There is a lot more to the financial ecosystem than meets the eye. All of the financial aspects people encounter in everyday life is just part of the equation. There is an equally large – if not larger – shadow economy that cannot be overlooked.
The Shadow Economy Concept
Different names are given to the shadow economy in this modern era. Some refer to it as the underground financial world, whereas others prefer the “parallel economy”. Regardless of the name given to it, it is a harmful financial ecosystem that causes ongoing headaches for all of the world’s governments.
As the name suggests, the shadow economy focuses more on the unsavory type of business dealings. It is a home for the illegal activities taking place on a daily basis. This encompasses both the online and offline world, as crime is not tied to just sitting behind a computer. The real crimes are still facilitated by banks first and foremost.
It is also important to note that illegal activities are only one facet of the shadow economy. This “side” also encompasses the unreported income from providing various goods and services. Money laundering and tax evasion are two examples of shadow economy-oriented business practices.
Interestingly enough, even barter transactions for which no income is reported are classified as shadowy transactions. Barter is not necessarily all that different from how it was conducted thousands of years ago. In this day and age, some bartered items are later on sold for monetary gain, thus creating an actual income that needs to be reported appropriately.
Some Noteworthy Examples
According to the IMF, there are quite a few different examples to describe activities in the shadow economy. The trading of stolen or contraband goods, drug dealing and manufacturing, and even gambling can fall into this category. As far as gambling is concerned, it pertains to service providers operating without a license, as well as the so-called street hustlers.
Smuggling and fraud are two other examples that run rampant on a global scale. On the other side of the spectrum, there are the barter of stolen and smuggled goods, producing or growing drugs for own use, and theft for own use. Again, the drug-related offenses only exist in regions where the at-home growing of drugs if prohibited.
Those avoid taxes or evading them altogether are another driving factor of the shadow economy. Even if one provides legal services or goods and is paid “under the table”, it is still pertinent for users to report taxes accordingly. Those failing to do so – either willing or unknowingly – help fuel this parallel economy.
As far as tax avoidance is concerned, there are some interesting notes. Providing employee discounts is considered a tax avoidance scheme The same goes for do-it-yourself work and neighbor help, as those are also ways to effectively avoid taxes.
Trying to help someone out makes one part of the shadow economy. Most people wouldn’t even give that concept a second thought.