Shadow economy refers to all undertakings that add to officially calculated Gross National product but are not registered with the relevant authorities. According to Buszko (2018), shadow economy comprises of criminal activities such as sale of drugs, smuggling, prostitution, gambling and other unlawful enterprises as well as legal transactions that are mainly conducted in cash and unreported to fiscal or competent authorities. The extent to which the shadow economy is practiced in organizations depends on the national culture. Uncertainty avoidance and power distance are the two main dimensions of national culture that have a great impact on shadow economy.
Transactions in the shadow economy are measured and accounted for using the survey method, currency demand approach and the model approach method. The smallest numbers are generally provided by the survey method and rather high ones by the currency demand approach while the Model approach only provides a structure to derive figures (Kirchgässner, 2016). Shadow economy is influenced by high level of taxes, corruption, organized crime, inefficient government activities and a complicated legal system.
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Shadow economy leads to loss of billions of taxable dollars hence challenge to the government. According to Kirchgässner (2016), reducing the tax burden and lessening official and business regulation are the best policy measure to reduce the shadow economy. Daniel Crdova says, for countries like Peru and Georgia, these steps would be difficult to implement because their huge shadow economy results from growing urbanization and commerce. Unfortunately, today what we call shadow economy is the real economy in most developing countries. With 20 million people out of work, shadow economy has risen to a very high rate since people get involved in hidden business activities to earn a living. I have learned that shadow economy is complex, dynamic and even supports so many people. I do not think any country can fully do away with the shadow economy especially because there are not enough regulation mechanisms and enforcement agencies to control everything.
References
Buszko, A. T. (2018). Cultural implications for the shadow economy. Engineering Economics , 29 (1), 46-52.
Kirchgässner, G. (2016). On estimating the size of the shadow economy (No. 2016-03). CREMA Working Paper.
