The paper "The Unofficial Economy in Transition" by Simon Johnson, Daniel Kaufmann, and Andrei Shleifer examines the impact of political control on economic activity in transition economies, particularly those in Eastern Europe and the former Soviet Union (FSU). The authors argue that the politicization of economic life, where politicians exercise control over businesses, has hindered small business formation and growth. They find that countries that have successfully reduced political control and replaced it with functioning market institutions have healthier public finances, smaller unofficial economies, and better growth records. The authors define the unofficial economy as activities not reported to the state statistical office, often involving tax evasion and regulatory circumvention. They use electricity consumption as a proxy for overall economic activity, subtracting it from measured GDP to estimate the size of the unofficial economy. The paper also measures the extent of political control through indicators such as taxation, regulation, and corruption. Empirical analysis shows that the movement of production into the unofficial sector has significant consequences for public finance. High taxes, regulations, and corruption drive firms out of the official sector, leading to a decline in tax revenues and the provision of public goods like law and order. This, in turn, makes operating in the official sector less attractive, further exacerbating the problem. The authors present a simple model to illustrate the dynamics between the official and unofficial sectors, showing that the allocation of labor between these sectors can lead to multiple equilibria: one with all resources in the official sector, one with all resources in the unofficial sector, and a knife-edge equilibrium where both sectors coexist. The model suggests that economies can bifurcate into two groups: those with low taxes, regulations, and corruption, and high growth rates, and those with high taxes, regulations, and corruption, and low growth rates. The paper concludes by discussing the reform agenda for countries in the former Soviet Union, emphasizing the importance of depoliticization and building market-supporting institutions to foster economic growth.The paper "The Unofficial Economy in Transition" by Simon Johnson, Daniel Kaufmann, and Andrei Shleifer examines the impact of political control on economic activity in transition economies, particularly those in Eastern Europe and the former Soviet Union (FSU). The authors argue that the politicization of economic life, where politicians exercise control over businesses, has hindered small business formation and growth. They find that countries that have successfully reduced political control and replaced it with functioning market institutions have healthier public finances, smaller unofficial economies, and better growth records. The authors define the unofficial economy as activities not reported to the state statistical office, often involving tax evasion and regulatory circumvention. They use electricity consumption as a proxy for overall economic activity, subtracting it from measured GDP to estimate the size of the unofficial economy. The paper also measures the extent of political control through indicators such as taxation, regulation, and corruption. Empirical analysis shows that the movement of production into the unofficial sector has significant consequences for public finance. High taxes, regulations, and corruption drive firms out of the official sector, leading to a decline in tax revenues and the provision of public goods like law and order. This, in turn, makes operating in the official sector less attractive, further exacerbating the problem. The authors present a simple model to illustrate the dynamics between the official and unofficial sectors, showing that the allocation of labor between these sectors can lead to multiple equilibria: one with all resources in the official sector, one with all resources in the unofficial sector, and a knife-edge equilibrium where both sectors coexist. The model suggests that economies can bifurcate into two groups: those with low taxes, regulations, and corruption, and high growth rates, and those with high taxes, regulations, and corruption, and low growth rates. The paper concludes by discussing the reform agenda for countries in the former Soviet Union, emphasizing the importance of depoliticization and building market-supporting institutions to foster economic growth.