System D - $10 Trillion Shadow Economy

[NobleSavage]

In many countries -- particularly in the developing world -- System D is growing faster than any other part of the economy, and it is an increasing force in world trade. But even in developed countries, after the financial crisis of 2008-09, System D was revealed to be an important financial coping mechanism. A 2009 study by Deutsche Bank, the huge German commercial lender, suggested that people in the European countries with the largest portions of their economies that were unlicensed and unregulated -- in other words, citizens of the countries with the most robust System D -- fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations. Studies of countries throughout Latin America have shown that desperate people turned to System D to survive during the most recent financial crisis.

So what kind of jobs will predominate? Part-time work, a variety of self-employment schemes, consulting, moonlighting, income patching. By 2020, the OECD projects, two-thirds of the workers of the world will be employed in System D. There's no multinational, no Daddy Warbucks or Bill Gates, no government that can rival that level of job creation. Given its size, it makes no sense to talk of development, growth, sustainability, or globalization without reckoning with System D.

http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

Lends a little support to the libertarian train of though.

 

[untermensche]

The European nations that did best and continue to do best are the nations that have the strongest government operated social programs.

This undermines a lot of Libertarian thought.

 

[barbos]

Yeah, Italy and Greece have the biggest shadow economy and they are not doing so well compared to Germany who I think don't have much System D.

 

[NobleSavage]

Yeah, Italy and Greece have the biggest shadow economy and they are not doing so well compared to Germany who I think don't have much System D.

The underling study was specifically about Germany. They suggested that Germany would be better off by going in one direction or the other.
http://www.dbresearch.de/PROD/DBR_INTERNET_EN-PROD/PROD0000000000252019.pdf

I don't have a dog in this fight, yet. I just think it's interesting. And $10 trillion should not be ignored.

 

[Loren Pechtel]

The European nations that did best and continue to do best are the nations that have the strongest government operated social programs.

This undermines a lot of Libertarian thought.

The ones that crashed worst were the ones with high social spending.

 

[Loren Pechtel]

How much of that System D economy is stolen or illegal goods?

 

[barbos]

Yeah, Italy and Greece have the biggest shadow economy and they are not doing so well compared to Germany who I think don't have much System D.

The underling study was specifically about Germany. They suggested that Germany would be better off by going in one direction or the other.
http://www.dbresearch.de/PROD/DBR_INTERNET_EN-PROD/PROD0000000000252019.pdf

I don't have a dog in this fight, yet. I just think it's interesting. And $10 trillion should not be ignored.

Don't want to waste time reading it but in general the more developed countries tend to have lower shadow economy, also less developed countries are less affected by crisis because they simply don't have much to be affected.
Proper study should include countries with similar economic development but with different proportion of shadow economy. The closest would be Germany and Italy and this example would clearly contradict their thesis.

 

[NobleSavage]

How much of that System D economy is stolen or illegal goods?

I'm guessing it's going to be hard to determine that.

 

[untermensche]

The European nations that did best and continue to do best are the nations that have the strongest government operated social programs.

This undermines a lot of Libertarian thought.

The ones that crashed worst were the ones with high social spending.

The economies that spend the most did not do the worst.

It was countries like Greece, that spend the least that did worst.

It makes perfect sense.

Government spending on social programs allows people to buy more goods and services with their money. It creates a more vibrant economy.

Cutting government spending on social programs (austerity) and spending more to pay down debt has the opposite effect. It lessens economic activity.

 

[NobleSavage]

A NEW estimate of the size of shadow economies around the world sheds light on a worrying trend. Friedrich Schneider, of Linz University in Austria, reckons that, for the first time in a decade, transactions taking place outside the taxable and observable realm of the official economy captured by GDP numbers are increasing. Shadow economy does not mean ill-gotten gains here, but legal economic activity that is not taxed. Mr Schneider attributes this reversal to the financial crisis, which seems to be pushing more people in OECD and EU countries to avoid the extra burden of taxation by resorting to informal transactions. The shadow economy, in other words, can act as a cushion when times are tough.

http://www.economist.com/node/16784402

 

[untermensche]

In the US the illegal drug trade is a large shadow economy.

