We often correlate the underworld to something dangerous, illegal, and unethical. Likewise, the underworld economy or dark markets are places where the trading of illegal goods takes place. The underworld economy runs on the concept of counterfeiting. Counterfeiting is a form of theft. It involves unlawfully duplicating anything of value in order to deceive and sell these duplicated items to the buyers. Counterfeit items can be money, coupons, credit or debit cards, clothes, and jewelry. As it is indirectly a form of theft, theft of intellectual property, the economic cost of counterfeiting is hence, similar to those associated with other types of theft.  

Counterfeiting is pervasive across different countries and industries, it creates a multibillion-dollar illegal industry of itself that causes a significant drain on the world economy. To state in simple terms, on a larger level, the economic cost of counterfeiting is that it crowds out the money from the legitimate economic activity and facilitates an underground economy. The developments of such illegal markets majorly deprive governments of revenues which in turn makes it tough to provide vital public services. Due to this taxpayers have to pay higher rates and they are put under distress, and it robs people of employment by dislocating thousands of legitimate jobs. Most importantly it makes customers vulnerable to the usage of harmful low-quality products.

According to the Organisation for Economic Co-operation and Development, 2.5% of international trade or USD 461 billion is accounted for the trade of these duplicated goods in 2013. This figure is estimated to reach USD 991 billion by 2022. The economic cost of counterfeiting could reach an estimate of USD 1.9 trillion by 2022 and the negative impacts of it are projected to drain USD 4.2 trillion from the global economy whilst putting 5.4 million jobs at risk by the year 2022. The major products and industries where rampant counterfeiting takes place are software, music recordings, motion pictures, sportswear, perfumes, fashion clothes, luxury items, watches, toys, pharmaceuticals, aircraft components, and spare parts & car accessories. 

In the economy, the right holders of original products within the different sectors have to bear the cost of counterfeiting. Industries that find themselves in direct competition with the various illegal actors of the dark market, suffer a direct loss in their sales. In reality, some markets for certain products are even dominated by counterfeiters which creates barriers of entry for the actual producers of genuine and original products. In some cases, these counterfeiters sell fake products by deceiving the customers to believe it is the original one, which causes customers to create a bad image of the actual manufacturers when they find the quality of these bought goods to be poor and not up to the mark. This creates a loss of goodwill for the actual companies or producers. Besides the direct losses of sales and goodwill, there are expenditures that are incurred for protecting and enforcing intellectual property rights in order to safeguard the original product.

The economic cost of counterfeiting can be measured in both tangible and intangible form. Such economies lose out on foreign direct investments as well as foreign know-how because producers from abroad are reluctant to manufacture reputable products as they cannot rely on the enforcement of intellectual property rights due to the rife in counterfeiting. Secondly, there is a loss of exports along with loss in foreign exchange and jobs because the existence of poor-quality duplicate products in the country creates trust issues among importers who do not even trust the genuine ones. While the counterfeiting industry causes loss of jobs, it can also be argued that it creates jobs within its own industry. But these ones are often the jobs in poor working conditions with unfair wages. Due to this, in such economies, there is an increase in child labor as well. Thirdly, the existence of counterfeiters discourages innovation and invention as there is no incentive for additional gains for the innovators due to the risk of duplication at lower costs. Hence, there is a hindrance to market development in the economy. Finally, there are losses to the government in the form of tax revenues as these counterfeiters find illegal ways to sell their replicated produce and evade the taxes. 

These losses due to counterfeiting are not only felt in the economy or by the producers of genuine products, but there is a social cost of counterfeiting too that is involved. The ultimate victims of this underground economy are the end consumers. They are deceived as they end up purchasing poor-quality goods at an excessive price and are even left exposed to health hazards and safety dangers. Counterfeiting is also related to many other criminal activities, as it gives rise to trade in narcotics, terrorism, and money laundering and affects society as a whole.

The reasons for counterfeiting and its increasing pace are the advances in technology due to which the primal technologies keep getting cheaper and it is easier for illegal producers to duplicate even the high-end, high-tech products including pharmaceuticals. Then, due to an increase in international trade, there has been an increase in both the production and consumption of counterfeiting with more products to duplicate and more marketplaces to sell. And then comes the emerging markets, where previously controlled markets are now free-market economies, which again gives more opportunity to the existence of underground markets.

Keeping all these reasons and the huge economic cost of counterfeiting in mind, there are various steps and policies the governments try to adopt in order to reduce and eliminate counterfeiting. Nations have developed strict anti-counterfeiting and anti-piracy policies with heavy punishments and charges to the guilty. Additionally, better implementation of intellectual property rights, trademarks, quality assurance certifications, educating the customers, and encouraging the manufacturers to protect their products help in decreasing the problem of counterfeiting and prepare the ground for fully eliminating the underground economy.

So, now we know that when we see someone wearing a fake ‘Adidas’ t-shirt, the problem isn’t just about the illegal usage of a brand’s name, there are many more complex issues at large that impact the entire economy.

 

Referred to:

World Bank research paper dated Feb 2016 – The economic effects of counterfeiting and piracy

Economic Times article dated 30/07/2020 – Counterfeiting products create a 1 lakh crore whole in the economy

The Economist article dated 24/03/2016 – Counterfeiting and Piracy (Stamping it out)

 

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