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What is a Black Economy?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 November 2016
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A black economy, also known as a shadow economy, refers to an economic segment that does not follow the established commercial and accounting principles of its region. Goods and services offered in the black economy may be legal or illegal, but the financial aspect of a black economy is almost always illegal. Since most black economies are cash-based and unreported to financial agencies, they are untraceable. For that reason, no one can say with certainty how large a black economy truly is, though many economists try to make educated guesses based on data.

The reason a black economy violates commercial laws is that money is usually paid in cash, or “under the table,” thus is not subject to state or national taxes. Those receiving money from a black enterprise will usually avoid depositing it in bank accounts or reporting it as income, so as to remain untraceable. The anonymity of a black industry also allows for the inclusion of illegal activities, such as arms trading, prostitution, and drug trafficking, since people involved in these industries naturally want to stay under the radar of government enterprise.

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Not all goods and services offered by a black economy are illegal in and of themselves. Any job, even those done by a licensed professional, turns into a black market transaction if money is paid through unreported channels. Construction work, catering, landscaping, and almost any other type of service or exchange of goods can become part of the black trade if money is not properly reported to tax authorities or does not adhere to commercial law. Therefore, a job, such as building a house, can be totally legal and to code, but the financial aspect may be unlawful.

Black economies tend to flourish during periods of rationing, such as during war. In World War II, a shortage of everything from coal to sugar created a thriving black market throughout Europe. For cash or trade, extra rations of all kinds were available to those who knew where to look. War profiteering, or the selling of stolen military goods through black enterprises, became an enormous problem during the long, difficult campaign. Similarly, under Prohibition in the United States, all trading in alcohol was a result of black market finances, as to report earnings or expenditure on booze was to alert authorities to the presence of an illegal supplier.

Modern examples of black economies revolve mostly around activities and goods that are heavily regulated or illegal. Copyright infringement or piracy is a common form of black enterprise, allowing unauthorized copies of movies, music, and other copyrighted material to be sold for cash over the internet or through fly-by-night vendors. Countries with strict censorship laws are quite likely to create an expansive black economy that deals in forbidden goods at exorbitant prices.

The arms trade is a frequent and frightening nest of black economics. The movement of weapons is usually heavily regulated by government law, meaning that deals to obtain illegal or restricted weapons must be handled with the least traceable methods possible. This industry is seen as extremely dangerous, and has been associated with the proliferation of weapons among gangs throughout the world.

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