But it has nothing to do with "entrepreneurial spirit".

For the sellers it is partly about a lack of opportunity and legitimate economic pathways but it is also about exploitation.

But that is the what the whole war on drugs is. A way to exploit human weakness and profit from it by inflicting more harm upon the already afflicted.

 

[NobleSavage]

Just posting articles as I find them.

http://www.washingtonpost.com/blogs...-shadow-economy-is-the-recessions-big-winner/

Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy.

“It’s typical that during recessions people work on the side while collecting unemployment,” Baumohl told me. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

If the shadow economy is in fact growing, that has upsides and downsides. It's certainly a good thing that people are finding ways to survive during a brutal downturn. But it's yet another sign that the formal economy is utterly failing to create enough jobs for everyone.

 

[NobleSavage]

This seems to be the ranking and composition index that others (including Wikipedia) are using:

http://www.havocscope.com/products/ranking/

 

[untermensche]

This seems to be the ranking and composition index that others (including Wikipedia) are using:

http://www.havocscope.com/products/ranking/

# 1 counterfeit drugs.

# 3 counterfeit electronics

There's the entrepreneurial spirit in action.

 

[NobleSavage]

This seems to be the ranking and composition index that others (including Wikipedia) are using:

http://www.havocscope.com/products/ranking/

# 1 counterfeit drugs.

# 3 counterfeit electronics

There's the entrepreneurial spirit in action.

Imitation is the sinceriest form of flattery... I wonder how many "counterfeit" drugs are chemically the same, like generics sold before patent expiration, vs. sugar pills or worse something harmful. Same with electronics, how much is a just a manager running the line a little longer at Foxconn and selling the extra on Alibala?

 

[Bronzeage]

So what kind of jobs will predominate? Part-time work, a variety of self-employment schemes, consulting, moonlighting, income patching. By 2020, the OECD projects, two-thirds of the workers of the world will be employed in System D. There's no multinational, no Daddy Warbucks or Bill Gates, no government that can rival that level of job creation. Given its size, it makes no sense to talk of development, growth, sustainability, or globalization without reckoning with System D.

http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

Lends a little support to the libertarian train of though.

I would like to read more of the article, but it's from 2011, and the site is being squirrelly about it.

In any case, black market economies always exist when the official economy is too inefficient to serve people's needs. This says a lot because black market economies are by definition, quite inefficient. The main forms of transaction in a BME are cash and barter. This means it is impossible to collect capital for large projects. The size of the BME is deceptive. It may be $10 trillion dollars, but one transaction has no real connection or effect upon another. It reminds me of a man with whom I once worked. He claimed to have 30 year experience at his job. The joke in the shop was, he had one year experience, 30 times in a row.

A successful BME is actually a failure of the open market economy. It's actually the economy that existed in the middle ages. It's the default position economies. When it works well, it's only because it's the only thing that works. This does not make it the best solution to anything.

 

[bilby]

# 1 counterfeit drugs.

# 3 counterfeit electronics

There's the entrepreneurial spirit in action.

Imitation is the sinceriest form of flattery... I wonder how many "counterfeit" drugs are chemically the same, like generics sold before patent expiration, vs. sugar pills or worse something harmful. Same with electronics, how much is a just a manager running the line a little longer at Foxconn and selling the extra on Alibala?

I don't know about electronics, but most counterfeit drugs are very definitely not the same as generics. Hundred dollar bills are very hard to forge. Packets of tablets are much easier - and potentially much more lucrative. I used to work for a generic pharmaceutical manufacturer, and many of our products were exported to South East Asia. We frequently got Quality Control returns that turned out not to be our product at all, but counterfeits - some very convincing to the naked eye. The least bad of the counterfeit drugs I have come across contained less than half (typically around 10%) of the labelled active ingredient; the majority contain no active at all; and a non-trivial fraction contain cheap-but-toxic substances intended to produce side-effect like symptoms to fool patients into thinking they got the real thing.

