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6.995, 2024 7.75
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879
THE FIGHT AGAINST THE HIDDEN ECONOMY: CAUSES, CONSEQUENCES AND
BEST PRACTICES.
Azimov B.F.
Associate Professor of the Asian International University
Botirov Shahzod O`tkirovich
Master's student of the Asian International University
Annotation:
This article discusses the hidden economy, ways to combat it, and factors affecting
the emergence of the hidden economy. The article also highlights advanced foreign experiences
in combating the hidden economy and gives practical recommendations for their application.
Keywords:
hidden economy, causes of the emergence of the hidden economy, foreign
experiences
The hidden economy (or hidden economy) is a set of economic activities that are not openly
carried out by its participants, are outside state control, do not pay taxes, are contrary to the law
or are not registered in accordance with official standards. These types of activities are not
recorded in official statistical reports and lead to distortion of real data for macroeconomic
analysis. The existence of the shadow economy is explained, on the one hand, by factors such as
dissatisfaction of the population and business entities, bureaucratic obstacles, high tax burden,
and complexity of regulation. On the other hand, it leads to a decrease in tax and social fund
revenues for the state, a reduction in the formal labor market, and a violation of the principle of
social justice. International experience shows that the shadow economy exists not only in
developing countries, but also in developed countries, and is one of the serious problems in their
economic policies. Therefore, a deep analysis of this area, identification of its causes and
consequences, and development of effective strategies against it are urgent scientific and
practical issues. One of the most important factors in the formation of the shadow economy is the
excessive tax burden. When taxes are high, entrepreneurs and individuals refrain from officially
declaring their income. As a result, cases of concealment of income, calculations on a “cash”
basis, and double-entry bookkeeping increase. This situation is especially common among small
and medium-sized businesses, which often aim to avoid taxation.Another reason for the
development of the underground economy is excessive administrative procedures, complexities
in the preparation of documents, and lack of transparency in licensing. Business entities often
face many obstacles in obtaining permits or formalizing their activities. This forces them to
evade the law and operate informally. The mandatory nature of formal labor contracts, the
existence of legal requirements such as minimum wage levels and social insurance payments,
encourages some employers to employ employees on an informal basis. This, in turn, leads to
violations of workers' labor rights and their lack of social protection. The informal formation of
labor relations is an important component of the underground economy. Excessive state
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intervention in the economy, administrative regulation of prices, and restrictions on imports and
exports also create the basis for the underground economy. The incomplete functioning of
market mechanisms and the dominance of bureaucratic systems in economic decision-making
make the business environment difficult and encourage the transition to informal activities.
When entrepreneurs are limited in their ability to freely set prices, trade, and provide services,
they choose to conduct economic activities in a hidden form. Another reason for the widespread
spread of the shadow economy is the distrust of citizens and entrepreneurs in state institutions. If
the judicial system is not functioning well, corruption is high, and justice is not guaranteed in
conflicts with tax and regulatory authorities, citizens are not inclined to formalize their activities.
This strengthens the shadow economy. Although the shadow economy, in most cases, does not
manifest itself in official statistical reports, it has a direct and indirect impact on the national
economy. These impacts are complex, multifaceted, and in the long term are expressed in
slowing economic growth, increasing social instability, and reducing trust in state institutions.
The shadow economy has a negative impact on everything from macroeconomic indicators to the
daily lives of ordinary citizens. We analyze these impacts in two main areas - macroeconomic
and social. Macroeconomic impacts: 1. Reduction in state budget revenues. The most significant
negative impact of the shadow economy is a significant reduction in the revenue share of the
state budget. Informal economic activities are usually not taxed or are deliberately hidden. This
leads to a shortage of funds allocated to state-funded areas such as healthcare, education,
infrastructure, and social benefits. As a result, the state is unable to fully fulfill its economic and
social obligations.2. Distortion of the competitive environment. Participants in the underground
economy often do not pay taxes, do not pay social insurance contributions for workers, and do
not comply with labor legislation. This allows them to lower the prices of production or services
compared to competitors in the formal sector. As a result, honest business entities in the formal
sector face difficulties in continuing their activities in such unfair competition. This situation
reduces the business environment and the level of economic freedom in the long term, and
hinders the development of small and medium-sized businesses. 3. Deterioration of the
investment environment. Investments, especially foreign direct investment, develop in an
environment where there are transparency, the rule of law, economic stability, and guarantees of
state protection. The prevalence of the underground economy undermines these factors. When
investors see a high level of the underground economy in the country where they are investing
their capital, they assess the financial and legal risks as high and, as a result, refuse to invest.
