Shadow economy

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A shadow economy or informal sector is seldom mentioned or recorded in monetary terms. Its mode of production is economic self-help of any kind. Some self-help schemes are based on moral values or solidarity like in families, voluntary mutual services and neighbourhood assistance; others operate in the field of illegal and undeclared work and are often highly competitive and even exploitative or violent. This sector is very dynamic and always at risk of criminality. But… very importantly… it has also often been the starting point for solidarity-based initiatives – the Local Social Economy.

File:Fig 2.jpg

The diagram shows the local economy (within the circle) and the global economy (outside the circle). It does not fully describe the concept of a mixed economy where goods and services which could be marketed profitably are delivered by the traditional Private Sector and all others by the Public Sector or the state. There has always been a Third Sector of unmet needs which has not been served by the market or the state (the first and second sector). The Third Sector is where people had to find other ways of delivering the necessary goods and services. These activities can be divided into a formalised economic sector, the not-for-private-profit or Social Economy and an informal sector, the Shadow Economy - ‘in the shadow’ because its activities are not officially measured or valued. The dividing lines between the Social Economy and the Shadow Economy are often overlapping. The Social Economy and in particular the Community Economy (on local level) are evolving out of the Shadow Economy by putting informal activities into formal structures. This move is based on placing value on things that were previously not valued and often underestimated. This is exemplified in Local Exchange and Trading Systems (LETS) and volunteering organisations.

The diagram shows the Third Sector as a necessary and complementary economic system which emerges ‘out of the shadow’ from below and that it becomes only visible in formalised structures. Diagram 3 looks at this process in more detail.


Birkhölzer, K. (2008): Local Economic Development and its Potential. Berlin: