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The shadow economy in EM: Bad for sovereign risk, good for consumer spend

  • We chart the size of the 'shadow', 'informal', 'grey', 'undeclared' economy in EM; eg China 13% versus US 7%, India 52%

  • Undeclared (not taxed or regulated) economic activity harms fiscal sustainability and financial markets development

  • Silver lining: consumer spending and private sector resilience to shocks may prove greater than standard metrics imply

The shadow economy in EM: Bad for sovereign risk, good for consumer spend
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
24 June 2022
Published byTellimer Research

We chart the size of the 'shadow', 'informal', 'grey', or 'undeclared' economy in emerging markets, using a data set from World Economics.

Undeclared – ie not taxed or regulated – economic activity harms fiscal sustainability and debt servicing, as well as formal financial markets development (ie higher cost of capital).

A large shadow economy reinforces a vicious circle for institutional development – the ease of transacting away from the government's gaze undermines the operations and growth of the institutions that should underpin that government.

The 'shadow', 'informal', 'grey' economy in emerging markets

The silver lining, during economic shocks like Covid, commodity inflation, or increases in the cost of borrowing, is that consumer spending and private sector resilience may prove greater than metrics of the formal economy alone imply.

The scale of undocumented remittances was evidenced by the rapid growth of remittances during Covid lockdowns, which inhibited cash carried by physical couriers or transactions outside traditional banking channels.

It may be that domestic consumer spending proves more resilient than might otherwise be expected as emerging markets, particularly the poor ones at the mercy of higher imported oil and food prices and higher sovereign debt costs, suffer economic stress.

Related reading

Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? (Medina and Schneider), Jan 2018

Is there an asymmetric link between the shadow economy and the financial depth of emerging market economies? (Hajilee and Niroomand), Jan 2021

Why blockchain's impact will be biggest in EM and how to pick the winners (Domjan), May 2021

EM equity strategy recap during the market rout, June 2022

Commodity exposure in EM: Stick or twist, June 2022

EM credit sell-off unlocks pockets of value, but more pain could be in store (Curran), June 2022