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THE SIZE AND DETERMINANTS OF THE UNOFFICIAL ECONOMY IN CROATIA Prepared by Davor Mikulić Zagreb, Semptember 2015 1 Scope of the paper • Overview of unofficial economy estimates in Croatia and new member states (NMS) – Exhaustiveness of national accounts results – MIMIC approach estimates • Identification of UE determinants 2 Non-exhaustiveness types (national accouts approach): N1 – Deliberately non-registered (underground ) N2 – Illegal producers N3 – Not required to register N4 – Legal persons not surveyed N5 – Registered entrepreneurs not surveyed N6 – Producers deliberately misreporting N7 – Other statistical deficiencies 3 MIMIC approach (Schneider) Structural model: determine the relationship between an unobservable variable (unofficial economy) and a set of indicators related to UE Indicators: GDP, money in circulation, participation rate Causes: size of government, share of direct taxation, fiscal freedom, business freedom, unemployment rate, government effectiveness 4 Estimates of unofficial economy in Croatia 5 Is Eurostat approach conservative? Eurostat bil. HRK 23 Unofficial economy GDP GVA GVA before UE 330 278 255 Imputed NA items (dwelling rents, FISIM…) GVA before imputed NA items GVA, government units GVA - GOV - IMPUTED GVA, FIN INST GVA, LARGE ENT (50+) GVA, SMALL UNITS (<50) Monetary household income (HBS) 30 225 50 175 16 95 64 120 MIMIC 93 UE, as % of category 7,0 28,2 8,3 33,5 9,1 36,5 10,3 41,4 13,2 53,2 36,3 19,3 146,0 77,5 6 Comparison of UE estimates (MIMIC and NOE approach) 40 Bulgaria Croatia Estonia MIMIC 35 30 Poland 25 Latvia Hungary Slovenia 20 Romania Lithuania Czech Slovakia 15 5 10 15 20 NOE Adjustment 7 Comparison of UE estimates Reference period NMS Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovenia Slovakia OECD-EU Austria Belgium Ireland Italy Netherlands Spain Sweden Croatia 2001 2000 2002 2000 2000 2002 2002 2002 2002 2002 2001 2002 1998 2003 1995 2000 2000 2000 Adjustment for NOE in national accounts Buehn, Schneider (2012) Ratio Buehn, Schneider (2012) NOE 12.0 10.2 7.7 9.6 11.9 14.4 18.9 7.8 17.7 6.9 14.6 6,2 7,9 3,0 4,0 14,8 1,0 11,2 1,3 10,1 28.2 36.6 19.1 32.0 25.1 29.8 32.8 27.7 33.5 26.6 18.6 18,6 9,7 22,0 16,1 27,0 13,3 22,7 19,2 33,4 2.4 3.6 2.5 3.3 2.1 2.1 1.7 3.6 1.9 3.9 1.3 6,4 1,2 7,3 4,0 1,8 13,3 2,0 14,8 3,3 8 Unoffical economy and GDPpc 9 Unoffical economy and corruption 10 Econometric tests of determinants of UE in new member states • Depedent variable: UE NOE (model 1) and UE MIMIC (model 2) • Period: 2000-2011 • Panel data – fixed effects • yi,t =α +βXi,t + ei,t (1) 11 Determinants of the unofficial economy in economic literature • Burdens on the official economy; • Public sector services; • Tax morality and government controls; • Labour market conditions; • Structural factors. 12 Causes of unofficial economy in new EU member states and Croatia Variable Constant Government spending Index of economic freedom GDP per capita Freedom from corruption Adjusted R2 Redundant cross section fixed effects LR testF statistics (p-value) Number of observation Dependant variable: UE Dependant variable: UE estimates based on MIMIC estimates based on Eurostat approach approach Estimated parameters 41.036*** (43.01) 0.02071 *** (2.92) -0.1137*** (-5.67) Estimated parameters 5.34*** (2.94) 0.196 *** (3.98) 0.153*** (4.49) -0.00041 *** (-13.57) -0.031 ** (-2.21) 0.9896 -0.00029 *** (-5.41) -0.075 *** (-3.12) 0,933 386.28*** (0.000) 92.24*** (0,000) 132 132 13 CONCLUDING REMARKS Significant differences in UE in NMS Exhaustiveness of national accounts results in lower estimate of unofficial economy in comparison to MIMIC Lower variability in MIMIC estimates for individual countries Government expenses, as broadest indicator of costs government posed to the official economic units, turned to be more significant than revenues Improvement in overal institutional framework reduces the share of unofficial economy Official and the unofficial economy in NMS are substitutes not complements Impact of economic freedom is unclear 14 Thank you! ☺ 15