When examining the phenomenon of the ‘shadow economy’, the definition of the term is of the utmost importance. Many scientific controversies and political discussions arise because of differing or unsatisfactory definitions. To analyse the causes and, above all, to estimate and evaluate the consequences of the growing shadow economy, it is necessary to clarify what is meant by the latter in each context.

Since the term ‘shadow economy’ comprises numerous economic activities, it is difficult to provide a formal definition. For example, one has to distinguish between goods and services produced and consumed within the household, ‘soft’ forms of illicit work (‘moonlighting’), and illegal employment and social fraud, as well as criminal economic activities. In the context of the European Economic and Monetary Union, the definition has to be made comparable and more or less uniform. The shadow economy has been identified as a very problematic area within the European National Accounts. A harmonisation of terms is needed and should be attained by integrating the shadow economy into the gross national product (GNP). Although this is generally regarded as necessary, a global definition has not yet been found.

An overview of different ways to define the shadow economy will be given here for general guidance. The objective is to make the definition transparent for the following analysis, without laying claim to a homogeneous definition. It has to be noted that considerable differences exist between developing, transitional, and OECD countries concerning the activities of their respective shadow economies.