It is difficult, at this stage, to predict the impact of Covid-19 on the black economy in the region. Lockdowns and the near-total ban on air travel could well affect underground trade – but only if regulators up their street smarts.
Michael T. Schaper
22 June 2020
Covid can be a continuing conundrum when it comes to the black economy.
In late April, a number of Indonesian anti-smoking advocacy groups went on the record to suggest that the Jokowi government should ban tobacco consumption in a number of high-risk areas, possibly including private residences. The group, which included the National Commission on Tobacco Control and several other public health bodies, pointed out that smoking can potentially be a gateway to Covid-19. So a ban might well help control outbreaks of the disease, which is important in a country with more than 65 million smokers.
That all sounded well – until you look into the details. After my recent ISEAS Perspective publication on the black economy in Southeast Asia, I received an interesting email on this issue from a major peak industry association in Malaysia.
Their CEO pointed out that such bans were actually leading to rampant smuggling. Outlawing tobacco sales and usage through formal channels had simply meant people were now turning instead to illicit providers.
The result? Smoking was still taking place. Legitimate businesses were losing sales, whilst the tax authorities were losing massive amounts of excise duties. And a culture of law-breaking was becoming active again.
“This has undone the massive efforts our organisation has done to curb such activities,” the CEO concluded in frustration.
So not all well-intentioned public policy to prevent Covid-19 leads to positive outcomes.
At the same time, though, other unexpected behavioural changes are leading to a reduction in the black economy. The CEO of a hairdressing small business group in Australia wrote in to say that customer concerns about the potential spread of the virus through money handling had led many businesses to become cashless for the moment.
She had found it a positive experience, stating “I must say for my own business it has made transactions so much easier to manage… I know the concept of being a cashless economy is often in discussion (sic). I for one would now support it in a way I hadn’t before.” She added that she’d been pleased to see that online sales were more secure, easier to manage and to reconcile than cash.
Not surprisingly, a government regulator working in the small business space in Singapore also thought this was an excellent idea. His email, which came independently but at about the same time, said that, “With many in the community preferring to have no contact transactions, the use of credit and debit cards is allowing us (to have) much better compliance and tracking. And we will be able to determine the size of the black economy much better, by comparing the size of legitimate transactions now with previous behaviour.”
That’s a seeming win-win outcome, and an interesting one to note in a region where cash has usually been strongly preferred as a means of payment.
And, finally, one last unexpected outcome: the effective ban on international travel may well be reducing smuggling and money laundering. The restrictions on people moving in and out of countries has also apparently led to a decline in illegal transfers of cash, drugs and other goods across borders, especially those that are carried personally by traffickers. Closed borders may be wreaking havoc not only on tourism and other legitimate sectors, but also on underground operators such as smugglers.
We’re still lacking any official measurements on Covid-19’s impact on the black economy in the region. The latest reliable figures, dating back to 2015, estimated that the shadow economy then accounted for about 28.3 per cent of regional GDP (see Table 1). No researchers have yet published any more recent information.
Table 1: Regional Black Economy
|Estimated size of black economy |
(% of GDP, 2015)
Sources: Medina & Schneider (2018)
However, just last month, the International Labour Organization (ILO) called out the issue as an important one, stating that Covid-19 was likely to push more businesses into the unregistered, informal sector. The ILO urged governments to extend financial and social support to these businesses and their owners, pointing out that the unusual times provided a unique opportunity to do so and thus reduce the enduring size of the informal sector, especially in lesser developed economies.
the effective ban on international travel may well be reducing smuggling and money laundering … Closed borders may be wreaking havoc not only on tourism and other legitimate sectors, but also on underground operators such as smugglers.
The impact of Covid-19 is continuing to play out across the region in many different ways – some of them obvious and easily apparent, but on other occasions unpredictable and eludes even preliminary conclusions. It’s a bit of a mixed bag of possible outcomes, really.
So, on balance, is Covid-19 a friend or foe of the shadow economy? If done right, and policymakers are a bit astute, then I think we have a real chance now to reduce underground trading. A rare positive outcome at a time of very sobering economic news.
Dr Michael Schaper is a Visiting Senior Fellow with the ISEAS-Yusof Ishak Institute, and is chair of the Australian government’s Black Economy Advisory Board. This commentary represents his personal views and do not necessarily reflect those of any government agency.
ISEAS Commentary — 2020/82
The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute. No part of this publication may be reproduced in any form without permission.