The underground economy in pandemic's time

The underground economy is a problem that affects countries of the European Union and I do consider interesting to research information about it, especially in times of pandemic. Focusing on studies related to the impact of COVID-19, prior to the vaccine, on the underground economy, we find a possible increase of it as a consequence of the pandemic.

The combination of the public health emergency, economic distress and disinformation-driven panic would have driven consumers and sellers into the black economy. It should be noted the increase in popularity that the Dark Web (DWMs) has had in the months of the lockdown.

Both the incidence and intensity of the pandemic contribute significantly to the spread of the shadow economy through countries. In numerical terms, a 10% increase in the intensity of the epidemic would lead to a substantial increase in the underground economy of approximately 2.1%.

Due to institutions that do not act efficiently and sudden job losses, citizens and businesses are likely to find the informal sector attractive. The government's almost exclusive focus on finding the cure for the epidemic, on the other hand, reduces the potential costs of shadow operations.

Specifically, epidemics affect, in the first place, the proper functioning of government institutions, leading to the emboldening of potential lawbreakers. Anecdotally, there is evidence in the current COVID-19 crisis of cases of unauthorized (in-home) hairdressing, informal home-based classes, unauthorized ambulance or taxi services, etc.

Finance technicians consider that the greatest collection potential is found in the fight against fraud. Several studies affirm that reducing the submerged economy rate by ten points, would suppose an additional income for a country of 38,500 million euros per year, almost four times more than a two-point rise in VAT.

Additionally, the closure implemented by governments due to epidemics can lead to certain products and services in the formal sector not reaching demand, which can be a great opportunity for shadow agents willing to appear.

However, to alleviate this increase, authors state that strong economic growth in the formal sector would increase the opportunity cost of producing in the shadow economy. Greater political freedom would encourage elected officials to behave favourably, reducing the need to move into the informal sector. On the other hand, greater economic freedom in the formal sector would decrease the relative benefits of the underground economy.