Analyze, using examples, the argument that an informal economy will Essay

Analyze, using examples, the argument that an informal economy will always exist in any society in which there is a formal economy - Essay Example cerned about the informal economy running in parallel with the formal economy - with the legal activities escaping the tax net, and the illegal activities hoodwinking the law enforcement agencies. Hence one comes to accept the fact that in any society with a formal economy, the informal economy exists too. â€Å"The hidden or informal economy is usually taken to mean any undeclared economic activity† (Grabiner, 2000). An economic activity remains undeclared either for the purpose of evasion of taxes or because it is prohibited by law. Informal economy is thus a burden on the state, since the major part of it is illegal and even when it is legal, it leads to tax evasion or undue claims by the so-called unemployed on social security system like unemployment / medical / other benefits. Undisclosed income or black money may be put to fuel further growth of informal activities, because it cannot be openly used for any legal purpose. construction sector, consulting in professional services sector, seasonal labour in farm sector etc., all paid for by cash-in-hand. To the extent these legal activities go unreported to the authorities, they form a part of the informal economy. Coming to the illegal activities, which obviously will not be reported to the authorities, they may be financed by the undeclared profits of legal businesses (Grabiner, 2000, p.1). Trading in smuggled goods / prohibited substances like drugs, gun running, trafficking, exhibition of prohibited cinematographic works (pornography) etc. are common examples of illegal and criminal activities in the informal economy. To add to this, there are many devious ways by which black money is generated, exploiting the loopholes in the framework of legal economic activity. For example, under-invoicing of imports to cheat on customs duties, or over-invoicing of exports to claim export subsidies, are two of the common sources of generation of black money. To facilitate completion of such transactions, further