Hidden Dangers of the Informal Economy

McKinsey has an article on the economic dangers of the grey market that is an interesting read, but I don't buy into all of their assertions. According to the World Bank, the informal economy of developing nations represent a significant 40% of their GNP [PDF], while it's a 17% figure for developed nations. McKinsey has found that the grey market has been growing in many nations -- and believes this poses a significant danger to productivity and the world economy. They rightly believe that the grey market has cost advantage over their legal counterparts -- they avoid taxes and regulations, and often are engaged in a grey market value chain that as a whole is a low cost operator. While I agree with this, and I agree that the grey market does pose a danger to productivity and economic output in countries, I see this danger as being more relevant to the developed nations that have the economic and social infrastructure that needs sustaining. For developed nations, it's a chicken-and-the-egg question. They don't have the economic or social infrastructure in place. I think the grey market should be recognized as a vital part of developing nations developing. As long as the grey market doesn't spiral into criminal activities, the developed nations should recognize them as being vital to developing nations -- and vital to long term viability of the world economy. In the long term, the grey market will be converted to legal markets -- it will need to in order to survive. It's the short term thinking of developed nations that wish to protect global conglomerates that wish the grey market to disappear. Yes, there is the danger to the world economy when the grey market from the developing nations start to feed the economies of the developed nations -- but I think that's a constant battle that will and should continue to be waged -- but not on the backs of the developing nations. If McKinsey would have their way, the developing nations would only develop at the behest of global multinationals -- and that's just another form of colonialism. (For another interesting read, check out this paper: Competition Policy, Developing Countries, and the World Trade Organization. [PDF])