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Shadow economy: problem or solution?


Almost all countries, small and large, during the recent pandemic lockdown, took unprecedented measures to support the economy, in particular (and to a greater extent) the small business segment. The United States, as expected, bypassed the whole world in volumes of support, France and Great Britain surprised by the flexibility of the measures provided and the level of interaction between the financial authorities and the banking sector, but traditionally pragmatic Germany stood out most unexpectedly. There, it was decided to allocate up to 15,000 euros to each entrepreneur literally in a declarative manner: it was enough to submit an application online, and the funds were sent within 3 days to the specified account without any checks and calculations, only general identification.

For comparison, in the United States, assistance to small businesses was calculated on the basis of the actual payroll fund, provided that the company did not fire employees, and if they had already fired, then it was required to call the same employee back, reporting this to the financial institution that carried out the "delivery" of the state support, which took a lot of time. In Russia, in turn, the amount of assistance to an individual enterprise was significantly limited due to calculations based on the minimum wage, and the time lag from an application to receiving assistance could stretch up to 40 days due to various checks and controls. And such checks are quite normal, because no one wants taxpayers' money to go to unscrupulous entrepreneurs. Why do the Germans want?



source, research by VEB.RF


In Germany, they proceeded from the fact that even if out of 10 applications only 5 turn out to be bona fide businesses that pay all taxes and fees, then fast delivery of assistance is vital for them, however, the support of the other 5 will have no less effect . The Germans know how to count and understand that in such an extraordinary type of crisis, any help is important, and the shadow economy is not an exception here, but even a priority, especially considering that small business is exactly the segment where the “gray zone” is most often concentrated. Moreover, in Germany, the shadow economy occupies a relatively small share of GDP, even in comparison with its European neighbors, but nevertheless, German economists did not disregard the “gray guys” sector, realizing its albeit ambiguous, but positive impact on the economy.

Of course, the economic and financial authorities of all countries without exception are not unreasonably allergic to shadow business. Indeed, it is often with its help that drug cartels, mafia and other criminally obtained cash are laundered. However, even when criminals set up a new business for money laundering or buy an existing one, they make it really functioning, since it must generate real cash flow (in particular, cash). That is, jobs are organized, salaries are paid, services are provided and, most importantly, added value is created. And it is important not to forget that a smaller proportion of small businesses are involved in the laundering of criminal funds, and the vast majority of them have nothing to do with “dirty” money, going into the shadows not always for selfish and malicious motives, as is commonly believed.



2015 data, source







In the German case of “blind” assistance to everyone, it is also important to note that the main target of this approach was not so much the owners of gray businesses, but their employees. It is this category of citizens that was under the strongest blow, because it is as if they do not exist for the economic authorities. Moreover, all economists of the world understood and voiced this problem, in particular, a lot of words were said by American and European specialists, but in the States such people received relatively small financial assistance in the amount of 1  200 dollars a month (of course, for those who were on unemployment benefits even before the pandemic, this was a significant “increase”, but for the vast majority of those employed in the shadow economy and those who lost their jobs, this did not compensate for the lost income even by a quarter), and in Europe, including in Russia, they recognized the problems of these people, but took a rather cynical position “they chose not to pay taxes, therefore they cannot count on help.”


As noted just above,  the reasons for immersion in the shadow economy are not necessarily negatively mercantile, as they are commonly believed. For owners and organizers of a particular business, going into the shadows is not always the pursuit of profit in the form of savings on taxes and fees, but often the only way to simply stay afloat and, in principle, function, therefore, official reporting for small businesses in most countries is more of a formality than real indicators. , it is for this reason that an individual approach to the assessment of SMEs has better performance indicators compared to classical financial models based on the analysis of tax reporting. For employees, in turn, this is not an evil desire to get into their pocket what a neighbor gives in the form of taxes, but often there is no alternative choice. Of course, the factors and reasons for the formation of shadow economies vary in different countries, but there are general trends. Our colleagues from ACCA (Association of Chartered Certified Accountants) in their study, where they forecast the dynamics of the shadow economy, also asked their respondents about the factors that influence the growth of the gray economic zone. The most popular economic factors among ACCA respondents are presented in the infographic below.



High tax burden

Economic downturn/recession in the local economy

The complexity of the tax system


Global economic downturn/recession

Ease of participation

in informal sectors 

Ease of care  

from paying taxes

It is quite natural that all the governments of the world are fighting the gray economy, demonizing it in every possible way, but, as often happens, no one is trying to find problems in themselves. Often, governments are indignant and publicly scold non-payers, although the effectiveness of tax administration raises no less questions than the integrity of citizens hiding in the shadows. Here are examples of different countries:

  • in Russia, the funded part of the pension is frozen from 2014 to 2022 inclusive, while enterprises pay all fees for employees, but they do not go to the piggy bank last, but to pay current pensioners

  • in Venezuela in December 2018, the pension savings of citizens were transferred to the “home” national cryptocurrency Petro (as you might guess, pensioners were not happy with this)

  • in Italy, the pension system is generally a favorite lever of political speculation and a tool to beat the budget: at the beginning of 2019, the retirement age was lowered from 66 (for women) and 67 (for men) to 62 years, subject to an accumulated work record of 38 years, and relatively shortly before it was an increase in the retirement age initiated by another party in power




People are not officially registered anywhere 



There is an official job

but most of the salary is paid

"in an envelope"



Along with white employment, employees on the side have a “gray” part-time job


It is difficult to give a “black and white” answer to the question “is the shadow economy good or bad?” It all depends on the context in which we are. If you face a choice: a white transparent business or a gray one, then it is obvious that the first option is always better both for the state and society, and for the people involved in this business. However, if you choose between shadow business and its absence, then everything is not so simple here, there are many assumptions and “if”: if the business is illegal and poses a threat to the life and health of people involved in it, or, even worse, has a negative impact on society as a whole, then no one needs such a business; if this is a business that, for objective reasons of the business environment, cannot function without going into the shadows, then for any economy and society its “gray” presence will always be better than its absence.

As noted earlier, any business is trying to create added value and provide employment for the population, and by paying even gray wages, it indirectly injects funds into the white economy, since most of the shadow funds are spent in the “clean” zone. Undoubtedly, the shadow economy is a disease, but if we draw parallels with medical terminology, it is one thing when the disease is caused by a harmful lifestyle, and quite another when the causes are mutations at the cellular level. Corruption is also considered to be one of the most harmful phenomena, but if, remaining in medical terminology, we compare it with the shadow economy, then the latter is a benign tumor (it would be better, of course, not to exist, but you can live), but corruption is a malignant cancer that spreads rapidly and kills the development of any competitive economy.

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