Term paper The illicit, informal or black market economy has grown to a massive size worldwide - $1.

79 trillion, according to black market information site Havocscope. The black market encompasses illicit trade of any kind, whether it is in drugs, counterfeit goods, illegal arms, or even conventional consumer products and services that are bought and sold off the books. As populations grow globally, demand for goods and services both licit and illicit also grows; much of this demand is met within the black market economy due to lack of government enforcement, increased criminal syndication, economic hardship, and other factors. Many black market activities illegal arms sales, human trafficking, drug smuggling, and others seem to have a clearly identifiable distribution of positive and negative effects for the players involved. Those who produce, smuggle, broker, and sell illegally often profit handsomely from their activities, while the people being trafficked, becoming addicted to drugs, and otherwise being harmed as a result of these activities are clearly affected negatively. These activities also have fairly clear externalities for indirectly associated countries and individuals, possibly including war, civil unrest, and corruption in government. Such activities are most often the result of a need for distribution of goods or services that are considered illegal by governments in the areas in which the activities are taking place. However, other types of black market economic activities often do not have such clear distinctions of how different parties are being affected, either positively or negatively, and to what extent. In contrast to the first set of activities, many other types of black market activities are undertaken by producers, smugglers, or sellers in an effort to avoid taxation, regulation, or government price control, rather than to avoid restrictions on

contraband. Such activities might include the trade of goods off the books and the provision by unlicensed persons of services that typically require licensure. By examining the motivation for a black market economic activity, the direct effects and externalities of that activity often become more evident. In contrast to contraband black market activities, black market activities existing because of taxation, regulation, or economic hardship may have an overall net positive effect on those involved directly and indirectly; such activities might become even more beneficial in the event that they are legalized or decriminalized. In many parts of the world there exist informal economies of significant size and cultural and societal importance. These economies are not typically taxed or regulated by governments and are not considered in the evaluation of a countrys GDP since the transactions comprising these economies take place off the books. These informal economies typically exist because of a lack of economic opportunities within the formal economy; their growth is compounded by the desire of participants to avoid regulation, licensure, or taxation. Informal economies are often particularly concentrated in extremely densely populated, impoverished urban communities. Known as favelas in Brazil and jhopadpattis in India, these shantytowns comprise a very significant portion of world population: investigative journalist Robert Neuwirth asserts that one in seven people worldwide live in such communities. With such densely populated, impoverished, and often poorly policed and regulated conditions, these shantytowns and extra-legal settlements are almost perfect settings for informal economic activities to take root. Such communities often lack modern infrastructure such as plumbing, electrical distribution, trash pickup, transportation, health care and emergency services.

Infrastructure may be absent to due lack of funds or social or racial bias against the inhabitants of such a community. The formal economy may also fail to meet the need for consumer goods and services. However, the need for these key infrastructures and functions still exists. Because the government and the formal economy often fail to meet this demand, informal economic players step in to do so. Hong Kong was once home to an extremely densely populated housing settlement known as the Kowloon Walled City. At its peak, Kowloon was comprised of over 300 interconnected high rise buildings with a total population of approximately 33,000 (Girard). The Walled City was formerly a military outpost for the Chinese during the Song dynasty, but did not become the infamous overgrown urban settlement it was known for being until after World War II. As a result of the Convention for Extension of the Hong Kong Territory in 1898, Britain received ownership of a significant portion of Hong Kong but was excluded from possessing the Walled City. After Japans defeat in World War II, China sought to gain control of the Walled City; as a result, thousands of squatters moved into the City in order to take advantage of the protection that Chinese control would provide them. Efforts to remove these squatters were unsuccessful, and the British adopted a hands-off policy with regard to the City. The Citys population continued to grow throughout the decades following the War. Starting in the 1950s, a Cantonese organized crime syndicate known as the Triads began to effectively take control of the City in the absence of any real government presence. The City became known as a destination for many different kinds of vice activities, including prostitution, gambling, and opium smoking. Police raids became very common in the decades following World War II due to the influx of organized crime and illegal activities; the

