The Global Shadow Economy and SMEs: Part Two


So, what can be done?

In part one of our shadow-economy series, we discussed the ever-growing importance of the shadow economy, particularly for SMEs who have been consistently undermined and underserved by the financial services industry.

Today, we’ll be talking about the change-makers, the actors whose involvement is pivotal to finally harnessing SMEs and fundamentally transforming the global financial landscape.

Market Forces & Regulation

The majority of the market forces governments have put into play are restrictive, and dramatically increase the size of labour costs in the formal economy, almost forcing SMEs to remain undigitized and informal.

If these governments were to consider legalising certain shadow economy activities, by:

  • Liberalising the labour market

  • Pushing reforms that make the economy more competitive

Then shadow economy participants would finally receive the incentive needed to leave the informal economy, in which they have been systemically compromised. (IMF)

Governments also have a key role to play in reducing the extent of the regulations with which SMEs are forced to comply.

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According to the OECD,

“Given the substantial fixed cost of compliance with tax regulatory requirements (e.g. record keeping, filing and payment processes), small businesses are at a disadvantage with respect to large enterprises… It is important that governments, in formulating regulatory policies take into consideration the different size categories of firms.”

Data and the Supply Chain

Every single industry can experience exponential uptakes in efficiency and growth with digitisation. Manufacturers and distributors are incredibly driven in their pursuit to see smaller, unbanked SMEs join the formal economy. Not only do they reduce their costs due to fewer security and insurance related concerns, they also gain both information and accountability from a shrinking informal economy, allowing them to more effectively serve and empower their customers.

By providing manufacturers and distributors with solutions into which they can integrate their unbanked and unregulated customers, we will undoubtedly lessen the influence of the shadow economy and catalyse pivotal, but undermined SMEs.

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Fundamentally, the key to curbing the informal economy epidemic lies in incorporating SMEs into each and every one of our plans, initiatives, and technological advances. The global public and private sector are uniquely poised to lessen the gap between underserved SMEs and the formal economy now.

We can transform the landscape from being one that is exclusive and damaging to international growth to one that empowers a segment of society whose potential to stimulate the global economy is unparalleled.