Monday, December 28, 2009

A big Shadow Economy is a good thing

Researchers at Deutsche Bank--the German multinational--have reached a staggering conclusion about the informal economy: it's a good thing. The Financial Times has details.

From the article: "Countries with a high prevalence of moonlighting builders, unrecorded cash transactions, missing invoices, tax evasion or illegal activities such as drug dealing, have seen smaller contractions during Europe’s worst downturn since the 1930s than more honest neighbours." For instance, "Greece’s economy has shrunk only about 1 per cent this year – compared with about 4 per cent for the European Union as a whole."


Jim said...

If Greece has it good, then why are youth rioting there, and why is there talk of the country being in such trouble?

rn said...

Jim: Good question.

Here's what I've been able to glean from various press accounts.

1. The riots really mark the anniversary of a spate of police violence under a prior government.

2. Greece's economic troubles seem to stem from years of runaway government spending (far beyond the country's take in tax revenues) combined with the increased financial restrictions that have come from adopting the euro. The country cannot fashion an independent solution to its economic crisis, because some of its possible actions could drag down the value of the currency, and European leaders won't allow that.

The point of the Deutsche Bank study was not that the Shadow Economy has saved Greece, but that it has cushioned the country from the shock of the current global recession/depression. Without a large informal sector, the report suggests, the situation in Greece would be far, far worse. The Shadow Economy does not refer to the bribery that apparently exists in Greece's public sector. It is, rather, an alternative and interrelated economic system that provides jobs and supports people's incomes.

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