Which Countries Have the World’s Biggest Black Markets?
A new report reveals which nations have the largest unreported and untaxed business sectors—known as the shadow economy or black market.
Entitled “Shadow economy exposed, Estimates for the world and policy paths,” the report also claimed that the black market has actually been decreasing, especially in low–income countries. Higher-income nations, meanwhile, reported smaller rates of decrease due, the report authors believe, to there being less room for improvement and relatively more stable socioeconomic conditions.
The 100-plus page report by EY— which provides consulting, assurance, tax and transaction services—reveals that China’s shadow economy is worth $3.6 trillion (20.3% of GDP), followed by runners up the United States at $1.4 trillion (5% of GDP) and India’s $931 billion (26.1% of GDP).
Emerging markets also feature near the top, such as Brazil ($448b, 20.6%), Indonesia ($326b, 23.8%) and Mexico ($320b, 17.9%) “reflecting widespread informal employment and business activity”.
Even other so-called advanced economies such as those of Germany, Japan, France, Italy and the UK report prolific under-the-table dealings to evade tax and hide riches.
“Our results indicate that, on average, high taxation is the main driver of the shadow economy in advanced economies. Some non compliant taxpayers simply do not register (part of) the transactions that they make in cash while others use sophisticated tax frauds or transfer money to tax havens (other sources of the tax gap). Third–party information, including traces of electronic payments, and technological solutions such as electronic invoices and online cash registers are used in preventing and/or increasing detection of hidden transactions and frauds. Still, some improvements can be considered in terms of facilitation measures (e.g., simplifying the tax system and reducing bureaucracy) and building trust (e.g., using participatory budgeting to include taxpayers in the process of public spending decisions).”
Managing and formalizing these vast informal sectors remains a major global economic challenge.
The report continued: “The covid–19 pandemic, along with a series of unforeseen energy shocks, led to a severe economic slowdown globally in recent years. Many governments resorted to measures aimed at shielding households and businesses from the impact of these disruptions. While helping to avoid a deeper economic contraction, such policies often resulted in significant deficits and public finance imbalances. Now, as governments navigate the path to recovery, they face additional financial pressures due to the urgency to transition toward more sustainable and digital economies. Investing in green technologies, infrastructure for renewable energy and digital transformation is not just an option but a necessity that demands high capital. At the same time, following monetary policy tightening by central banks, the cost of capital is and will likely remain higher for longer compared to before the pandemic. Fiscal consolidation calls for spending cuts or revenue increases—and usually a mix of both. Considering social, economic and political costs associated with reducing government expenditure or increasing taxes, addressing the so–called tax gap—the difference between the total amount of taxes owed to the government vs. what is actually paid—gains a heightened significance.”
Larger tax gaps indicate more tax evasion and avoidance, leading to a shortfall in revenue that could have been used for the above–listed investment needs. Consequently, reducing the tax gap has emerged as a critical strategy for governments to secure needed additional finances. Sources of the tax gap include tax frauds, tax evasion practices and other types of noncompliance, such as bankruptcies of businesses.
However, one of the main culprits for this shortfall is the “shadow economy,” also known as the “non–observed” or “unregistered” economy. It involves unreported economic activity from both registered and unregistered entities, where no invoices or fiscal receipts are issued, rendering transactions unreported and taxes unpaid.
This study presents an in–depth examination of the shadow economy, focusing on its multifaceted components as well as relationship with the tax gap and informal employment. It offers valuable insights into the functioning of these components, the detrimental effects they generate and the strategies that could be implemented to mitigate their adverse impacts. Activities involved in the shadow economy range from hidden and underground operations of registered businesses to avoid official scrutiny and taxation, informal market activity by unregistered enterprises such as street vendors, illegal activities forbidden by law (e.g., drug production and selling), to household production of goods for own consumption.
It is important to note, the report states, that the influence of the shadow economy and tax gap goes beyond financial discrepancies. It carries severe long–term negative consequences, such as the reduction of government revenues, lower quality and quantity of public goods and services, distorted competition, deterrents to investment and economic growth and the degradation of economic institutions and social attitudes.
This fosters an environment of evasion, resulting in a heightened aversion to tax regulations. While noncompliant taxpayers may initially experience some benefits, such as decreased costs or increased business competitiveness, these gains are likely short–lived and individually owned. Eventually, especially at the national level, they should be outweighed by detrimental effects, as argued in the literature.
World’s 13 biggest black markets:
| Rank | Country | Shadow Economy Value | Shadow Economy % of GDP in 2023 |
|---|---|---|---|
| 1 | 🇨🇳 China | $3.6t | 20.3 |
| 2 | 🇺🇸 United States | $1.4t | 5.0 |
| 3 | 🇮🇳 India | $931b | 26.1 |
| 4 | 🇧🇷 Brazil | $448b | 20.6 |
| 5 | 🇮🇩 Indonesia | $326b | 23.8 |
| 6 | 🇲🇽 Mexico | $320b | 17.9 |
| 7 | 🇩🇪 Germany | $308b | 6.8 |
| 8 | 🇯🇵 Japan | $282b | 6.7 |
| 9 | 🇷🇺 Russia | $265b | 13.1 |
| 10 | 🇫🇷 France | $205b | 6.7 |
| 11 | 🇹🇷 Turkey | $180b | 16.1 |
| 12 | 🇮🇹 Italy | $180b | 7.8 |
| 13 | 🇬🇧 UK | $179b | 5.3 |
Full report here: