Shadow economies – sometimes called the black market or informal economy – exist in every country. But how big are they?  This continues to be of interest to me as you here more reported about this in Greece & Spain as a reason that the governments are having revenue shortfalls.  Economists Ceyhun Elgin and Oguz Oztunali are researching the size of shadow economies, or black markets, around the world.

They estimate that shadow economies account for 22.67 percent of world GDP.   The world financial crisis caused people to have much less opportunities to earn money in the official economy.  They try to compensate their income loss through shadow economy activities.  Not surprising, they report that richer countries tend to have smaller black markets than poorer countries.

A recent post on Steven Levitt and Stephen Dubner’s Freakonomics blog discussed the growth of the shadow economy across the world. The post claims that the shadow economy is the second largest in the world. Freakonomics: “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’.”

Forbes Magazine had this to say: Aside from the legal aspects of the black market, the shadow economy has negative implications in terms of tax revenue. In a July 2010 article from Bloomberg Businessweek, Chris Prentice discussed how the rise of the shadow economy affects tax revenue for nations.

Based on estimates, Prentice notes that “given 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”. Prentice quotes Austrian economist Friedrich Schneider, “Taxation and regulation increased in most countries over the past 10 years…reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation.”

Governments must therefore make the official economy more attractive and reduce incentives that lead citizens to participate in the shadow economy. Prentice concludes, “At a time when official economies around the globe are dealing with high unemployment, it might be some time before shadow economies lose their appeal”.

Call me stupid, but it sounds like this is an issue that needs to be fixed on a worldwide basis.  Let’s just hope this shadow does not start spreading on US soil.