How is the economy affected by recovery of the underground economy?

Readers Question What if the underground money parked in Swiss bank is recovered. Will it destabilize the current economy?

‘Underground money’ I assume you mean money gained by illegal methods and money that will be frozen until someone can prove they legally own it.

Recovering frozen money

One scenario – If there is a large stock of illegal money currently frozen in Swiss bank accounts and this is recovered and put back in the economy and spent.

In theory, this injection of money into the economy could cause inflationary pressures. However, as a % of total money supply in the EU economy, it is likely to be a very small % and so wouldn’t really destabilise the economy.

What happens if you make the underground economy legal?

If all the’underground economy’ was recovered and put back into the real economy, you would probably see an increase in real GDP. The ‘hidden’ economy or ‘underground’ economy refers to money and economic transaction not measured by government statistics and ignoring government regulations and laws.

If this activity switched from illegal to legal forms, it may just show up in higher GDP. I don’t think it would destabilise the economy because it isn’t really changing economic activity, just how it is measured.

For example, if you took a US state that has legalised Marijuana. Previously Marijuana sales were ‘underground’ and not recorded. Now it is legalised, sales will be registered by the government. The government will receive tax and it will show up in higher real GDP statistics. A little ironic perhaps, but legalising drugs is one way to increase real GDP statistics.  See also: Underground economy.

Readers question: If yes what is the difference between FDI and hidden money.

A big difference. There is no real correlation

You could have ‘illegal, unrecorded foreign direct investment, e.g. a Mexican drugs cartel investing in drug distribution in the UK. This would increase the size of the underground economy in the UK. Though you might expect a percentage of the illegal profits to be repatriated to Mexico.


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