Why Do We Criminalize the Underground Economy?

Economist Robert Neuwirth says that what's sometimes called the "black market" accounts for trillions of dollars that circulate back into the economy.

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Sep 19 2015, 4:38am

Photo via Flickr user papalars

On Thursday, September 10, a group of 40 street vendors marched to Los Angeles City Hall to protest a new ordinance that bans unlicensed vending in parks. But it's not just the city's green spaces where vendors aren't allowed to sell their goods. A controversial law bans all sidewalk vending in LA—even though more than 50,000 street vendors operate in the city, hawking everything from used DVDs to fish tacos.

With protests and a grassroots campaign to legalize vending, the situation in LA may finally reach a boiling point. But words like informal, illicit, and underground have long been used to describe transactions that exist in a thorny gray area: not fully legal, but not explicitly harmful either. In fact, Robert Neuwirth, researcher, journalist, and author of Stealth of Nations: The Global Rise of the Informal Economy, says the underground market accounts for trillions of dollars that circulate back into the economy, employing nearly half the world's workers.

It might seem odd that an activity deemed "underground" would be so visible—from knock-off purse vendors on Manhattan's Canal Street to pop-up taco stands and fresh fruit slicers on Alvarado Street in Los Angeles. That's why Neuwirth is leading a crusade to discard the terms underground economy or informal economy from everyday use—though so far, he admits, the campaign has not been very successful.

VICE caught up with Neuwirth on Skype to discuss recent vendor protests in LA, the unexpected benefits of piracy, and why we need to refer to the informal economy's members as true entrepreneurs.

VICE: You've spoken a lot about the the term underground economy. Why do you feel that's not an accurate depiction of the group and transactions it seeks to describe?
Robert Neuwirth: Because it lumps the criminal underground with everyone else. The vast majority of people who are working in what I call "System D," what people tend to call the "informal economy," are not selling drugs, and they're not doing human trafficking, and they're not harvesting organs from people. They're selling Downy fabric softener. They're selling Colgate toothpaste. They're selling sandwiches without a license. They're selling something for cash that they aren't reporting to the government. It's a different kind of enterprise—[the sale of a] legal product done in this quasi-legal way.

"For a lot of people it is impossible to survive and be 100-percent aboveboard."

You mentioned the phrase "System D," which you've coined. Where did that come from?
Well, I didn't coin it—I stole it. It really was the term of art in the former French colonies, mostly Africa, some of the Caribbean. What we call the informal economy, they call l'économie de la débrouillardise. "Débrouillard" is kind of self-reliance or ingenuity, what some people call a MacGyver kind of approach to making money.

These are people who are just trying to make ends meet and are going out there to sell a legal product in the only way they know how. So I thought "System D" was a much more descriptive phrase than "informal economy."

Who do you consider to be a part of System D?
It's everyone dealing with a legal product in a quasi-legal way. That varies all the way from a person who bakes zucchini bread in their home and sells it to a coffee bar, which then retails it, to the folks on Canal Street selling pirated Gucci and Chanel bags and perfume. They tend to be paid cash, out of the cash register, so whether they declare it [on their taxes] or not is unclear.

The brands tend to take the position that piracy is bad. I don't because I don't think anyone is being fooled. Anyone who can afford a real Gucci bag is buying a real Gucci bag because the pirated versions are sometimes fairly clumsy. On the flip side, the brands themselves are getting great street advertising. [But] they just say, "We own the brand, anyone else using the brand is illegal, and therefore wrong." And I do understand that point of view. I just don't see it as the massive crime they describe it as.

Your favorite fake purses are part of System D. Photo via Flickr user guccibear2005

Do you think these brands lose money because of counterfeit or unlicensed versions of their products?
First of all, the companies complaining about piracy are making money. Indeed, they're making lots of it. Gucci is making money. Puma (which I was told by one source was the most-pirated clothing brand in China) is making money. Even Coach, which has seen sales tank as it cuts out mid-priced bags in favor of the hyper-luxury market, is profitable. I have never seen any proof that piracy is seriously eroding their bottom line.

I attended a conference a few years back at which I ran into an executive from a major sneaker manufacturer. Over drinks, I got a chance to ask him about piracy. Initially, he got all thug on me, insisting that I had to promise to never quote him: "If you tell anyone I said it, I'll have to kill you." I said that was fine with me. Then he said, "The truth is, we need it. Piracy is market research for us. If we produce a new design and it isn't being pirated, we know something's wrong."