crime situation in the City became so severe that Hong Kong policemen refused to venture into the City without large groups of comrades. Eventually, due to the increased police presence in the City, crime levels reached levels no higher than those of the surrounding areas (Harter 8). During the Citys heyday, its inhabitants developed a substantial and complex informal economy. The need for the informal economy grew out of the extremely dense population, poverty, and lack of government support in the city. As Professor Seth Harter writes in the Journal of Urban History, The needs of Walled City residents were met through a distinctive mix of ad hoc and extralegal measures (99). Doctors, dentists and other skilled service providers operated without licensure or conformation to health and sanitation codes (Vines). Other residents made money and helped their community by hauling water buckets into the City from public plumbing located outside the city. The Triad organized crime syndicate also participated in these kinds of activities, charging a fee to residents who utilized the syndicates service (Harter 9). Despite the deplorable conditions within the City, its residents adapted and found ways to provide themselves with the goods and services required of city dwellers. Many residents even participated in concerted efforts to improve the city by forming a Kaifong, a traditional Chinese neighborhood mutual aid group. The Kaifong appealed to the Hong Kong government in an effort to arrange urban services, made efforts to clean up the city, and took on projects around the city such as lighting installation. Perhaps remarkably, the Walled City Kaifong even organized a fundraiser to benefit Ethiopian famine victims (Harter 10). Amidst the illicit gambling halls, brothels, and opium dens, real efforts were being made on an informal, grassroots level to improve the City from the inside out. Rising housing

prices in surrounding areas of Hong Kong coupled with the reduction in crime from the increased police presence in the City led to massive population growth. Harter asserts that immigrants to the City sought the economic protections that life in the City offered them; many of these protections were directly linked to informal economic activity. Because of the lack of licensing and regulation on many goods and services within the city, prices remained low and affordable to the urban poor living there. Housing, especially, remained affordable to many poor people because of the cheap methods and materials used in the construction of the interconnected concrete apartment dwellings in which many people lived. Additionally, buildings built within the Walled City were not required to conform to building codes, and owners of buildings were not required to pay any property tax (Harter 100). Further increasing the attractiveness of housing within the Walled City was an increase in prosperity in Hong Kong at the time,

leading to an increase in residential property prices. Due to the size and prevalence of its informal economy, the Walled City at that time provided many poor residents of Hong

Kong with an affordable cost of living and numerous opportunities to earn a living performing services or producing or selling goods off the books. Many of those benefitting from the City likely would not have been able to find such benefits within the formal economy. Greg Girard, a prolific photographer who spent five years exploring and photographing the city, said about the city, So seemingly compromised and anarchic on its surface, it actually worked -and to a large extent, worked well.

Figure 1. Girard, Greg. Kowloon Walled City Night View from SW Corner. 1987. Photograph. Kowloon Walled City. Http://www.greggirard.com/work/kowloon-walled-city-13. Web. 26 Sept. 2013.

In 1987, due to various political factors, Chinese and British authorities announced that the City would be demolished and its residents evicted. In 1991, the Hong Kong government began the eviction process, compensating City property owners at a rate determined to be equivalent to the fair market value of each property; business owners, industrial occupiers, and medical practitioners in the City received special compensation to make the eviction more attractive (Hong Kong Housing Authority). Many property owners resisted the eviction, but within several years the City was cleared of inhabitants and subsequently razed. A park was later built over the site in an effort to improve the image of the area and to preserve historically significant buildings. In Lagos, Nigeria, a squatter settlement known as Makoko thrived until 2012 when Nigerian security forces dismantled it. Makoko was built partially on a lagoon, and many of the structures comprising the settlement were built on stilts. The Makoko informal economy was based largely on fishing and trade of various local foods and consumer goods. Many residents also were engaged in small entrepreneurial operations for example, processing fish and selling them for a profit of a few cents each (Neuwirth). As expected, such cottage industry operations in Makoko were not regulated or licensed by the Nigerian government. This lack of control and taxability, along with a perceived negative effect on Lagos image caused by the slum, led the Nigerian government to evict the settlement dwellers and dismantle the entire community. The authorities gave all residents 72 hours to vacate the settlement, and then they destroyed it using chainsaws. The Nigerian governments motivation to dismantle the slum was to open up the land it occupied for new development (The Economist). As a result of the destruction of the settlement, many impoverished people

