The Underground Economy

A look into South Africa’s massive “Black Market”

The underground economy, often referred to as the “black market” or “informal economy” in South Africa, is massive. But what exactly is the underground economy and what impact, good or bad, does it have on society? This article will explore these questions broadly and leave you with a better understanding and hopefully appreciation for the so called underground economy.

When the term “Underground Economy” is raised in SA, two things often come to mind:
1. Spaza shops, informal markets and traders, traffic light and road side vendors etc. (Often called the “informal sector”)
2. Criminal activity.

This is an exceptionally narrow view. In fact, the underground economy can be largely grouped into four main categories:

1. Any economic activity yielding income that is not reported to the tax authorities.
2. Economic production that violates one or several other mandates, such as compulsory government licensing and rate making, inspection and label laws, labor laws, government regulations of agriculture, export and import controls, government control over money and banking, governmental control of energy production and distribution, and countless others. Violators may or may not evade taxes, but they all work illegally, hiding from government inspectors.
3. Productive activity by transfer beneficiaries who draw government benefits(Read: SASSA grants) or receive public assistance. Their freedom to work is severely restricted.
4. Productive activity by illegal aliens without residence status. They may pay income taxes and other taxes, but must remain underground for fear of deportation or in the case of South Africa, lack or difficulty of obtaining the relevant documentation.

Thus an important distinction should firstly be made between criminals who are committing acts of bribery, fraud, and racketeering, and wilfully inflicting wrongs on society, and otherwise law-abiding citizens who are seeking refuge from the wrongs inflicted on them by government. They are employers and employees who are rendering valuable services without a license or inspection sticker, or failing to report their productive activities to the political authorities for whatever reason. Governments love to group these two together.

For the rest of this article I will be referring specifically to the second group mentioned above.

To clarify, all of the following falls into this category: Anything bought or sold in cash that is not reported to SARS, all employees paid in cash or who are not registered with authorities, all goods sold that are not reported to authorities for whatever reason. This includes South Africa’s massive cannabis industry that is now basically legal but loopholes has to be found in order to operate and (I’m sucking thumb here) probably 90% of shebeens. All economic activities of the vast majority of African immigrants in South Africa. All barter trade taking place, including livestock exchanges, gifts and most lebola payments, payments to most seasonal workers, most taxi fares, and the list goes on and on. Also, the vast majority of “crypto” activity.

Many tax paying South Africans complain and moan about the underground economy, mainly because of the lack of taxation, without realising that they are also taking part in it by participating in at lease some of the economic activities mentioned above. But the driving force behind the underground is yet more substantial and reputable than tax evasion. It is the inalienable right to life and property, which comprises the right to sustain both life and property through honest work. It is a basic right that precedes and supersedes all rules and regulations that would deny it. It takes precedence over minimum wage laws, license restrictions, union rules, and many other mandates that are denying the right to work.

Our ANC government has repeatedly tried to “grow” or “support” the part of the underground economy which they term the “informal sector”. But like all government activity their “efforts” fail miserably. Luckily for the informal sector participants, the lack of government involvement and regulation is exactly what allows this part of the economy to flourish. This sector is as close to a free market as one can find these days. In this way the laziness and incompetence of the ANC deployed cadres actually help South African citizens in a weird roundabout way. Viva ANC!

What the government should do if they want to help their citizens even further is to lift restrictions and raise the level or turnover at which point regulation starts. These small, flourishing businesses all reach a point at which they cannot continue to grow because it would require succumbing to regulation, tariffs, tax etc. It is not hard to imagine that this growth ceiling hampers the informal sector and stifles many successful entrepreneurs from growing their business.

In other words, what I am proposing is to not try and increase the amount of former informal sector businesses that “make it” into the “formal sector”, but to increase the size and scope of the informal sector itself and allow for more growth in scope and size within the informal sector and the underground economy before regulation is needed.

Luckily, as the competence and influence of government continues to decline, this is exactly what is happening on a ground level anyway. As the regulated economy stagnates or withers away the underground economy endeavours to take its place.

One of the many challenges the underground economy faces is the need to hold and transact in cash. Many people in South Africa cannot or choose not to have a bank account for various reasons. As inflation increases, the amount of cash and the value of notes compared to the amount and price of valuable goods decreases. Furthermore, it is dangerous to hold large sums of cash for obvious reasons.

Innovations in crypto currencies and especially the Bitcoin Lightning Network provide interesting potential solutions to these and other problems stifling the underground economy. Although adoption of these technologies are slow and currently almost insignificant, the potential value they can provide to the underground economy is tremendous. The ability to pay or transfer money to anyone around the country or world instantly, for free, without the need to present any document or fill in any forms or proof of anything, should not be underestimated. This will have an enormous impact not only on the so called underground economy of South Africa, but around the globe. This technology is already available and is currently in the adoption phase.

As these technologies become widely used and government influence continues to deteriorate over time, the underground economy will grow and prosper, providing income and jobs to millions of hard working and honest humans in South Africa.