What do you think about the recent decision to outlaw unlicensed vending in LA city parks?
Banning street vendors from parks is silly. Here's an example from New York: The boardwalk in the Rockaways is controlled by the city's Parks and Recreation Department. But long stretches of it are pretty desolate, and beachgoers have a long walk to get anything to eat or drink. Most people would be ecstatic if there were some vendors from whom they could buy some refreshments. There are lots of parks, all around LA and New York and other cities, where having vendor carts would make sense.

Do you think we'll continue to see more System D members stepping up to demand more rights through protests and other efforts?
It's essential for street vendors and other people in System D to organize and assert their existence. Maybe once upon a time they could hide in the shadows, but that's no longer possible. LA has a proud heritage of street vending and the newspapers a century ago were full of stories about guys selling tamales on the streets.

You mentioned how people tend to equate the informal economy with drug dealers or smugglers. Do you think the reputation of System D could ever change?
I'd certainly hope so. Criminal activity should be prosecuted under criminal law. If drugs are illegal, we can prosecute people under criminal law. We don't prosecute them for not paying taxes, or for selling on the street without a license. We prosecute them because we say drugs are illegal or prostitution is illegal. You can quarrel with those laws if you don't agree with them, but they're laws.

If we get rid of the association with the criminal underground, then we can perceive System D entrepreneurs as what they are: entrepreneurs. Folks doing business and trying to do what any other store does: to sell a product at a price that people want. That's no different than Walmart. I'd like to see [System D workers] looked upon with at least as much respect as Walmart.

In your book Stealth of Nations, a building manager of a mall in Brazil quotes a Brazilian saying: "If you work 100-percent legally, you cannot survive." Do you think that's true in the US, too?
I'd say it's by and large true here—probably not as true for the upper-middle class. But there's a reason why the upper-middle class is called the upper-middle class: it's not the median, the average. I would say for a lot of people it is impossible to survive and be 100-percent above board.

"Let's be honest—everyone's going to have a side hustle. It's going to be the necessity."

And what does that impossibility of living 100-percent legally say about our society?
I think it says something really profound about how hard it is to survive, and how difficult it is for so many people in our society to support their families and to make a living and to pay rent.

A part-time security guard might work selling Caribbean food out of the back of his SUV in his off hours. We should be saluting that because that's bootstrap economics. That's hard work. That's the supposed story of America.

Research showed the informal economy had a positive effect during the recent recession—creating jobs, reenergizing the economy. What role do you think System D will continue to play in our economy?
We're in a statistical post-recession, and the vast majority of people have it just as hard or harder than they did before 2008. So I think System D is going to continue to play a big role. It's ludicrous to pretend it's not.

We used to have a perfectly honorable term that, when I was a kid, we used to use, and it was called "moonlighting." We don't hear it very often now. It used to be that the guy that worked in the factory making vacuum cleaners would, on the weekend, moonlight in a kind of second job repairing small appliances—because he knew about small appliances and motors. Today, the term I've heard is "income patching" or things like that. More and more people are going to have multiple jobs. That one job for life in the factory is not going to be the norm. Hell, we hardly even have factories anymore!

Have you heard the term "side hustle"?
Like hustle in a good sense, as opposed to bad sense. Hustle the way they use it in Nigeria, like "work hard and fast." And not hustle like "I'm street-conning someone." Absolutely, I like that term much better. Let's be honest—everyone's going to have a side hustle. It's going to be the necessity. It's going to be a lot harder to have these big time, full-time jobs that will pay the full freight.

There's a presidential election coming up. What kind of policies will potentially help System D workers?
Obviously, some kind of path to legalization should immigrants desire it. I think immigrants are the backbone of this country.

But locally, [we need] policies that recognize that there's this in-between zone that has always existed. We never tried to criminalize moonlighting, when the guy was working on vacuum cleaners. It makes no sense for governments to call it informal or illegal, because that's just criminalizing two-thirds of the world's working population, close to 2 billion people. What we need to do is have a kind of middle ground. Maybe governments can start a policy where, if an entrepreneur is starting a business, he's got six years to go formal. Give him a phase-in time to run his business and get it all started before he has to do all the rigmarole of licensing. Or it might be offering a larger number of licenses, or the license fee might be slightly higher but you wouldn't pay any taxes—something that would be a concrete benefit to a person selling things on the street.

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