Parallel Economy, Organised Crime & Prosperity
A parallel economy also referred to as an informal or shadow economy, or black market in some regions, thrives when individuals or groups engage in unregulated economic activities that evade government oversight and taxation. Cash is often the primary medium of exchange, but alternative forms of exchange have been observed, which include gold, precious artwork, and even property transfers under pseudonyms. Moreover, the parallel economy encompasses money transfers via unconventional routes like the hawala networks, which facilitate anonymous transactions without physical cash movement. This illicit transfer method is prevalent in South East Asia and is frequently exploited by terrorist organizations and drug traffickers that also cater to criminal syndicate financial needs. The primary objective of the parallel economy is to operate beneath the government's radar, avoiding regulatory scrutiny and tax obligations.
While economic underground activities are often associated with the parallel economy, they need not be the only motivator. Several factors contribute to its growth, including:
1. High taxation: Excessive tax rates drive individuals and businesses to operate outside the formal economy, seeking to avoid tax payments. Lower tax rates can reduce parallel economy activity, but don't eliminate it entirely.
2. Overregulation: Complex and burdensome regulations prompt entrepreneurs and small businesses to opt for informal operations, finding it easier to navigate outside the formal system.
3. Corruption: Widespread corruption erodes trust in institutions, leading individuals to engage in informal economic activities. Notably, corruption often originates from the top, trickling down to lower levels.
4. Economic instability: During times of economic crisis, high inflation, or war, people may turn to the parallel economy as a survival mechanism.
5. Limited access to formal financial services: In some communities, restricted access to banking and credit leads to the development of informal financial systems, fostering parallel economy growth.
The parallel economy impacts the overall economy both positively and negatively. While it can provide income opportunities and stimulate entrepreneurship, it also deprives governments of tax revenue and can lead to unfair competition and exploitation.
Usually there is a correlation between highly developed economies and a lower presence of parallel economies. Countries with strong institutions, high levels of transparency, and well-functioning regulatory systems tend to have smaller parallel economies.
Characteristics of highly developed economies that contribute to a smaller parallel economy include:
1. Low corruption levels
2. Simple and efficient tax systems
3. Access to formal financial services
4. Effective law enforcement and judicial systems
5. High levels of trust in institutions
These factors reduce the incentives for individuals and businesses to engage in informal economic activities, making it more likely that economic activity will occur within the formal economy.
Empirical evidence supports this correlation, with studies showing that countries with higher GDP per capita, better governance, and stronger institutions tend to have smaller parallel economies. However, it's important to note that even in highly developed economies; some parallel economic activity may still exist, particularly in areas like cash-based transactions or small-scale entrepreneurship.
As mentioned at the beginning organized crime and parallel economies are closely connected. Criminal organizations often exploit the informal nature of parallel economies to engage in illicit activities, such as:
1. Money laundering: Using parallel economies to conceal and legitimize illicit funds.
2. Tax evasion: Avoiding taxes by operating in the informal sector.
3. Counterfeiting: Producing and distributing counterfeit goods in parallel markets.
4. Smuggling: Using parallel trade channels to smuggle goods and evade customs.
5. Extortion and protection rackets: Controlling and exploiting informal businesses.
In return, parallel economies provide organized crime with:
1. Anonymity: Concealing identities and activities.
2. Flexibility: Adapting to changing circumstances and laws.
3. Access to cash: Generating cash flows through informal transactions.
The connection between organized crime and parallel economies creates a self-reinforcing cycle, where criminal activity fuels the growth of parallel economies, and the informal sector provides a fertile ground for criminal enterprises to thrive. This nexus undermines legitimate businesses, distorts markets, and erodes trust in institutions.
The chart above reveals intriguing anomalies in the relationship between parallel economies and organized crime. Despite having a robust surveillance system, the United States struggles with a significant organized crime network. In contrast, India's substantial parallel economy coexists with relatively low levels of organized crime. The Nordic countries, however, exemplify a harmonious balance between the two, showcasing exemplary governance. Their low rates of parallel economy and organized crime set a high standard, surpassing the rest of Europe.
Interestingly, Western European countries with higher per capita GDPs tend to have better control over parallel economies and organized crime. China, despite its authoritarian regime, exhibits moderate parallel economy levels but high organized crime rates, suggesting widespread corruption. Similarly, the UAE, Saudi Arabia, and Qatar, all with authoritarian regimes, struggle with high organized crime rates. Israel, a democracy, stands out with lower organized crime rates compared to its regional counterparts. New Zealand and Australia, like the Nordic countries, boast strong per capita GDPs and exemplary track records in controlling parallel economies and hence suffer less from implications of organized crime.
