The Caribbean’s Shadow Economy

The Caribbean has one of the largest informal economies in the world, encompassing street vendors, unregistered businesses and craft workers. While this untaxed and unregulated marketplace provides jobs and incomes for impoverished communities, it also leaves them vulnerable to crime and exploitation as well as hampering domestic development.

What is the informal economy?

The International Monetary Fund (IMF) defines the informal economy as any economic activity that falls outside the regulated economy and tax system. The businesses in this shadow economy are usually smaller scale and reticent to provide information so economists do not have access to much statistical data when tracking and quantifying the sector.

The IMF estimates that the global informal economy is large, but receding. From 2010-2017, the areas with the largest shadow economic sector were sub-Saharan Africa, and Latin America and the Caribbean. In both regions, the informal economy is worth around 34 per cent of GDP (in comparison to 9 per cent of GDP in North America).

Informal economies tend to be larger in low-income and/or undeveloped countries and it’s not hard to see why. Poor access to education and career opportunities, lack of vocational training, poverty, crime and corruption can all drive people out of the formal job market and into unregulated business. While some fall through the cracks due to economic and societal pressures, others willingly operate in the shadow economy as a means to avoid paying taxes or fees or simply to circumvent the arduous administrative work that comes with operating a business.

The Caribbean context

A 2017 report from the Inter-American Development Bank (IDB) examined six Caribbean countries and determined that Jamaica’s informal economy is worth around 43 per cent of its GDP while Trinidad and Tobago’s is around 35 per cent and Barbados’ 37 per cent. Statistics from Saint Lucia are harder to find, however research from the University of the West Indies suggests that 30.5 per cent of jobs on the island come from the shadow economy and a 2010 report from Saint Lucia’s Central Statistics Office credits informal enterprises with contributing 8 per cent of Saint Lucia’s GDP and 27.3 per cent of total employment.

In Saint Lucia and the wider Caribbean, the underground economy encompasses a broad spectrum of individuals and activities. In the island context, it can include farmers taking their produce to local markets, beach vendors selling crafts to tourists on the beach, unlicensed taxi drivers, artists with stalls by the side of the road, musicians playing for change in city streets. 

The informal economy has also proven an unconventional way of addressing the employment gender gap in the Caribbean. The ad-hoc nature of the labour force allows women to become more involved, giving them the flexibility to work around their family and domestic responsibilities. It is also often the only option for women denied access to education. According to UN Women, 59 per cent of informal jobs in Latin America and the Caribbean are filled by women. These include domestic labour, agricultural and seasonal workers, and craftswomen.

Why formalise?

Many Caribbean citizens are deprived of a steady income and it’s a feature of Caribbean ingenuity and resilience that informal workers will turn to whatever options available to provide for themselves and their families. But it comes with a cost to the whole country.

National policy is developed on the basis of national income data and tax revenues. The shadow economy allows a significant part of a country’s economic activity to go unmonitored, potentially skewing important statistics and disrupting economic models that can be used to plot national development. 

Speaking at a recent forum, IMF Managing Director Kristalina Georgieva commented: “Informality results in lower tax revenues that hinders the government’s ability to spend on social programs and investment. This means the individuals that are most in need of social programs and of public infrastructure may not receive them. If we get a better handle on informality, it may unlock much needed progress in a range of areas.”

Additionally, operating outside of the regulatory framework means no formal protection, leaving workers exposed to crime, corruption, exploitation and dangerous working environments. According to the IMF, poverty levels among people in informal employment are, on average, twice as high as that of people in formal employment due to low productivity, low incomes and limited access to government benefits. It’s also worth noting that the underground economy isn’t simply concerned with legitimate activity. It also includes smuggling, drug trafficking, trade in illegal or restricted items, prostitution and fraud – adding fuel to the Caribbean’s already severe crime crisis.

Competition

Seeking to end its reliance on tourism, the region has focused on economic diversification in recent years – creating a whole rainbow of fiscal potential. The blue economy (maritime), the green economy (agriculture) and the orange economy (arts and culture) are all industries that deserve dedicated attention, but the often ignored underground economy is arguably a more pressing concern as it poses a real threat to all facets of the formal economy, not only by lowering productivity but also impacting legitimate businesses.

In the small markets of the Caribbean, formal and informal business cannot help but compete and the latter has a decided advantage given that it doesn’t have to play by the rules. Evading taxes, regulations, fees and paperwork gives shadow operators the chance to lower their supply costs – something that, in a formal society, generally comes about through efficiency and innovation. Customers, who are simply looking for the lowest price, find themselves unwittingly participating in this black market and making it harder for formal firms to capture market share. It’s a particular concern in the area of Intellectual Property Rights – for example, an unlicensed crafts vendor may easily lift product designs from a formal competitor and reap the rewards of work that’s not theirs.

The Organisation for Economic Cooperation and Development (OECD) has guidance for policymakers in the Caribbean and other developing regions trying to reduce their informal activities. It suggests more advocacy from competition authorities, in combination with reducing the regulatory burden for those operating legitimately. In summary, policymakers must incentivise a move from informal to formal by reducing the costs of entering the established economy and increasing the benefits of doing so.