The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Second Economy (Unofficial Economy)

  • Michael Alexeev
Reference work entry


The second (shadow, unofficial) economy played a major role in Soviet-type economies (STEs) and served as a precursor of unofficial sectors in the transition economies. This article lists the main causes of the second economy, outlines approaches to its measurement, and examines its effect on the economic performance of the STEs. The main focus is on the unofficial economy during transition to markets. The article presents estimates of the unofficial economy, describes negative externalities that it generates, discusses reasons for its different size and dynamics in different countries, and outlines approaches to reducing it. Positive aspects of the unofficial economy are also noted.


Bribery Command economy Corruption Developing economies Entrepreneurship Informal economy Liberalization Path dependency Price control Public goods Rationing Repressed inflation Rule of law Second economy Shadow economy Soviet economic reform Speculation State-owned enterprises Tax evasion Transfer pricing Transition and institutions Trust Unofficial economy Wealth effects 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Alexeev, M. 1988. Market vs. rationing: The case of soviet housing. Review of Economics and Statistics 70: 414–420.CrossRefGoogle Scholar
  2. Alexeev, M., R. Conrad, and J. Hay. 2004b. Nalogooblozhenie i pravovaia reforma v perekhodnoi ekonomike: predvaritel’nyi analiz [Taxation and legal reform in an economy in transition: a preliminary analysis]. In Pravovye reformy i ekonomicheskii rost [Legal Reform and Economic Growth], ed. E. Berglof and S. Shishkin. Moscow: CEFIR.Google Scholar
  3. Alexeev, M., C. Gaddy, and J. Leitzel. 1991. An economic analysis of the Ruble overhang. Communist Economies and Economic Transformation 3: 467–479.CrossRefGoogle Scholar
  4. Alexeev, M., E. Janeba, and S. Osborne. 2004a. Taxation and evasion in the presence of extortion by organized crime. Journal of Comparative Economics 32: 375–388.CrossRefGoogle Scholar
  5. Alexeev, M., and W. Pyle. 2003. A note on measuring the unofficial economy in the former Soviet republics. Economics of Transition 11: 153–175.CrossRefGoogle Scholar
  6. Alexeev, M., and L. Sabyr. 2004. Black markets and pre-reform crises in former socialist economies. Economic Systems 28: 1–12.CrossRefGoogle Scholar
  7. Boycko, M. 1992. When higher incomes reduce welfare: Queues, labor supply, and macro equilibrium in socialist economies. Quarterly Journal of Economics 107: 907–920.CrossRefGoogle Scholar
  8. Campos, N. 2000. Never at noon: On the nature and causes of the transition shadow, Discussion paper. Prague: CERGE-EI.Google Scholar
  9. Ericson, R. 1983. On an allocative role of the Soviet second economy. In Marxism, central planning, and the soviet economy: Economic essays in honor of Alexander Erlich, ed. P. Desai. Boston: MIT Press.Google Scholar
  10. Friedman, E., S. Johnson, D. Kaufmann, and P. Zoido-Lobaton. 2000. Dodging the grabbing hand: The determinants of unofficial activity in 69 countries. Journal of Public Economics 76: 459–493.CrossRefGoogle Scholar
  11. Grossman, G. 1977. The ‘second economy’ of the USSR. Problems of Communism 26: 25–40.Google Scholar
  12. Grossman, G. 1979. Notes on the illegal private economy and corruption. In soviet economy in a time of change, vol. 1, ed. Joint Economic Committee of Congress. Washington: US Government Printing Office.Google Scholar
  13. Grossman, G. 1989. The second economy: Boon or bane for the reform of the first economy. In Economic reforms in the socialist world, ed. S. Gomulka, Y. Ha, and C. Kim. Armonk, NY: M.E. Sharpe.Google Scholar
  14. Grossman, G. 1991. Wealth estimates based on the Berkeley–Duke émigré questionnaire: A statistical compilation. Berkeley–Duke Occasional Papers on the Second Economy in the USSR, No. 27.Google Scholar
  15. Ivanova, A., M. Keen, and A. Klemm. 2005. The Russian flat tax reform. Economic Policy 20: 397–444.CrossRefGoogle Scholar
  16. Johnson, S., D. Kaufmann, and A. Shleifer. 1997. The unofficial economy in transition. Brookings Papers on Economic Activity 1997(2): 159–239.CrossRefGoogle Scholar
  17. Johnson, S., J. McMillan, and C. Woodruff. 2000. Why do firms hide? Bribes and unofficial activity after communism. Journal of Public Economics 76: 495–520.CrossRefGoogle Scholar
  18. Kaufmann, D., and A. Kaliberda. 1996. Integrating the unofficial economy into the dynamics of post-socialist economies: A framework for analysis and evidence. In Economic transition in Russia and the New States of Eurasia, ed. B. Kaminski. London: M.E. Sharpe.Google Scholar
  19. Kim, B. 2003. Informal economy activities of Soviet households: Size and dynamics. Journal of Comparative Economics 31: 532–551.CrossRefGoogle Scholar
  20. Lau, L., Y. Qian, and G. Roland. 2000. Reform without losers: An interpretation of China’s dual-track approach to reforms. Journal of Political Economy 108: 120–163.CrossRefGoogle Scholar
  21. Leitzel, J. 1995. Russian economic reform. London: Routledge.Google Scholar
  22. Leitzel, J. 1998. Goods diversion and repressed inflation: Notes on the political economy of price liberalization. Public Choice 94: 255–266.CrossRefGoogle Scholar
  23. Leitzel, J. 2003. The political economy of rule evasion and policy reform. London: Routledge.CrossRefGoogle Scholar
  24. Lipton, D., and J. Sachs. 1990. Creating market economy in eastern Europe: The case of Poland. Brookings Papers on Economic Activity 1990(1): 75–133.CrossRefGoogle Scholar
  25. Murphy, K., A. Shleifer, and R. Vishny. 1992. The transition to a market economy: Pitfalls of partial reform. Quarterly Journal of Economics 107: 889–906.CrossRefGoogle Scholar
  26. Ofer, G., and A. Vinokur. 1992. The soviet household under the old regime: Economic conditions and behavior in the 1970s. Cambridge, MA: Cambridge University Press.Google Scholar
  27. Osband, K. 1992. Economic crisis in a shortage economy. Journal of Political Economy 100: 673–690.CrossRefGoogle Scholar
  28. Polterovich, V. 1993. Rationing, queues, and black markets. Econometrica 61: 1–28.CrossRefGoogle Scholar
  29. Roland, G., and T. Verdier. 2003. Law enforcement and transition. European Economic Review 47: 669–685.CrossRefGoogle Scholar
  30. Schneider, F. 2005. Shadow economies around the world: What do we really know? European Journal of Political Economy 21: 598–642.CrossRefGoogle Scholar
  31. Schneider, F., and D. Enste. 2000. Shadow economies: Size, causes, and consequences. Journal of Economic Literature 38: 77–114.CrossRefGoogle Scholar
  32. Sinelnikov-Mourylev, S., Batkibekov, S., Kadochnikov, P., and Nekipelov, D. 2003. Otsenka rezul’tatov reformy podokhodnogo naloga v Rossiiskoi Federatsii [Evaluation of personal income tax reform in the Russian Federation]. Working Paper No. 52. Moscow: Institute for Economy in Transition (IET).Google Scholar
  33. Stahl, D., and M. Alexeev. 1985. The influence of black markets on queue-rationed CPE. Journal of Economic Theory 35: 234–250.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Michael Alexeev
    • 1
  1. 1.