Development Economics

The Importance of the "Shadow" (Free) Economy


From its January 2012 issue, Wired magazine has an interesting interview with economist Robert Neuwirth, who studies what he calls (for obscure Frenchy reasons) "System D," otherwise known as the Black Market, or "unofficial economy," or free economy, or the place where people meet each others needs without tons of official approval, guidance, or management.

Some excerpts:

In his new book, Stealth of Nations: The Global Rise of the Informal Economy, Neuwirth points out that small, illegal, off-the-books businesses collectively account for trillions of dollars in commerce and employ fully half the world's workers. Further, he says, these enterprises are critical sources of entrepreneurialism, innovation, and self-reliance. And the globe's gray and black markets have grown during the international recession, adding jobs, increasing sales, and improving the lives of hundreds of millions….

Neuwirth: If you think of System D as having a collective GDP, it would be on the order of $10 trillion a year. That's a very rough calculation, which is almost certainly on the low side. If System D were a country, it would have the second-largest economy on earth, after the United States…. In most developing countries, it's the only part of the economy that is growing. It has been growing every year for the past two decades while the legal economy has kind of stagnated….Because it's based purely on unfettered entrepreneurialism. Law-abiding companies in the developing world often have to work through all sorts of red tape and corruption. The System D enterprises avoid all that. It's also an economy based on providing things that the mass of people can afford—not on high prices and large profit margins. It grows simply because people have to keep consuming—they have to keep eating, they have to keep clothing themselves….Half the workers of the world are part of System D. By 2020, that will be up to two-thirds. So, we're talking about the majority of the people on the planet.

He goes on to tell of how goods get from China through middlemen to the streets of the underdeveloped world, including involvement with huge international conglomerates who are aiming where the consumers are. (I want to taste the Gala sausage roll, apparently found only with street vendors in poor places.) Neuwrith talks of the amazing innovations in mobile phone networks that enable commerce in even the poorest countries. 

In conclusion:

Wired: Are there things that the US should be doing to take better advantage of the realities of System D in the developing world?

Neuwirth: Absolutely. For starters, if we really want to engage in true, ground-level economic development in these countries, then we have to begin looking at these markets. These are the places where the bulk of people are being employed. And we have to listen for these markets to tell us what's needed in a community. It's not a bureaucrat in Washington or Nigeria who can best establish what's needed to help the poor in Lagos. It's the people who are working in these markets and living on the streets who can tell us that.

A previous Neuwirth book called Shadow Cities was reviewed in Reason's Aug/Sept. 2005 issue.

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  1. The eurozone crisis in diagrammatic form. Pretty good use of charts.

    1. Not really surprised to see that the chart places the blame of “private sector” debt without any discussion on how governmental policy encourages private debt.

      1. Despite the fact any “private sector” debt denominated in a fiat currency is actually a public sector debt.

        I guess a gangster here and there creates a private debt contract denominated in silver doubloons or payment in physical goods, but most debts are redeemable with greenbacks.

      2. There should probably be more attention paid to the role of the euro in distorting interest rates and making them too low in southern european countries.

        There should also be more analysis of unsecured liabilities such as pensions and future medical entitlements.

  2. NPR did a surprisingly good (for them, considering the subject) piece on this.

    Libertarian-friendly chef Anthony Bourdain writes a lot about System D in his restaurant-related stuff. I think he got it from Orwell’s “Down and Out in Paris and London”.

    1. From Wiknoweverythingia: In The Nasty Bits, Bourdain references first coming upon the term while reading Nicolas Freeling’s memoir, The Kitchen, written about Freeling’s years as a Grand Hotel cook in France.

      I was watching Bourdain’s The Layover last night, and am really glad that man is on TV. Too bad Ken Burns thinks it’s dangerous for me to choose it.

  3. It’s not a bureaucrat in Washington or Nigeria who can best establish what’s needed to help the poor in Lagos.


  4. The main issue with black markets and shantytowns is that us upper class folk don’t like to have to look at them. They’re all messy and stuff.

    We prefer a scenic vista of candle shops, locally-owned burrito joints, and a secondhand music store.

    Left unchecked, black markets will result in every family trying to build a treehouse in their front yard.

    1. And they’ll all want to put up flashy signs, creating visual clutter, instead of the far more esthetically uniform sinage designed by zoning boards.

      What a silly idea they have, putting up visually obtrusive signs so customers can find them.

      1. Ugh! Sometime I hear those people display their “merchandise” right out on the sidewalk. Can you imagine? On the sidewalk? How gauche!

  5. This sounds like the same observation Hernado De Soto made when he suggested that governments recognize property rights.

    That being said just how big is the underground Cheetos economy.

  6. The planners at the IMF, World Bank, and USAID do not agree with this message of bottom-up problem solving.

  7. This is where I agree with the Georgists. (I’m pretty sure they were the ones who advocated this.) We should increase the power of black and gray markets in order to delegitimize highly regulated markets and the state at large.

    1. Link? I was unaware of this aspect of Georgism.

      (I first picked up on Georgism as a young lad reading newsletters from the Henry George society when my mother would visit an old pensioner lady who refused to ever leave her house. Being an obedient statist at the time, like most children, I liked the part about really high taxes on land but was deeply suspicious of the idea of not taxing anything else.)

      1. Oh, never mind, a quick browse on wikipedia leads me to believe I’m thinking of agorism. It appears Samuel Konkin came up with counter-economics.

        This is what happens when you have a million theories of libertarianism. (Just kidding, I like that aspect of libertarianism.)

        1. It’s strange that I only learned of SEK3 recently, via quotations in Kings of the High Frontier.

  8. Oh no! No no no no no no no no!!!!

    This simply will not do! People out there who aren’t being adequately governed?! I won’t stand for it!

    1. This just goes to show that capitalism benefits only those who already have property.

      1. You are free to GAMBOL.

  9. Jeff Riggenbach’s Mises article on Neuwirth’s books is a good read.

    1. ^^^ Thanks for the link.

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