were left homeless and jobless since the informal economy in Makoko was an integral source of income for many of the residents there. Although informal economic activity may be more prevalent or obvious in densely populated, impoverished urban settlements like the Kowloon Walled City or Makoko, similar activities are performed in developed, modern cities also. In Baltimore, Maryland, for example, there exists a practice known as hacking drivers provide rides to local people for a small fee, typically much lower than a licensed cab would cost. The origins of this practice are both economical and racial: in the early days of the Yellow Cab, minorities particularly African Americans were often discriminated against and refused taxi service. Hacking developed out of the need for cheap and convenient transportation since taxis were often unusable. Most of the customers of the hackers are low-income city dwellers who dont own their own cars, but still need access to transportation for work, shopping and other reasons. As former Baltimore hacker Melvin Harris details, "A hack's busiest season is the first of each month because everybody gets a government check. All of the checks come the first of the month. Everyone cashes their checks, pays their rent, gas, telephone bills, et cetera. And then, with what you have left, if you want to go somewhere, you go in a cab or a hack" (RoysterHemby). Clearly for those Baltimoreans with low incomes, hackers are an important part of daily life. Hacking, however, is considered illegal in Baltimore and in other US cities like Philadelphia where the practice is prevalent; hackers are subject to stiff fines and even jail time if caught. Many other informal services are pervasive throughout developed cities. Any time there is a time for a good or service and the formal economy

doesnt meet the demand, or is economically or socially prohibitive for those with the demand, the informal economy is likely to fill the need. Sudhir Venkatesh, a sociologist and researcher, embedded himself for ten years in the impoverished South Side of Chicago while observing the social and economic activity there. Venkateshs research revealed a vast and complex informal economy in which all manner of goods and services are bought and sold off the books, and payments are often given in the form of old televisions or cell phones (Venkatesh 91). The informal economy of Maquis Park the name that Venkatesh gave the area of Chicago he embedded himself in was ripe with entrepreneurial activity. Venkatesh notes in his book Off the Books (a compilation and summary of his research at Maquis Park) that a high degree of interconnectivity existed between the Maquis Park informal microeconomys various sellers and providers. Venkatesh also observes that a lack of outside financing and significant barriers for aspiring Maquis Park entrepreneurs to obtain financing prohibited most operations from becoming legitimate or successful. For most impoverished urban dwellers, obtaining financing for a new company is very difficult due to credit history issues or a pervasive distrust of large financial institutions. Venkatesh also suggests that many government programs intended to spur investment and development in impoverished urban areas have not necessarily benefitted residents; many times, outside private corporations instead take advantage of the provisions of such programs to obtain land cheaply, for example. While shantytowns, extra-legal urban settlements, or developed cities that host informal economic activity can have widespread positive impacts on residents as well as outside parties, these types of situations may, if uncontrolled, also negatively impact

involved parties or produce undesirable externalities. Though not intentional, such negative impacts and externalities are the result of unchecked, rampant growth of populations in the settlements previously described. Possibly one of the most immediately impactful externalities of urban slums and informal economic activity is the lack of tax revenue generated for governments. The lack of taxation in many settlements, at least in the short run, keeps funds within the community and increases wealth of the residents. It may in fact be fair that taxes intended for the upkeep of government services are often not paid in slums, because often such government services are absent from or unreliable in these areas. However, if government services such as police, fire departments, social workers, utilities, and others serve a particular community, it is reasonable to expect that the community should contribute to the maintenance of such services. Many governments do in fact attempt to tax extralegal settlements. Such efforts are often met with opposition and mixed results. For example, the governmental authority over Mumbai, India the Brihanmumbai Municipal Corporation recently explored the taxation of Mumbais slum residents, who comprise nearly 60% of the citys population (Makne). The plan was initiated due to lack of property tax revenue from those residents, despite the fact that the authorities there provide sanitation, water supply, and other services to all residents, including slumdwellers. Previously, only legally authorized homes and buildings were taxed, and extralegal slum buildings and dwellers sat in a tax gray area. As penalty for owning and occupying unauthorized buildings, taxes for Mumbai slum dwellers are slated to be three times higher than those imposed on owners of legal buildings (Makne). The plan has met many difficulties. Since the tax collection infrastructure of the city is built to