Some of these are downright dangerous in their own right, even before you consider the potential harm of patients unaware that they are going untreated.

 

[Canard DuJour]

So what kind of jobs will predominate? Part-time work, a variety of self-employment schemes, consulting, moonlighting, income patching. By 2020, the OECD projects, two-thirds of the workers of the world will be employed in System D. There's no multinational, no Daddy Warbucks or Bill Gates, no government that can rival that level of job creation. Given its size, it makes no sense to talk of development, growth, sustainability, or globalization without reckoning with System D.

http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

Lends a little support to the libertarian train of though.

That appears to be the author's intention but it'd take a very uncritical reader to buy it.

For starters the study he cites states :

And it is equally a toss-up whether a large shadow economy fundamentally mitigates or exacerbates the vulnerability of the official economy to crises.

and concludes :

Which path of the two is the right one for Germany, though? The answer is simpler than one might expect: honest work does pay off! For one thing, people should have learned from the economic crisis that only morals and decency are the key to sustainable business activity. For this reason alone, Germans should exhibit a greater degree of honesty vis-à-vis their tax officials. For another, the foregoing analysis makes one thing quite clear: had Germans generated a negligibly small share of GDP in the shadow economy to the degree that the performance of France, Austria and the Netherlands paled in comparison, Germany would presumably not have fallen into recession. On this note, may you have a Merry Christmas!

Countries like Greece and Portugal with larger proportions of their economies in the shadow economy didn't "fare better" but lost slightly smaller proportions (a couple of %) of already smaller GDP. Yer average German or Scandinavian still fared better. Because, as others point out, the shadow economy isn't so good at the big capital-intensive stuff first world economies need.

IOW a crisis precipitated by deregulation and widespread financial insecurity tends to breed more unregulated activity and financial insecurity. Thanks to "the libertarian train of thought" more of us are on the way back to selling vegetables by the roadside.

 

[Togo]

IOW a crisis precipitated by deregulation and widespread financial insecurity tends to breed more unregulated activity and financial insecurity. Thanks to "the libertarian train of thought" more of us are on the way back to selling vegetables by the roadside.

There's a quite an active shadow economy amongst some of my friends. Car maintenance for cooked meals, website work for carpentry, people making things that either there isn't a mainstream market for (painted scenery and props for theatricals) or that people don't want to go commercial to get (vibrators and shackles for sex games). Lots of made-to-measure ball gowns, transportation of heavy goods (e.g. an aerial hoop for exotic dancing), snake hire (no, not kidding), protest organisation (what do you do if you have 300 students, a cause, and no communications or coordination?), and of course home-made items like beer, jam, soap and fireworks.

My favourite one was the ball organiser who got 12 of their friends to turn up and flirt with anyone who wasn't having a good time. They got 'paid' in a variety of way, such as by clearing away all the leftover refreshments and material at the end of the night, keeping the clothing they'd been given, or various other odds and ends over the previous or next few weeks.

This kind of exchange doesn't work on a strict commercial basis, and the people you do things for you aren't always the same people who pay you back, but it works quite well, and makes use of time, which the underemployed often have to spare.

 

[Loren Pechtel]

# 1 counterfeit drugs.

# 3 counterfeit electronics

There's the entrepreneurial spirit in action.

Imitation is the sinceriest form of flattery... I wonder how many "counterfeit" drugs are chemically the same, like generics sold before patent expiration, vs. sugar pills or worse something harmful. Same with electronics, how much is a just a manager running the line a little longer at Foxconn and selling the extra on Alibala?

Counterfeit drugs are usually not up to the standards of the real thing.