles.
Neither can it be disputed that governments are fighting a losing battle despite putting in place counter measures to curb the illicit activities. Meanwhile, the black economy continues to thrive unabated in parallel with the white counterpart.
Like other developing countries, Fiji is also in the same boat. Therefore, it came as no surprise when our Attorney-General and Minister for Finance Aiyaz Sayed-Khaiyum told delegates at the 2015 Certified Practising Accountants Congress in Nadi last month that a study conducted a few years ago found that Fiji’s black economy amounted to one-third of the gross domestic product (GDP) as a result of which Fiji was losing more than $2billion in tax revenue annually (FT 21/8).
For a small nation such as Fiji, such loss (albeit estimated) is quite exponential thus raising serious concerns about its impact on our economy. Another country which has come under the spotlight lately over allegations of black money held by their businesses in offshore accounts is India. According to a study conducted by Global Financial Integrity, India ranked fourth among the world’s largest exporters of illicit money.
Defining black economy
So what exactly is a black economy? Definitions of a black economy vary widely but it is generally described as the segment of a country’s economic activity that is derived from sources that fall outside of the country’s rules and regulations regarding commerce.
The activities can be either legal or illegal depending on what goods and/or services are involved. A typical example is a case of a construction worker who is paid under the table will neither have taxes deducted from his pay nor will the employer pay taxes on his earnings. The construction work is legal; it is the nonpayment of taxes that classifies the event as part of the black economy (Investopedia).
Other terms that are synonymous with black economy include informal economy, shadow economy, underground economy and black market and the proceeds derived from such (illegal) activities is commonly known as black money.
Global indicator
Admittedly the informal economy is very hard to measure. The main difficulty arises on account of the fact that it exists in the shadows. There is, therefore, wide variation in the figures reported as estimates are required to be made in indirect ways.
Given the fact that undeclared work and underreported income are not registered (largely because of loopholes in the national legislation) renders it rather difficult to obtain reliable estimates for a comparative analysis of the global scenario. However, assessing the extent and characteristics of such illegal activities is indispensible from the standpoint of formulating effective policy measures to combat the bulging black economy.
It is believed that a large proportion of the black economy constitutes of undeclared work which usually refers to the wages that workers and businesses do not declare with intent to avoid taxes or to circumvent the labour regulations. In contrast the trend in countries with high levels of taxation may be different where businesses underreporting income to avoid taxation may represent a significant chunk of the black economy.
Whatever the case may be, it must be recognised that this sector adds considerable value to the economy. Economists have estimated that in developing countries the informal economy accounts for 36 per cent of GDP whereas in developed countries it has been estimated to be around 13 per cent of GDP.
Why does the black economy exist?
Black markets are those goods and services that form the black (or underground) economy. Typically, black markets arise when a government restricts economic activity for particular goods and services, either by making the transaction illegal or by taxing the item so much that it becomes cost-prohibitive such as cigarettes, alcohols, etc.
Driven by demand a black market may arise to make illegal goods and services available (for example, drugs, prostitution and gambling) or to make expensive items available for less money (such as pirated software).
Corruption is another contributor. Several studies have concluded that complicated tax laws and licensing systems cause serious difficulties in complying and this encourages people to evade tax. Furthermore, excessive controls and regulations in securing government licences and permits force people to circumvent them through black money.
According to experts the level of black economy activities depends on the culture, incentives and opportunities to cheat. It is therefore vital for the Government through its agencies to accurately monitor and police those rogue businesses and take steps to reduce the incentives to take businesses underground.
This can be achieved by reviewing the tax rates and the increase in public utility costs, deregulating the labour market and cutting the red tape. It is no coincidence that countries with a relatively low tax regime and less bureaucratic systems have the smallest black economies.
Good and bad black economy
There are divergent opinions as to the positive and negative implications and the tolerance level of the shadow economy. Dr Friedrich Schneider, a renowned author, claims that a shadow economy is not a bad thing for it creates additional goods and services and in the process also creates value adding. But the State is the big loser because of taxes and social security contributions foregone.
In his view, a shadow economy is not simple black and white, it has all shades of grey in between. It is so deeply embedded into the system that as one commentator has aptly quipped: “Black money is so much a part of our white economy, a tumour in the centre of the brain — try to remove it and you kill the patient.”
Similar sentiments are echoed by Samar Vijay, the author of the book A Tryst with Money: An account of our Journey with Money to the Unknown Destination. He writes, “in the Indian context, one of the high-ranking black-market operating countries, it is a combination of curse and boon. It is a curse because if black-market economy were to merge with the mainstream economy, India will probably be one of the top economies in the world today, which will substantially boost the tax revenue”.
The positive side effects should not be overlooked given that over 60 per cent of the earnings from shadow economy is spent in the formal sector. Some gurus subscribe the view that its existence in moderation is not problematic but when its size reaches up to 40 per cent of GDP then it will pose a serious threat to a lot of people.
Another school of thought is that turning a blind eye to illegitimate trade is still part of the culture and it must change to protect jobs and businesses and to support national development objectives.
In the next sequel we will examine the economic impact and the modus operandi used in the concealment and laundering of black money.
* Selwa Nandan is a former adviser for trade facilitation with Oceania Customs Organisation and a consultant on Customs and trade matters. For feedback, email: selwa.nandan@gmail.com.
