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What is the shadow economy (SE)?

The SE can be defined as: the market-based production of and payment for legal goods and services that are deliberately concealed from public authorities.

Crucially, the prevalence of SE activity throws up considerable practical and ethical issues with which professional accountants around the world need to grapple.

The research reveals a variety of viewpoints.
  • Two-thirds (66%) believed that the SE will grow by 2025, with one-third (31%) believing that it will grow significantly
  • Only 7% said they are making efforts to improve processes to spot and handle SE activities among their clients and customers
  • Reducing corruption was ranked as the most popular method of tackling the SE.

Who should tackle the shadows?

Expert opinion is divided. Some state that government holds the prime responsibility, others suggest it is the responsibility of the individual to make the right choices, and a third group argue that the community has a significant potential role in establishing cultural norms and practices that discourage participation in the informal economy.

Action at all levels

Effective management of the SE requires action at all levels – government, cities, local communities and individuals. 

8 key ideas for the future management of the SE:
  1. Uniform regulation – uniform cross-border regulation in regional blocks and improving international coordination 
  2. Tackling inequality – policies that reduce inequality and create a fairer economic system, and encourage people to care more about their society
  3. NGO dialogue – use the expertise and knowledge of NGOs for better understanding of the causes and consequences of what is happening among the general population
  4. Access to the legal process – democratise the law-making process and providing easier participation in law-making
  5. Infrastructure provision – address longer-term infrastructural issues and drivers, especially in ‘areas where no economic activity was present previously
  6. Capacity building – provide better training for government employees who are monitoring the SE
  7. Economic alternatives – introduce government workfare programmes instead of unemployment benefits
  8. Acceptance and accommodation – for economies with the highest levels of informal activity, this needs to be addressed in a counter-intuitive fashion. If there is unlikely to be a longer-term economy that is sufficiently robust, stable or successful for more formal forms of governance to be 'wrapped' around it, the key strategy is to embrace the SE as a source of innovation and growth.

About Faye Chua, lead author, ACCA