Download Behind the informal economy: estimating, explaining and

Behind the informal
economy: estimating,
explaining,counteracting
Guoda Steponaviciene, Lithuanian Free
Market Institute
The Informal Economy in the EU Countries. Round
Table, Sofia, April 18-20, 2002
Estimating. Nature of the object.
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The very nature of informal economy is to escape from
being measured, therefore both the definition and
methodology shall be treated only as a way of
approximation more than elsewhere in the economy.
Informal activities are particularly flexible in reacting to
changes in the regulatory framework. Every new
prohibition or regulation widens the very notion of
shadow economy.
It is universally recognized that official statistics fail to
reflect the whole national economy. Informal economy
exists in all countries, although in transition economies
there are some additional reasons for it to exist.
Estimating. Definition
Informal economy here - economic activities
that either are illegal or, if legal, go unreported
(or partly unreported) so as to avoid taxes or
state regulation. Illegal economy is any activity
banned by law.
 Economy of households is not included in the
concept.
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Estimating. Official statistics
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LDS presented its estimates of informal economy only
for 1995. It accounted for 23.4 percent of GDP. Of
this, 16 p.p. for economic reasons and 7.4 p.p. for
statistical reasons. Illegal activity was excluded from the
analysis.
The main method was anonymous opinion poll of tax
inspectors, the staff of the state social insurance fund
and population interviews. Salaries and wages were
adjusted on the assumption that ones in private
enterprises could not be lower than in state-owned
entities.
Estimating. LFMI survey
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LFMI has conducted a survey of macroeconomic variables since
1997. It is a regular, semi-annual survey. Informal economy is
one of the indicators under investigation.
The survey is based on the expert consensus paradigm that
originates from the theory of rational expectations. The theory
states that market participants use all available information to
make estimates and forecasts. It is the expectations of market
participants that determine their actions and the direction of
economic development.
Survey participants include managers, financial analysts and
other persons selected from successful businesses.
Estimating. LFMI survey results
Informal economy, % GDP
30
25
20
estimate
a year forecast
15
10
5
0
1997
1998
1999
2000
2001
Explaining
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The roots of shadow economy are in the burden of
taxes and regulations.
Other factors are:, the quality of state administration
and services, the volume of cash transactions, price
differences in neighbouring countries and the general
economic situation.
Under favorable business conditions the risk of going
informal does not pay off.
Counteracting
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Minimum regulations
Simple and efficient administration
Equal and transparent rules, small bureaucracy
Clear procedures for tax and other business disputes
Reasonable fines
Property and business security
Legal stability
Corporate development (brand name, publicity)
General level of income
Lithuanian Free Market Institute
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Our motto: if you don't create a free market, a
black market will emerge
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LFMI is an independent non-profit organization established in
1990 to advance the ideas of individual freedom and
responsibility, free market and limited government
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www.freema.org, [email protected]