
man, the second economy consisted of all produc-
tion and exchange undertaken directly for private
gain, knowingly illegal in some substantial way,
or both. This definition encompassed both legal and
illegal activities, but most studies focus on the il-
legal part, also referred to as underground, unof-
ficial, or shadow economy, or the black market.
The legal second economy was made up mainly
of private agriculture, small-scale construction ser-
vices, extraction of precious metals, hunting of
valuable wild animals, and certain professional ser-
vices, such as those provided by physicians, den-
tists, and tutors.
The illegal economy was significantly larger
than the legal part of the second economy. Legal
private activities often served as fronts for illegal
ones. The most common illegal economic activity
in the USSR was theft of state property. Presum-
ably the second-most widespread illegal activity
was the corruption that reached into the highest
echelons of power; one purpose of corruption was
to protect the functioning of the rest of the illegal
economy. Another major illegal activity was spec-
ulation, defined as resale of goods by individuals
for profit. Unlike theft from the state sector and
corruption, which would be illegal anywhere, spec-
ulation was a crime only in socialist economies.
Illegal production by individuals or by teams
was also significant. Much of the illegal produc-
tion for private purposes took place at state enter-
prises. Output was usually sold privately, but
sometimes it was distributed through the official
retail trade network. Private manufacturing with-
out an official facade also existed.
None of the major conditions giving rise to the
existence of a large underground economy were
unique to the USSR, but the way they came to-
gether in Soviet society was unusual and created a
highly favorable environment for an illegal econ-
omy. These conditions included price controls on
virtually all consumer goods, the prohibition of
many private economic activities and high taxes on
others, the ubiquity and poor protection of public
property, the immense discretionary power of
poorly paid bureaucrats, and social attitudes that
tolerated theft of state property, corruption, and
many other economic illegalities.
While the Soviet second economy was large, its
magnitude, especially in the illegal sphere, is diffi-
cult to ascertain. One widely used way to estimate
the extent of the second economy was based on in-
terviewing emigrants from the USSR about their
lives prior to emigration. Three major surveys were
performed in Israel and the United States in the
1970s and 1980s. The Berkeley-Duke household
budget survey, the only one focused explicitly on
the second economy, implied that about 27 percent
of urban household income in Russia in the late
1970s was derived from the second economy. The
corresponding estimates from the other two sur-
veys were about half that amount.
Evaluating second economy dynamics is even
more difficult. One methodology infers the growth
of the second economy from comparisons of elec-
tricity consumption with the official Gross Do-
mestic Product. This approach indicates that
Russia’s second economy grew by more than 80
percent between 1979 and 1989.
The rise of the second economy amounted to
an implicit market reform within the Soviet sys-
tem, but it also facilitated or even compelled the
partial reforms of perestroika, which expanded the
scope of the legal second economy. Nonetheless, the
illegal and quasi-legal economy also mushroomed,
undermining central planning and leading to the
economic transition to markets starting in 1992.
During the transition, the notion of a second econ-
omy was restricted to illegal activities, the growth
of which continued throughout the 1990s. The rea-
sons for this growth included persistent excessive
regulation of the economy, high statutory tax
rates, weakening of official institutions and their
inability to protect property rights protection and
enforce contracts, lack of credibility of government
reform policies, and continued corruption. The il-
legal second economy may have benefited from the
emergence of the mafia, which taxes underground
firms but also provides property rights protection
for its victim/clients.
The existence of a large second economy, and
particularly its illegal part, had important implica-
tions for Russia’s economy both before and after
the collapse of the USSR. First, underground activ-
ity hinders an accurate understanding of the econ-
omy and impedes policy-making by distorting
various statistics, including GDP data, household
incomes and their distribution, and employment.
Additionally, the illegal economy weakens the feed-
back to policy-makers on government decisions
and actions, undermines official institutions, and
promotes corruption. From an efficiency point of
view, the illegal economy suffers from the black
market’s need for secrecy, which results in poor
flows of information, greater operational uncer-
tainty, and suboptimally small-scale production.
SECOND ECONOMY
1357
ENCYCLOPEDIA OF RUSSIAN HISTORY