System D: The Shadow Economy is the Second Largest in the World

In 2009, the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world’s workers. This new economy even has a name: “System D.”  

In a new article (accompanying photoessay here) for Foreign Policy, Robert Neuwirth explains: 

System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of “l’economie de la débrouillardise.” Or, sweetened for street use, “Systeme D.” This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy.

The shadow economy is involved in everything from “mobile phones to heavy machinery to roses” to “trash pickup, recycling, transportation, and even utilities.” And it’s big:

The total value of System D as a global phenomenon is close to $10 trillion. Which makes for another astonishing revelation. If System D were an independent nation, united in a single political structure — call it the United Street Sellers Republic (USSR) or, perhaps, Bazaaristan — it would be an economic superpower, the second-largest economy in the world (the United States, with a GDP of $14 trillion, is numero uno). 

Is this the economy of the future?


John B.

There's another meaning to "Systeme D". It is derived from "démerder" or "to remove oneself from the shit". To be great at System D is to know how to interact with the opaque bureaucracy that is ubiquitous in French life. The meaning is similar in that to know how to navigate it you are likely creative, socially adept, and inventive.

HH

Does the comparison double-count the US shadow economy?

Mike B

I would say it is more like the economy of the past. Think of the informal economy as Amazon.com vs Ebay (neglecting the fact that Amazon doesn't pay taxes either). It has much less overhead than the formal economy so therefore it has cost savings that can be passed onto the consumer. Where corruption and bureaucracy are high those costs are significant so therefore the informal systems become attractive. Where those costs are lower then most consumers will tend to prefer the safety of the formal economy.

The study shows that the United States, with its business friendly environment and low corruption levels, has the lowest informality rates in the world. As developing economies become more like that of the US, they too will see their informality drop. However there will always be room for the informal economy as some portion of consumers will feel comfortable enough to take advantage of it or their needs will simply not be served by formal enterprises. Remember a side effect of informal economies are informal methods of dispute resolution. This runs the gamut from "fooled me once" to the St Valentines Day Massacre. I think most people prefer to have the rule of law to backstop their economic transactions.

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old.frt

You forget that the informal economy emerges in lockstep with anything which is desired and proscribed, e.g., sex, drugs, guns, music.
So every time the US makes a law about something, shortly thereafter an entrepreneur emerges to satisfy the demand.
Let's hear it for the knockoff artists, the loan sharks, the ATF, DEA, and the local vice squads.
"Follow the money."

RJB

Will "the economy of the future" need government-supplied contract enforcement? Of course not. Government supplied infrastructure? Duh, no.

Russell Webster

If you believe the press in Europe, the entire Greek economy is System D

Nanno

It is, as a Greek recently interviewed on TV stated it quite nicely: Tax-evasion is the national sport.

According to the Greek director of the State's pension fund, Rovertos Spyropoulos, in the last ten years eight billion Euro's has been paid to deceased people.

Nanno

Some disturbing examples:

More Porsches than people declaring € 50k incomes.
http://blogs.telegraph.co.uk/finance/ianmcowie/100012894/fast-cars-and-loose-fiscal-morals-there-are-more-porsches-in-greece-than-taxpayers-declaring-50000-euro-incomes/

(Wealthy) North Athens has, based on satellite photos, some 16,974 swimming pools but only 324!! were actually declared on tax returns.
http://www.nytimes.com/2010/05/02/world/europe/02evasion.html

alex in chicago

Perhaps if taxes and regulations on the normal economy were not so burdensome we wouldn't have this issue...

berhin

That's the economy supporting a large part of the developing world. Wherever good institutions and infrastructure is lacking, people have no choice but to do whatever it takes to survive. Not many people run legitimate businesses, pay taxes or expect anything from the government.

Jasper

Isn't this a sign that there is way too much regulation and barriers to legal entry globally? I'm sure shadow economy size correlates strongly and negatively with business friendliness of a regime.

Brian

Not necessarily. Many of the business friendly policies are used to attract big business and investment, instead of the average Joe.

The shadow economy develops from people who start out too small to be regulated.

Rob

That article reads like a thinly veiled endorsement of laissez-faire economics.... possibly made by someone who was embarrassed to admit it.

Rene

The best sport in Italy is, like Greece, tax evation and not soccer as everybody would think.

Mexican unemployment rate is too low compared to any developed country, guess: system D.

I lived in Venezuela 10 years ago. On Fridays, driving back home from office, the trafficc was very, very slow. Guess what you can find from street vendors: beer sold directly to your car, how cool is that. Huge market, huge system D.

John @ Van Winkle Insurance Group

I think this could possibly be the future if we are not careful of taxes. I am not a proponent of no taxes or against raising them, but if consumers and business owners find the value in evading paying taxes by doing a beneficial cash business (many already do), I think this would be a very likely scenario.

Mike H

Does this include, say, people selling stuff online from their homes? I would guess that if so, it's a small percentage. Am I right?

Tyler

That is a macbre IF.

Elmo Frank

BUYER BEWARE!
The $10 trillion figure is taken from the highly controversial work of Friedrich Schneider. The following is a quotation from a recent published review by Trevor Breusch of an co-edited volume by Schneider:(Size, Causes and Consequences of the Underground Economy: An International Perspective Trevor Breusch. Economic Record. East Ivanhoe:Dec 2006. Vol. 82, Iss. 259, p. 492-494 (3 pp.))
"The measurement or 'size' chapters are of particular interest to this reviewer.
They are the most controversial - and the weakest. A long chapter by Schneider and Bajada purports to show the size of the underground economy in 145 countries, and the changes in that magnitude over a 3-year period. They pay lip service to the problems of definition, but never say what they are actually measuring.
The precision of the calculations is astounding (for example, we are told that in Kazakhstan it increased from 44.1 to 45.2 per cent of GDP between 2001 and 2002), but there are no standard errors or other indications of uncertainty in these estimates.
What is worse, it is impossible to reconstruct these results from the documentation that is provided here or in the other Schneider papers on which this chapter is based. Neither the data nor the model details were forthcoming from Schneider when I asked for them."
In another in depth review of the Mimic models Schneider uses, [http://ideas.repec.org/p/wpa/wuwpem/0507003.html] Breusch concludes:
"The literature applying this model to the underground economy abounds with alarming
Procrustean tendencies. Various kinds of sliding and scaling of the results are carried out in the name of "benchmarking", although these operations are not always clearly documented. The data are typically transformed in ways that are not only undeclared but have the unfortunate effect of making the results of the study sensitive to the units in which the variables are measured. The complexity of the estimation procedure, together with its deficient documentation, leave the reader unaware of how the results have been stretched or shortened to fit the bed of prior belief.... There are many other results in circulation for various countries, for which the data cannot be identified and which are given no more documentation than "own calculations by the MIMIC method". Readers are advised to adjust their valuation of these estimates accordingly."

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Roger Zimmerman

Is this the economy of the future?

Probably, given that the most dynamic and productive people tend to be the ones that most dislike government busybodies meddling coercively in their day to day affairs. Of course, as De Soto observed, were governments to recognize and protect the property rights of these entrepreneurs, but somehow refrain from regulating and taxing them to oblivion, we could have the best of both worlds. I think that is very unlikely, so I would put my money on the incessant growth of the informal sector.

Burke Files

It may seem silly but this was an interesting holiday take on System D - very funny.

http://www.aegisjournal.com/real-stories-from-the-field/black-friday-and-system-d/2011/12/

Thanks fro what you guys do.