collect from only authorized buildings, collecting taxes from slum dwellers would require a massive augmentation of the current tax collection capacity in the city. Further complicating the issue is a lack of residential and property records for unauthorized buildings because these buildings were constructed without authorization, no official government records exist for them (Makne). Creating and maintaining these records would be a required step in the implementation of such a tax plan. There are also political roadblocks to implementing a slum dweller tax plan. Because such a large portion of Mumbais residents live in the slums, supporting a tax plan for the slums could be political suicide: although these residents do not generally pay taxes, they are still able to vote. In response, party leaders have taken stances that support the tax plan while also providing some kind of benefit to the slum dwellers - for example, one leader has proposed that the plan be implemented with the stipulation that slum dwellers living or owning businesses in unauthorized buildings be given property rights to those buildings (Makne). Currently, the plan is on hold as the Brihanmumbai Municipal Corporation evaluates it further. This type of situation is undoubtedly prevalent throughout other slum cities in India and indeed the rest of the world. With no truly equitable solution to the problem of taxation, a plan involving comprise should be developed so that all parties involved benefit, at least somewhat. For example, the plan to impose taxation as well as transferal of property rights on slum dwellers would create the much needed revenue stream for the government as well as benefit slum dwellers by recognizing their assets. Similar plans could be implemented in other extra-legal settlements to address similar problems of lack of tax revenue, while incentivizing the development of new

government-provided services such as water, power, sanitation, and medical access. Certainly, access to these amenities is a huge benefit for slum dwellers, who may not have access to clean water, medical care, or power. The tax situation for informal economic players operating in developed cities such as the hacks of Baltimore is more complicated. These people typically already have the benefits of municipal services, and likely have property rights and pay property taxes, as slum-like residential situations dont generally exist in wealthier cities. Taxation of these people for their informal economic activity would likely already be implemented if doing so were easy or even reasonably possible. Due to the underground nature of their businesses and trades, taxation is inherently difficult. Since these people are likely already receiving municipal services, there is little incentive to pay taxes on income earned through giving rides, fixing plumbing, and other under the table activities. In such situations the only clearly viable to recover lost tax revenue would be to enforce taxation by regulation of these activities. Doing so would undermine the economic benefits that informal economies afford poor residents access to goods and services at a price cheaper than the formal economy is able to give them. This type of situation should be avoided, as informal goods and services are typically very important to impoverished people, even those living in more developed, wealthier cities. An alternative approach should instead be taken. A hands-off approach to informal businesses, coupled with a strategy to address the underlying causes of demand for informal goods and services, should be a priority. In most situations, this would mean addressing the underlying causes of poverty in these areas, because lower cost is a strong driver of choice when it comes to formal versus informal goods and services. Perhaps even a government or community

investment in informal businesses would be an effective alternative to regulation. Such an investment would have immediate benefits for business owners and the communities they serve, while also developing a future revenue stream once the business is successful enough to pay taxes. In any cases, governments should make it a priority to avoid simply shutting down informal businesses without attempting some sort of comprise deal that can benefit both parties. Another increasingly relevant externality of slums and extra-legal settlements is the potential for disproportionately large emissions of greenhouse gases and other environmentally harmful impacts. Because older, less sustainably designed technologies are typically cheaper than new technologies that are designed with minimization of environmental impact as a priority, slum dwellers may adopt these technologies for their homes, businesses, and communities rather than the green technologies that are being increasingly adopted by wealthier cities and communities. As more of these communities develop, the risk for significant environmental harm including global warming grows at a rate that almost ensures that such impacts will be far reaching. While curbing emissions and other environmental dangers should be a priority for all cities and communities, strict regulations for developing communities may inhibit growth to an unreasonable point. Again, compromise in such a situation is vital. As a possible solution, government, corporate, non-profit or outside community investment should be considered for the development of infrastructure in slum settlements. Rather than using fossil fuel-based electricity generating methods or pollution-producing trash disposal methods, poor communities could use third party capital to install renewable energy or clean coal generation capacity and biomass

