Having analysed the extent of the global shadow economy and the causes of its dramatic rise in OECD countries, we now focus on the consequences of its development for economic and social policy. Despite the importance of this, there is hardly any literature on the effects of the shadow economy. There is no comprehensive model for such a causal analysis beyond micro-economic welfare studies. Here, some empirical considerations will be made. Analysing the consequences of shadow economic activities in a welfare economics context is too restricted to fully portray causal connections. Thus, we will also explain some effects derived from evolutionary economics, although, we do not claim to make final and completely satisfactory statements.

The evaluation of the welfare effects of shadow economic activities varies according to the basic point of view and definition adopted, as well as to the underlying reference model. For some, this is the purest and most efficient form of economic action (Friedman 1982); for others it is a danger to state authority and a sign of deteriorating morality. This chapter gives an overview of the various positive and negative effects of the hidden economy from a macro-economic perspective, and tries to convey a complete and balanced picture.

In general, welfare economics consequences are examined, e.g., on the GNP, as an indicator for the material welfare of society. In economic sciences, these are divided into allocation, distribution, and stabilisation effects. A very important objective for economic policy is to improve allocation.