The light and dark sides of the shadow economy


It’s not often you get the chance to sit in a room with a collection of today’s most influential minds and hear their thoughts and opinions on current global issues. But that’s what I was able to do this week at a panel discussion in London organized by CERGE-EI Alumni with the Legatum Institute and the European Bank for Reconstruction and Development. “The Shadow Economy – Impact on Innovation, East and West” was moderated by Edward Lucas, senior editor at The Economist, with contributions from Andrei Kirilenko (MIT), Peter Sanfey (EBRD), Tina Fordham (Citibank), Giles Andrews (Zopa) and CERGE-EI’s own Jan Švejnar.

The consensus was that some degree of shadow economic activity has a positive impact on those who find themselves excluded from more formalized economic systems, particularly those who exist close to subsistence levels. But there are also numerous examples of new businesses emerging due to technological innovation: Uber, Bitcoin and Zopa were the most cited examples. I was struck by Tina Fordham’s point that many CEE countries face the problems resulting from corruption above and beyond the other challenges of the developed western world, such as the growing competitiveness gap and decline in fiscal position. Unfortunately, they have fewer resources or political capital to fight them. The threat of getting locked into a “middle-income trap”, induced by inefficient public governance and corruption, is becoming more apparent, particularly when politicans themselves are reluctant to proceed with anti-corruption laws thanks to their own vested interests.

Returning to my hotel from the after-party in Soho, I mused on what I’d heard. There are numerous signs in the Czech Republic (and surely in many other countries too), that a particularly dangerous form of shadow economy has recently emerged to serve geopolitical interests. The relationship between corporate donations and political influence is intimate and extensive. So, for example, BIS (the Czech Security Information Service) regards the activities of Russian energy companies as one of the main issues facing the country. Now more than ever, we need to be aware of what is happening in the shadows!

The issue of shadow economies has implications far beyond standard economics discipline. It becomes crucially important when analysing topics as diverse as technological progress and international politics. My trip to London was a fascinating and inspiring experience. Many thanks to CERGE-EI Alumni and to UK Alumni Representative Jan Novotný.

Jakub Mateju is a 5th year student at CERGE-EI. He received the Alumni Award for Best Student Paper, winning a trip to attend the meeting of London Alumni. Find out more and watch the video of the discussion here.


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