Wednesday, July 06, 2011

"Black Economy" A Blessing?


The Black Economy
A Blessing?

My regular readers will know that I have very strong feelings about the way the Irish Economy has been handled.  My feelings have been heightened by the culture of graft and cronyism, and the obvious “Gravy Train” mentality of professional and business fat-cats, politicians, and many employees of government agencies, including the judiciary.

Dr Sam Vaknin PhD

I wrote a small piece on my take of the Irish “Black Economy”, and while searching Google to see if the piece had been picked up, I came upon this excellent article by Sam Vaknin. Among the professional hats that Sam wears are the following: He is a columnist in "Central Europe Review", United Press International (UPI) and  Very importantly in this context, until recently, he served as an Economic Advisor to the Government of Macedonia. He was born in Haifa Israel and later emigrated to Macedonia where he married and settled. He has a PhD in Philosophy, is trained in psychotherapy, and has published several books on a variety of subjects.

Sam Vaknin has written about the “Black Economy” from a refreshingly different angle of view.  I contacted Sam and he has given me permission to quote or re-publish this excellent thesis of his. Following are extracts, large extracts, from his article; The Blessings of the Black Economy.

The Blessings of the Black Economy (extracts)
By: Sam Vaknin, Ph.D.

Some call it the "unofficial" or "informal" economy, others call it the "grey economy" but the old name fits it best: the "black economy". In the USA "black" means "profitable, healthy" and this is what the black economy is. Macedonia should count its blessings for having had a black economy so strong and thriving to see it through the transition. If Macedonia had to rely only on its official economy it would have gone bankrupt long ago.

(The “Black Economy” or by the Irish so called “under the counter” business, accounts for some 15% of GDP in the USA, 19% of GDP in Spain, and anything up to 60% in Russia. In Macedonia, where Sam writes from, it is estimated to be some 40% of GDP.  Sam states that money earned on the “Black Economy” is usually squirrelled away in foreign accounts but eventually... )

People will bring their money back (into the official system) to open businesses, to support family members and just to consume it. It all depends on the mood and on the atmosphere and on how much these people feel that they can rely on the political stability and rational management.

Such enormous flows of capital happened before: in Argentina after the Generals and their corrupt regime were ousted by civilians, in Israel when the peace process started and in Mexico following the signature of NAFTA, to mention but three cases. These reserves can be lured back and transform the economy.

But the black economy has many more important functions.

1.    The black economy is a cash economy.
2.     It is liquid and fast. It increases the velocity of money.
3.     It injects much needed foreign exchange to the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of "we know better" institutions such as the IMF.
4.    It fosters economic activity and employs people.
5.    It encourages labour mobility and international trade.

Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does – and, usually, more efficiently.

So, what is morally wrong with the black economy? The answer, in brief: it is exploitative. - - -  operators of the black economy enjoy these (social -educational -medical etc.) services without paying for them. (The burden falls on those paying taxes)

Bureaucracies tend to misuse and abuse resources.

... Unfortunately, we all live in societies which are regulated by bureaucracies which are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner. Even economic theory admits that any dollar left in the hands of the private sector is much more efficiently used than the same dollar in the hands of the most honest and well meaning and well planning civil servant. Governments all over the world distort economic decisions and mis-allocate scarce economic resources.

Thus, if the goals are to encourage employment and economic growth – the black economy should be welcomed. This is precisely what it does and, by definition, it does so more efficiently than the government. The less tax dollars a government has – the less damage it does. This is an opinion shares by most economists in the world today. Lower tax rates are an admission of this fact and a legalization of parts of the black economy.

The black economy is especially important in times of economic hardships.

It (The Black Economy) enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practised by them), it adds to the wealth of the nation (black marketeers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market. Mercifully, the black economy is out of the reach of zealous missionaries such as the IMF. It goes its own way, unnoticed, unreported, unbeknownst, untamed.

Without the black economy, the population of Macedonia would not have survived. This lesson must be remembered as the government prepares to crack down on the only sector of the economy which is still alive and kicking.

Thank you again Sam for allowing me to use your article!
The original article can be seen on:
Sam Vaknin’s web site:


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