The New Black Market: Understanding the Underground Economy

The modern underground economy, known as "System D," is valued at more than $10 trillion.

The underground economy, or black market, encompasses all off-the-books or unlicensed activities that make money. It’s a shadow economy of informal transactions that go untaxed. Law enforcement and security professionals play an important role in fighting the crime and illegal activity occurring in the underground economy.

What Is the Black Market?

According to Investopedia, black markets include “economic activity that takes place outside government-sanctioned channels.” These under-the-table transactions seek to avoid taxes or government regulation. So where and why do black markets thrive and grow?

Why the Black Market Grows

The primary reason for black market growth is weak economic fundamentals. If a country has a high inflation rate and low currency reserves, it is far more likely to harbor a large underground economy. A fixed exchange rate can also have an impact. If the domestic currency is pegged at a higher level than another currency, black markets can emerge. The black market flourishes in developing nations or those undergoing extensive economic upheaval.

It’s important to remember that participation in the black market is not always obvious. When consumers purchase goods from a store in an exotic location, they may have participated in a black market transaction. Many corporations have products distributed in developing nations through middlemen who sell to stores operating in the underground economy.

Trying to find tickets to a sold-out concert and paying multiple times the face value of a ticket to a scalper can be considered a black market transaction. In developing nations, families may use underground economy transactions to procure important items like medicine.

The American black market has three major drivers: counterfeiting, drug trafficking and illegal gambling.

The American Black Market

Shadow economies and unregulated industry have long been a part of American life. In our nation’s infancy, many conflicts arose over frontiersmen unwilling to submit to the taxes and regulations the new government was handing down.

According to the Gale Encyclopedia of U.S. Economic History, the “Whiskey Rebellion” of 1794 was one of the biggest of uprisings in the immediate aftermath of independence. For several months, rebels in western Pennsylvania terrorized tax collectors over an attempt to tax corn whiskey. President George Washington and 12,900 militia men ended the Whiskey Rebellion.

These early episodes showcase American tendencies to protect informal economies. This expanded beyond common goods and into illegal activity in the 20th century when the 18th Amendment prohibited alcohol. Americans were willing to do whatever it took to continue to drink. Black market enterprises led by gangsters became commonplace across the country, producing their own booze and smuggling more in. According to the Foundation for Economic Education, alcohol consumption rose to 70 percent of pre-Prohibition levels within three years.

Havocscope reports that today’s American black market has three major drivers: counterfeiting ($225 billion), drug trafficking ($215 billion) and illegal gambling ($150 billion.) Other significant underground economy industries include movie and music piracy, organ trafficking and prostitution.

System D: The Modern Underground Economy

The Great Recession sparked growth in the modern black market. In 2011, Foreign Policy speculated that the total value of the global black market was $10 trillion, making it the second largest economy in the world behind the United States.

Today’s underground economy is even equipped with a kinder, gentler name: System D. The term is slang among French-speaking people in Africa and the Caribbean. The “D” stands for debrouillard, a French word used to describe a resourceful and ingenious person. The power players in System D believe that they are entrepreneurs in a brave new world.

Growth of System D

System D is able to grow without impediment because of the exact reason it exists — government regulation. Without restrictions to curb its growth, the black market expands naturally. It also is based on providing goods and services that people can afford. Large profit margins aren’t necessary in System D, allowing prices to remain low so people can keep consuming.

In the developing world, System D continues to grow at rapid rate. According to economist Friedrich Schneider, the black market in several countries grows faster than the actual gross domestic product. The Organisation for Economic Co-operation and Development (OECD) concluded that half of all workers in the world are employed in System D. In 2009, that number was around 1.8 billion people.

Effect on the Global Economy

The immense growth of System D has implications in a traditional economy as well. Changes in monetary indicators, participation in the economy and other output statistics can point to System D’s performance. If a country has a noticeably depressed GDP, that’s a big sign that the shadow economy is booming. Furthermore, raising taxes would be an incentive for citizens to participate in System D. Increases in welfare and other social assistance can lead to people reporting lower incomes.

System D isn’t going away anytime soon. In fact, the OECD projects that two-thirds of the world’s workforce will be employed in System D by 2020. Without government regulation, growth continues. There’s little doubt that System D has helped developing countries enter the modern era. China’s willingness to take part in System D has led to it becoming the world’s manufacturing center. By setting prices that the public can afford, System D has brought technology like smartphones to the world population.

Biggest Participants in System D

According to Havocscope, these are the countries with the highest global black market values.

Country Value
United States $625.63 billion
China $261 billion
Mexico $126.08 billion
Spain $124.06 billion
Italy $111.05 billion
Japan $108.3 billion
Canada $77.83 billion
India $68.59 billion
United Kingdom $61.96 billion
Russia $49.04 billion

Stopping the Black Market

In the United States, the primary task of stopping black market flow in and out of the country goes to the U.S. Customs and Border Protection authority. This federal law enforcement agency regulates and facilitates international trade. It is responsible for stemming the flow of illegal drugs, counterfeit items and other contraband. In 2015, the group seized more than $1.3 billion in counterfeit goods alone.

The group also works alongside the Drug Enforcement Administration (DEA) and the FBI to curb drug trafficking. The DEA made 31,027 arrests in relation to drug trafficking in 2015 and seized more than 160,000 kilograms of illegal drugs in 2014. But the drug trade still remains a large part of the American black market, with few signs of slowing down.

Understanding System D and the Underground Economy

For those interested in curbing the harmful effects of the black market economy, Point Park University can offer the necessary career skills. Our fully online Bachelor of Science in Criminal Justice and Master of Arts in Intelligence and Global Security degrees prepare students to protect and serve in several ways. Start your journey today.