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.