Photo: iStockphoto/Getty ImagesThe shadow economy is perhaps best described by the activities of those operating in it: work done for cash, where taxes aren’t paid, and regulations aren’t strictly followed. The size of this sector of the economy has grown large in some countries. “As a percentage of GDP, it ranges from 25-60% in South America, [and] from 13-50% in Asia,” according to a recent paper by Prof. Terra. “When the informal firms [of the shadow economy] become formal, they start paying taxes.”The other reason: “Informal firms are constrained in their growth,” says Prof. Terra. In addition, they don’t have access to credit markets.”When the percentage of economic activity in the shadow economy is high, these constraints slow down the entire economy.

Source: Wall Street Journal March 06, 2017 03:02 UTC