The continued fallout from the global financial crisis is believed to have driven a dramatic rise in this so called ‘informal’ - and by definition unreported and untaxed – sector in the mature economies since 2008. The expanding scope and true scale of those operating outside the system are by their nature hard to quantify. Estimates suggest that the total value of the shadow economy could be as high as US$10Tn annually – making it the second biggest global economy after the USA (US$14Tn).
The range of shadow economy activities encompasses everything from ‘cash in hand’ payments to construction workers and domestic cleaners through to illicit trade in everything from narcotics and people to pharmaceuticals and machine parts. The OECD estimates that in 2009 more than half of the global working population –1.8 Bn people - were effectively working ‘off grid’ in the shadow economy and that this could rise to two thirds of all those considered ‘in work’ by 2020.
Some estimates suggest that within 20 years, if the shadow sector continues to evolve in scope and complexity, it could represent 75% or more of all economic activity in some countries. The situation is clearly complex – some argue that money from the shadow economy does eventually make its way back into the formal economy through multiple routes. Others highlight that many countries and formal sector businesses rely on visitors from neighbouring economies spending the proceeds of their shadow economy activity – largely in cash transactions at hotels, restaurants and shops.
The longer term implications are clearly immense – for example there is the straightforward issue of how governments will fund critical services and infrastructure investment if a growing proportion of activity goes untaxed. In economies where the shadow economy dominates, this raises issues of what the best careers advice is for our children when most employment sits outside the formal economy. How should firms react when the majority of the potential labour force has gained its qualifications from unrecognised, unregistered institutions but that also have the best faculty? In recent informal conversations we’ve had with business leaders in some countries, they suggest that the ‘formal’ version of their industry could all but disappear in their economy because of the growth of the informal sector.