Question

The government is serious about tackling problems caused by the 'shadow economy' in Malaysia which is estimated to be a fifth of the officially reported RM1.45 trillion gross domestic product (GDP). A study conducted by the World Bank shows the shadow economy typically accounts for about 20 per cent of developing nations’ official GDP. (News Straits Times, October 15, 2019). Based on this article,
a)     Explain THREE examples of shadow economy and how these examples would give impact on the ineffectiveness of macro-economic policies.
(10 marks)
b)     What are the strategies that can be implemented by the government to mitigate shadow economy? Discuss THREE strategies and explain how each of the strategies can be an effective tool to address the issue.

Answer 1

A. The following are three examples of shadow economy-

• Illegal drugs- The whole selling of illegal drugs is market where transactions are happening but completely away from the economy or any legal oversight. There are no bills or any other way to track the transaction.
• Unreported income from self-employment- This may include work that only pay in cash. For example, a worker at a mom and pop store who gets paid weekly in cash.
• Fraud and gambling etc.

B. Three strategies that can reduce shadow economy are-

• Financial inclusion- Many poor prople in villages sometimes dont have bank accounts, access to digital payments etc. Hence they mostly deal in cash. If they are included in the financial system- through easy opening of accounts, digital wallets etc, their activities will be included in the economy.
• Easier and lax taxes- If tax laws are easier, for example one tax for whole national in specific categories, people will find it easier to file taxes and hence would have an incentive to be in formal economy. Also, if taxes are lower for micro businesses, they will also find it more palatable to take part in formal economy.
• Reducing barriers to entry and exit- Often times small businesses do not register their business because its a hassle. If laws and process of entering an industry and then exiting it is made easier, people will hesitate less to register their businesses.