Social Consequences of Shadow Economy and Challenges to Deal with In the Case of Money Transfer in Abroad: An Analysis Based on Bangladesh’s Economy

Ahasan Ahmed | 20 February 2021
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Shadow economy or black economy has become a global concern as it has profound negative impacts on the whole economy itself. Especially, Black money is dominating the economies of South Asia for quite a long time. In this article, we will try to find out the social consequence of black money in the economy. 

While such discussion always arises about the definition of shadow economy or what is black money. According to IMF definition, it involves all economic activities that are hidden from official authorities for monetary, regulatory, and institutional reasons. The monetary reasons include evading tax payments and social security contributions; the regulatory reasons include the weight of regulatory framework or avoiding government officials; and the institutional reasons include quality of political institutions, anti-corruption law, and the fragility of rule of law.

A recent study from International Monetary Fund (IMF) found the size of the shadow economy is almost 30 percent of the GDP in Bangladesh. According to several studies that size was around 30-35.5 percent of the GDP between 1990 and 2015. So, a large portion of the GDP remaining in the underground might impact a lot in a negative sense.

The negative issues can arise asthe black money remains untracked. Untracked money can be used for many activities through remaining the main culprits untracked too. The impacts of black money have an adverse impact on Bangladesh’s economy. Some of the social consequences are mentioned below:

    Impacts on the Bangladeshi economy directly:

Black money creates a shadow economy that remains untracked. Black money can impact in people life if this money circulates and contribute to the employment of people along with the whole economy. But some people kept the money unused which has no impact on the overall economy. Like- money in the pillow or unused money which one keeps in their house won’t go for any expenditure or creating employment it won’t impact the economy too. 

    Revenue loss of the government: 

As black money remains untracked government can’t collect revenue from this. The current information from several studies shows black money is remaining around 30% of the whole GDP per year. So, if we calculate with current GDP of Bangladesh the amount will be around more than 100 billion dollars. Which is around 8.5 lakh crore taka. As it remains untracked, the government is not able to gather any revenue from that. If only black money comes into the regular economy could have been paid as taxes to the government. After that, the Bangladeshi economy can take the benefit out of it to a large extent.

    Increased corruption practice because of black money: 

According to the Global Corruption Perception Index 2019 released by the Berlin-based Transparency International report, Bangladesh was the 14th corrupted country. A large corruption is possible here as money remaining untracked. Though govt. has taken some steps already but still found that it is not enough to deal with a large volume of corruption. If someone even investigates find no tracking of original culprits. Which is causing increased corruption practice in the country.

    Higher taxation in general people:

Government has to maintain a large budget to maintain growth. A large budget needs large revenue collection. As around 30% of the economy remaining in the black money market government can’t collect taxes from them. So, govt. has to collect money through higher taxation in VAT or other excise duties which are causing general people more intensively.

    Money going abroad: 

To understand the amount of money laundered away from the country to other countries we might go for an example. A report has shown as 5.3 billion dollars flew away to other countries in 2015 only.According to US-based research organisation Global Financial Integrity (GFI) between the period of 2005 to 2015 , almost Tk5.3 trillion black money has been siphoned off from the countr, which is around an average of over Tk50,000 crore per year.Several data has shown about buying houses in Canadian Begum para or Malaysian second home projects brought about the question is that the true amount of money fleeing away. Money staying in the economy might help somehow the country and its economy. But once it went away it can’t get back to our economy again.

The next question can be raised regarding how that money gets transferred or get whitened. There are several ways to transfer black money to the global mainstream. Several ways are said to be the way of transferring money or becoming white. Some of them are:

    Hundi:

Hundi is one of the ways of transferring money in aborad for Bangladeshi people. It occurs when a person sending money via third-person rather than using a traditional banking method. One person provides the untracked black money to the person in this country. Another collects the money from the other person in that particular country. So, black money easily got transferred remaining untracked as no traditional banking method was used. 

    A complex web of intermediaries through exporting

Some businesses use a smarter way to transfer money. They set a complex web of intermediaries to send money to offshore zones. For example, exporters ship the product at a low price in their affiliated house and asked the importer to take the product from there at a high price. The extra money will become whitened that way easily and can deposit in foreign banks.

    Transferring money through importing network

Importing with high price mentioning but getting the low priced product from the affiliated causes money to be transferred. Extra money can be stored on the depositary accounts as excess money generated from the trade. It’s another way to transfer money and be whitened easily in that economy.

    Whitening money through banking channel

Some people use banking channel with little transection to keep the black money untracked. Mobile Banking was said to be used in the same ways as transferring money to become white previously when the regulation was not that good back in earlier. 

After discussing such consequences it can be realized that, govt. should take steps to bring the black money into the mainstream economy. Bangladesh govt. has taken several steps to make the black money whitened. Especially, in every budget govt. provided chance to whitening money with only providing 10% as tax. But still, a very low amount of money came to the mainstream of the economy. From the previous study we can find, a total of Tk13,808 crore was whitened in the 41 years from 1972 to 2013, while the NBR got in taxes only around one-ninth of that amount. There are several consequences of that decision. We can talk about that in another article later on. 

In this article, we have talked about the current situation of the black economy its consequence and how that money gets transferred in the aborad. It can be understandable that the impact of having too much black money in the economy is bad with lots of consequences. Though staying black money is in the economy somehow can help people with increasing production and employment. But once it goes out of Bangladesh, it can’t be recovered easily or use to help increase production and employment. So, govt. needs to take steps to stabilize the situation and have to monitor the ways of transferring or whitening money we mentioned in the article. We can expect a sharp fall in the total percentage of black money in the economy through strict monitoring and good governance. 

Ahasan Ahmed, Research Assistant, Centre for Governance Studies(CGS). 

Views in this article are author’s own and do not necessarily reflect CGS policy.


Comments

  • 23 Feb 2021, 01:20 PM

    good writings