processing facilities. The earlier this type of investment is made, the easier a transition to environmentally- and economically-sustainable infrastructure will be. With an already established energy production or trash disposal system, a switch to sustainable methods will require more extensive investment and buy-in from the local community. Outside investment may not typically be available for slum communities, and other solutions should be explored in these cases. China and India, for example, have insisted that developed nations should not impose environmental regulations on them until they reach a more developed stage (Crawford). While this hands-off approach will make a transition to cleaner, sustainable infrastructure more difficult, it may be the only way to eventually contain environmental impact without stifling economic growth in poor communities. Government and business leaders should seek a balance between economic and sustainable growth in these communities. As black market and underground economic activities increase in significance and frequency around the world, governments, corporations, and individuals will need to understand, predict, and adapt to the effects and externalities brought by these activities. Many underground economic activities are clear threats to the security of societies, economies and nations. Arms trading, human trafficking, and drug smuggling and importation have serious ramifications for the countries and groups involved, and governments must work to prevent these activities in order to curb any detrimental effects. These activities are motivated by the fact that the goods or services involved in each activity are considered contraband they exist in order to circumvent government restrictions on goods or services. Other activities are motivated by an economic need to avoid government taxation and regulation. Such activities are very commonly found in

extremely densely populated urban settlements. Such mega-settlements exist around the world, and are becoming increasingly common as world population grows and formal economic opportunities become harder to come by for the impoverished urban dweller. Whereas trade in contraband goods or services is motivated by the need to skirt government restrictions, underground or informal economic activity in large urban settlements is driven by the need to avoid economic hardships due to taxation and regulation. By examining the informal or underground economic systems of these types of urban settlements or cities, a common theme begins to emerge: impoverished residents of densely-populated urban areas have demands for goods and services just as residents of more developed and affluent communities do. However, because of a lack of government support, excessive regulation and taxation, or other economic pressures, formal economies are often not able to meet these demands. Informal economies can often meet these demands instead, typically at a lower price and in a manner that is more efficient in a particular area. Generally speaking, governments do not approve of these types of informal economies, because they dont typically comply with regulation, are untaxed, and may generate image problems in certain areas due to their propensity to involve criminal activity such as prostitution and drug usage. These informal economies, however, are often the sole source of income for impoverished people due to lack of opportunities in the formal economy and other factors. Because the populations in the favelas and jhopadpattis around the world will likely only continue to grow, governments should adopt a more progressive, cooperative policy with regard to how such communities are treated. Instead of taking measures to minimize or eliminate informal economic activity in these places, governments should encourage

this type of activity through investment in local entrepreneurs and other social programs designed to give poor urban dwellers the resources they need to earn a living doing something productive. Some special regulations should be introduced in order to minimize growth of illegal informal economic activities such as drug use or prostitution, but care must be taken to avoid smothering developing informal economies. Eventually, these informal economies will grow into economies that can be regulated and taxed, thus integrating them into formal economies. Densely populated urban areas have the potential to innovate in big ways, and governments should aim to work with economic players informal or formal - in these communities in order to develop a relationship that is beneficial for all parties involved.

Works Cited
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Girard, Greg. Kowloon Walled City Night View from SW Corner. 1987. Photograph. Kowloon Walled City. Http://www.greggirard.com/work/kowloon-walled-city--13. Web. 26 Sept. 2013.

Makne, Eknath. "BMC 'votes' out Property Tax for Slum Dwellers." India.com. DNA India, 31 Oct. 2013. Web. 01 Dec. 2013.

Neuwirth, Robert. "Street Markets and Shantytowns Forge the World's Urban Future."Scientific American Sept. 2011: n. pag. Web. 25 Sept. 2013. <http://www.scientificamerican.com/article.cfm?id=global-bazaar>.

Royster-Hemby, Christina. "Hacks: A Baltimore Way of Life." Citypaper [Baltimore] 21 Apr. 2004: n. pag. Print.

Venkatesh, Sudhir Alladi. Off the Books: The Underground Economy of the Urban Poor. Cambridge, MA: Harvard UP, 2006. Print.

Vines, Stephen (24 March 1993). "Demolition begins on HK's Walled City". Business Times. p. 4. Retrieved 25 November 2009.

"Destroying Makoko; Nigeria's Commercial Capital." The Economist (US) 18 Aug. 2012: n. pag. Print.

Report on the Work of the Special Committee on Clearance of Kowloon Walled City . Rep. no. HA 13/2002. Hong Kong Housing Authority, n.d. Web. 19 Sept. 2013. <http://www.housingauthority.gov.hk/hdw/content/document/en/aboutus/ha/paperlibrary/ ha/HA13-02.pdf>.

"World Black Market Value." Havocscope Global Black Market Information. N.p., n.d. Web. 13 Sept. 2013. <http://www.havocscope.com/>.