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  • Mya Raithatha

Why Does The Hidden Economy Continue To Stay Hidden?

The hidden economy, also known as the shadow economy, is the proportion of GDP that is unaccounted for in official figures. This mainly refers to illegal activities, ones that go under the radar of tax collections and auditing, such as drug and arms dealing. This may seem irrelevant in modern day, as most of us only know these kinds of activities to be small-scale, and not making huge profits. This in fact, is not the reality, as for every active criminal, there is another higher up in the chain; meaning that the returns and significance of these people’s incomes is quite substantial- raising the question as to how these people continue to go undetected. The movie-like answer to this question is corruption, of both the mother state as well as local police authorities turning a blind eye to criminal activity. This may have been true 80 or so years ago, but most individuals within both the state and enterprise now lack the power to be able to carry out corrupt activities; or even just the general know-how, due to their involvement in such large-scale hyper-controlled organisations.

It is true that most who are part of the hidden economy deal in cash, so they cannot be traced when carrying out large transactions; it is also beneficial for the payee to do this, as their identity remains hidden. This enables them to stay hidden, as despite raising red flags when depositing large sums of cash in the bank, many use ‘front businesses.’ For those who weren’t already aware, front businesses refer to small scale businesses such as takeaways and beauty salons which pair up or are owned by someone operating another business illegally, such as a drug smuggler. The persons involved then pass any profits earned illegally ‘through’ this front business, by claiming them to be the profits of the innocent business, such as the takeaway, leading to the ‘cleansing’ of the money earned and the successful deposit of this cash in the bank to then be used for legitimate purchases. This can be applied to other transactions that produce a high turnover, such as real estate and exports. In many cases, local authorities claim to be aware of these activities, but lack the incentive to crack down on them, because of the fact the money is moving so fast, in many different directions.

A famous and more peculiar example of this is the Serbian criminal Arkan, who laundered money through both an ice cream shop and his own football team, FC Obilic [1]. This example shows how difficult it would be to trace down laundered money, as both of these businesses, particularly the football team, have the potential to and probably did make high revenues. If these businesses were to be shut down however, as a solution to hindering the laundering, particularly in places such as 1970s Serbia (which was not especially prosperous) it puts the town, city or even country in a position of regional economic disparity.

Certain types of area are shown over time to amass and attract criminal activity, either due to regional links (such as those lesser known, like Burma and Turkey which have weak borders and strong links to mainland Europe and Asia) but also the more obvious places, such as Mexico, which is so high profile and well known as a hub for criminal activity because of its close proximity to the US (and its respective demand) as well as its coastal exposure for shipping routes. This then comes back to a sociological trade-off, between illegitimately achieved economic prosperity- which produces very real economic benefits such as bettered living standards, productivity and investment- and legitimate, real economic activity, which almost always results in high levels of poverty, unemployment and crime. What should be preferred is very much up to morals, as the likelihood of legitimate business being created as a multiplier effect of an illegitimate injection is almost guaranteed. Additionally, it is unlikely that every member populating an area does engage in illegal activity, but they are still subject and able to benefit from the higher incomes surrounding them. There are many cases where law-abiding citizens feel unsafe in their area due to the high crime rates (whether they are involved or not) and it can sometimes create feelings of hostility in the community: but equally there are accounts of citizens benefitting from the incomes and expenditures of gangs and mafias- for example one’s house price may rise if it is now situated nearer to larger houses.

Coming back to the sociological trade-off, it is a choice of the authorities too, not just our opinion on which we would rather have. The reason why there is a lack of closure and pressure on financial criminals is because police officers and officials can have their own opinion on which is better, but the law itself does not state which should be enforced. Especially when looking from a global perspective, the modern governments would most certainly want to be displayed as having a prosperous economy, internationally, regardless of the social tensions that arise from ignoring financial crime in repeat regions. If we look at this issue from an alternative global perspective, the continent of Latin America in particular, if authorities were to abide by the latter (legitimate economic activity), their GDPs would plummet, suspending a higher majority into poverty and subsequently leading to a prime environment for further violent crime (and this is whilst neglecting the national economic impact on both trading and investment overall).

In conclusion, the reason the hidden economy remains hidden is most likely not because of personal corruption. It is the state’s lack of answers to important moral questions due to fear of electoral popularity, in order to benefit facts and figures which later benefit the whole economy. It seems to me this is some form of corruption, but not the one hyper-realised in mafia movies, but a new form of corruption, neo-corruption, which is the result of the dispersal of power throughout those in charge and the lack of clarity and decision making. Writing this, the question impends as to whether we can label this reasoning as corruption - or are we just working for the greater good?




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