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Forget China, 'System D' Is World's Second Largest Economy (Infographic)

January 19, 2012 by EconMatters   Comments (0)


By EconMatters

A recent article at Foreign Policy noted that the $10 trillion global black market is now the world’s fastest growing economy, and that in 2009, the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world’s workers. This new economy even has a name: ‘System D’.

According to an IMF economic study, black market, also called the shadow, underground, informal, or parallel economy, "includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities."

The IMF study also outlined the the potentially serious consequences of worlds fastest growing economy:

  • The growth of the shadow economy can set off a destructive cycle. Transactions in the shadow economy escape taxation, thus keeping tax revenues lower than they otherwise would be. If the tax base or tax compliance is eroded, governments may respond by raising tax rates—encouraging a further flight into the shadow economy that further worsens the budget constraints on the public sector. (On the other hand, at least two-thirds of the income earned in the shadow economy is immediately spent on the official economy, resulting in a considerable positive stimulus effect on the official economy.)
  • A prospering shadow economy makes official statistics (on unemployment, official labor force, income, consumption) unreliable. Policies and programs that are framed on the basis of unreliable statistics may be inappropriate and self-defeating. 
  • A growing shadow economy may provide strong incentives to attract domestic and foreign workers away from the official economy.

Based on an estimate by BusinessWeek, “[G]iven US GDP of $14.26 trillion, the world’s largest, that could still be as much as $1.2 trillion in taxable income that slips through Uncle Sam’s fingers each year."

In fact, shadow economy is part of the contributory factors to the current Euro crisis in the context of reduced government tax revenue and driving up consumer price levels. The IMF study showed in the 21 OECD countries in 1999–2001, Greece and Italy had the largest shadow economies, at 30% percent and 27% of GDP, respectively. In the middle group were the Scandinavian countries, and at the lower end were the United States and Austria, at 10% of GDP, and Switzerland, at 9%.

More importantly, the rise of System D highlights the inadequacy of global governments policies, processes, red tapes, and bureaucracies. This infographic lays out everything about the black market, how it affects our economy and our culture.

Black Market

Created by: Business Degree


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