Social impacts: 1. Weakening of the social protection system. Individuals working in the
informal economy usually do not have formal employment, do not have employment contracts,
and are not members of social insurance. This leads to their deprivation of basic social protection
measures such as pensions, health insurance, maternity leave, or unemployment benefits. As a
result, social inequality in society increases and dissatisfaction among the population may
increase. Young people, women, and unskilled workers are the groups most affected by this
system. This undermines the principles of social justice in society. 2. Deterioration of working
conditions. Workers participating in the informal economy often do not have safe working
conditions. They are not protected from accidents at work, and cannot receive medical care if
they suffer from occupational diseases. In addition, they are at risk of not being paid a fair wage,
violating working hours, and being fired at any time. These situations are especially common in
sectors such as construction, agriculture, and services, where the number of informal workers
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may be high. 3. Increased corruption and crime. Many types of activities in the shadow economy
are carried out illegally. This leads not only to tax evasion, but also to an increase in criminal
activities such as corruption, smuggling, human trafficking, illegal labor migration, and drug
trafficking. In such an environment, the rule of law weakens and the legal culture in society
decreases. This further deepens systemic corruption and crime. The problem of the shadow
economy is relevant for almost all countries. Its level, causes of formation, and strategies for
combating it directly depend on the economic development, institutional system, legal
environment, and tax and financial policy of each country. This section analyzes successful
experiences in combating the shadow economy using the example of developed and developing
countries.Experience of developed countries. Germany: Germany is one of the countries that has
developed effective strategies to reduce the level of the underground economy. The measures
taken to legalize the economy in this country include: simplification of the tax system, support
programs for small and medium-sized businesses, digitalization, strengthening the social
protection system, and the introduction of a strong monitoring system against informal work. In
Germany, the culture of tax compliance among the population is highly developed, which is also
an important factor in the fight against the underground economy. USA: In the United States,
digital technologies and artificial intelligence tools are widely used in the fight against the
underground economy. Tax authorities - the Internal Revenue Service (IRS) - detect fraud
through real-time monitoring, analysis, and audit systems. Mechanisms such as simplifying
business activities and formalizing the activities of self-employed people through the patenting
system are also important. In the experience of Scandinavian countries: Norway, Sweden and
Denmark, the main way to combat the shadow economy is to create an open, inclusive and
reliable socio-economic system. In these countries, the factors that encourage citizens to actively
participate in the formal economy are a high level of social services, free education and
healthcare, a low level of corruption and a culture of respect for the law. Experience of
developing countries. India: The share of the shadow economy in India is high, which negatively
affects the country's economic stability. The government has implemented several important
reforms in this regard: For example, in 2016, cash circulation was reduced by demonetization of
large denomination banknotes, and the taxation system was simplified and unified by the
introduction of the GST (General Sales Tax) system. At the same time, the country is trying to
increase official trade turnover by introducing digital payment systems. Brazil: The Nota Fiscal
Paulista project played an important role in the fight against the shadow economy in Brazil. In
this system, when a buyer requests a fiscal receipt for each purchase, he is refunded a certain
percentage of the tax amount. This not only increased the volume of taxation, but also formed a
culture of consumer protection of their rights. At the same time, a simplified tax system called
“Simples Nacional” was introduced to formalize small businesses. Georgia: The Georgian
government has carried out radical economic reforms since the 2000s. The tax system has been
simplified, strict measures have been taken against corruption, and public services have been
digitized. For example, business registration can be done online in a few minutes. As a result of
such changes, the level of the shadow economy in the country has significantly decreased. The
World Bank, the International Monetary Fund (IMF), the Organization for Economic
Cooperation and Development (OECD), and other international institutions recommend the
following main areas in the fight against the shadow economy: Figure 1. Areas recommended by
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international organizations in the fight against the shadow economy.
International experience in combating the shadow economy shows that this problem can be
solved not only through punitive measures, but also through a comprehensive approach -
combining institutional, tax, legal and cultural factors. For Uzbekistan, using the experience of
foreign countries, reducing the share of the shadow economy by liberalizing the business
environment, increasing the attractiveness of the formal sector and strengthening financial
literacy among the population is an important strategic task.
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https://doi.org/10.5281/zenodo.8254140
