Arnold Kling  

Underground Economy

Neuroeconomics... Detect Lie...

Doug Campbell writes,

Schneider in 2003 published "shadow economy" estimates (defined broadly as all market-based, legal production of goods and services deliberately concealed from the authorities) for countries including: Zimbabwe, estimated at a whopping 63.2 percent of GDP, Thailand's at 54.1 percent, and Bolivia's at 68.3 percent. Among former Soviet bloc nations, Georgia led the way with a 68 percent of GDP shadow economy, and together those nations had an average 40.1 percent of GDP underground. This contrasts with an average of 16.7 percent among Western nations.

Thanks to Tax Policy Blog for the pointer.
For Discussion. Does organized crime thrive more in countries with large underground economies?

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COMMENTS (4 to date)
Randy writes:

Government often is an organized crime. Going underground, even when it involves other types of organized crime, is a legitimate response.

luke writes:

It seems pretty easy to answer yes; organized crime is able to thrive more in underground economies. When a business operates illegally to avoid oppressive taxes and regulations by authorities, it also removes itself from the protection offered by those authorities - you cannot very well petition authorities to protect you if, to them, you do not legally exist. as a result, you are subject to protect yourself against crimes that can befall you.

When I studied in Russia, they said it is common for businesses to avoid taxes, but to be forced into paying mafia "protection" fees. essentially, businesses became territory of this or that mafia family, which would extract fees (taxes) from the business. after a company is owned by a particular family, the other families cannot move in on the company without fighting the existing "owner." sounds like 1920's prohibition era?

it is exactly like that. this topic for discussion seems strikingly simple. but the logical conclusion is also simple and self-evident - oppressive government regulation creates underground economies, which foster organized crime.

Randy made a great insightful comment - "organized crime" is very much modeled on government. organized crime systems seek to extract money from individuals (taxes) in return for defense services. the only difference being that mafia families hold no respect for the rights of the individuals they "serve." come to think of it, they are exactly the same.

John Thacker writes:

Organized crime indeed operates in the government's role of enforcing contracts in the underground economy; it is the underground government. For an underground economy to work well, some method of enforcing contracts is useful. Organized crime is one way.

Mikael writes:

Schneiders World Bank paper is a perfect example that we should be very very cautious when looking and analyzing data on GDP and GDP growth etcetera.

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