At a time when the world economy is dominated by doom and gloom, one factor that could mitigate circumstances somewhat for many people is the shadow economy. By this, I mean the informal and untaxed economy, a world populated by anyone from illegal gardeners and maids, unlicensed taxi drivers, and street vendors, to pirate DVD hawkers, drug dealers, prostitutes, and traffickers of various kinds.

Anecdotal reports in the international media suggest that as the recession bites, those who lose their jobs (or need to top up their incomes) may increasingly turn to work in the shadow economy.

If an economy is a collection of people trading goods and services, then it makes sense that the shadow economy should continue to function – and indeed expand – as the official economy slides into recession. By way of example, Reuters quotes an economist from the Polish Academy of Science as saying that Poland’s shadow economy could grow by PLN25bn (14.3%) to PLN200bn (US$53bn) this year.

Such projections of course assume that those laid off do not merely sit idle at home or live off savings. (A Financial Times columnist yesterday bemoaned that laid-off City workers in the UK were not doing their share of housework.) Yet in the case of emerging markets, many simply cannot afford to take time off, and must therefore immediately find new work. Indeed, even at the best of times, the shadow economy can be a substantial proportion of GDP in both developed and emerging economies (see tables in this link).

After the collapse of the Soviet Union, many wondered why Russia did not succumb to another revolution or coup in the late 1990s after so many years of economic decline. Some may point to the stoicism of the Russian character, but I would suggest that another reason was the existence of a substantial informal economy, which kept people with just about enough to survive.

Of course, the existence of a vast underground economy is usually a bad sign, and an indicator of economic immaturity. Shadow economies often thrive at war time, when the usual economic channels break down. Typically, it means many working on the wrong side of the law, without all the protections that the official economy provides (though many official economies also shirk worker protection). Often, the shadow world means exploitation of workers. Furthermore, some studies on Japan have suggested that the Yakuza – Japanese gangsters – were responsible for prolonging the country’s bad debt crisis in the 1990s.

(On this subject, I am currently reading Misha Glenny’s McMafia, a book on global organised crime, and will write about this when I’m done. Two other books I can recommend on organised crime in Asia are Blood Brothers: The Criminal Underworld Of Asia, and Yakuza: Japan’s Criminal Underworld.)

That said, the shadow economy also performs an auxiliary role to the official economy. There is often a real demand for dirty and dangerous jobs, and this creates huge demand for immigrant workers where the indigenous population has qualms about such jobs.

If the global economy is a universe unto itself, then the shadow economy is the dark matter that holds it together.