underground economies counter the business cycle

An interesting article from Patrick Barta in the WSJ-- in its own right and especially in the context of the recession...

Economists have long thought the underground economy -- the vast, unregulated market encompassing everything from street vendors to unlicensed cab drivers -- was bad news for the world economy. Now it's taking on a new role as one of the last safe havens in a darkening financial climate, forcing analysts to rethink their views....

Their wages are pitiful by Western standards. But there are no layoffs at the Manek market. All anyone has to do to work there is show up and start hawking -- something more and more people are doing these days.

...part of the "informal," or underground, economy, an enormous, vital and poorly understood segment of world commerce. It is becoming a lot more important now, as the global financial meltdown casts millions of people out of steady-paying jobs. Especially in developing economies, many of those people are landing in the informal sector, which has become a critical safety net as the economic crisis spreads....

Economists have stressed the negative aspects of informal trade for decades. Informal businesses often don't pay taxes, and they routinely lack the capital and expertise to be as productive as big enterprises, leading to less innovation and lower standards of living....

Informal markets are the most efficient response to inefficient (social and esp. legal) institutions. Interestingly, here, they can counter the impact of bad govt policies that create, lengthen, and/or deepen recessions.