A system that exists in violation of controls or a place where such a system operate
Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course. Start Free
What is a Black Market?
A black market refers to a marketplace or system of exchange that subverts official government regulations. Often referred to as the underground economy, it is economic transactions that are illegal or are non-compliant behaviors within a set of rules or laws. A black market is distinct from a grey market, which is the legal trade of goods through channels that are unofficial or unauthorized.
In 2012, the Max Planck Institute for the Study of Societies (MPIfG) began studying the sector. Director Jens Beckert led a team of scholars and academicians to figure out the difficult lines that separate the black market. The various cycles of manufacture, distribution, and consumption are difficult to track and may not be steadfastly criminal compared to human trafficking or the drug trade.
The researchers looked into the thriving counterfeit business based out of Argentina, the diamond trade originating from Sierra Leone, the illegal trading of rhinoceros horns, and white-collar crimes that occur in the financial markets.
Summary
- A black market is a system that exists in violation of the rules or laws in a place where such a system operates. It is an economic activity that exists and functions beyond the purview of sanctioned channels.
- It is non-compliant to institutionalized parameters and hence illegal.
- The process of trade in such a scenario sidesteps legitimate taxation and other government controls, and the proceeds can be termed as black money.
How It Works
As per Jens Beckert, director of the Max Planck Institute for the Study of Societies (MPIfG), the sheer volume of the illegal market is of great social and economic interest. Indirectly, a study into such a system also allows an understanding of the legal markets. The dynamics between black-market participants is an ecosystem that exists beyond the scope of any legal recourse in case of any dispute, leading to an immense impact on the market’s operational side.
Personal networks are the preferred system; it virtually exists on a bond of trust. This makes it difficult for black market businesses to expand. Beckert’s research also looked into the cooperation between business players in the absence of legal protection and government sanctity in the black market.
The study also provided insights into the slim demarcation between legal and illegal market aspects, especially in white-collar or financial market crimes. Within the parameters of entirely legal market structures, illegal activities can take place undetected or unpunished.
Symbiotic Relationship between Legal and Black Markets
Legal bans sometimes lead to the creation of a black market, which then makes it difficult to eliminate. A Stanford University research titled “Forbidden Transactions and Black Markets” by Chenlin Gu, Alvin E Roth, and Qingyun Wu goes on to say that legal marketplaces attract participants by trying to make the market safe and reliable.
The concept of penalization acts as a deterrent towards unlawful activities in the black market. However, sometimes, such legal penalties are insufficient and provide little social stigma, and hence do not hinder participation in the black market.
As illegal trading gathers volume, it organically allows more participants to continue to trade and avoid legal penalization. Consequently, black markets become difficult to eliminate if they operate for a prolonged period of time. Although policymakers can influence the extent of antipathy towards the black market by educating the public and sustained public relations, it often proves very difficult.
The black market represents almost a fifth of the global economic activity, a National Bureau of Economic Research study states. Authors Solomon Hsiang and Nitin Sekar, in “Does Legalization Reduce Black Market Activity? Evidence from a Global Ivory Experiment and Elephant Poaching Data,” go on to evaluate the first-ever global legalization experiment carried on in an internationally banned market. The findings are surprising.
They chart a 66% increase in the illegal ivory trade that aligned with the announcement of legalizing ivory sales. Further study of various data available on the black market implies that an increase in elephant poaching was linked with the legal sale. The authors show that partial legalization of banned goods does not reduce black market activity effectively.
Additional Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
