The existence of undeclared work, hidden economy and corruption have been identified by the European Commission and other international and local agencies as a major barrier to enabling embedded economic prosperity in SEE. In a recent study, the SELDI initiative and University of Sheffield Management School uncovered that hidden economy in SEE remains wide-spread; it perpetuates informality, which is linked to corruption, and denotes a substantial gap between formal and informal institutions. This gap is due both to underdeveloped formal market institutions, and also to the lack of coherent enforcement of rules, often related to corruption. The sustained high-levels of the hidden economy in SEE, low trust in public institutions and, in some cases, ambiguous national identity, has resulted in changes in tax morale and lower revenues for governments. These were the key conclusions from the policy round table held by the SELDI initiative, Sheffield University Management School, UK, and the Center for Liberal-Democratic Studies (CLDS), Serbia on 13 December 2016 in Belgrade.
Ruslan Stefanov, SELDI Coordinator and Marie Curie Research Fellow at University of Sheffield elaborated on the relation between corruption, economic growth and hidden economy. He noted that unreported incomes can be used for illegal activities. According to the SELDI hidden economy survey results, 81% of the workers in Kosovo, 75% in Turkey and 51% in Serbia hide partially or fully the actual value of their labour contracts. At the same time, mirror statistics of imports and exports show large discrepancies in EU28 and SEE, including both under and over reporting the value of the traded goods, as well as misreporting of their origin. Mr. Stefanov recommended that in parallel to the law enforcement, the policies identify key risk zones and tax gap areas (e.g. cross-border trade, labour, sales), and focus the efforts there. Businesses and citizens should be widely consulted on these areas, so that the society at large feels engaged in the reforms and thus raise its trust in the institutions. Marko Paunović, Center for Liberal-Democratic Studies (CLDS), Serbia stressed that while the state is captured, public services will not be of good quality, and citizens will not pay taxes willingly.
Prof. Colin Williams, Sheffield University Management School, University of Sheffield underlined the importance of the citizens’ perceptions of the quality of public services received for their taxes. He stressed that state failure leads to low tax morale, and the solution should be sought in promoting good governance and helping institutions be more effective. He also argued that punitive measures have short-term effect and can create negative tax morale in the long term. For that reason positive enforcement, tax fairness and information campaigns should be applied to achieve structural reform. According to him, increasing detection measures has larger effect than increasing the level of sanctions. Prof. Williams concluded that the key to success is changing the work of the formal institutions towards a service-oriented approach.
Dr. Peter Rodgers, Lecturer in Strategy and International Business, Sheffield University Management School, University of Sheffield further explained the benefits from the transition from compliance to a culture of commitment. He recommended the use of information campaigns targeting young people, changing norms, values and believes, as well as the approach of demonstrating that the vast majority of the population is compliant, highlighting the public services that result from tax earnings. Dr. Rodgers provided examples of how businesses and citizens can work together to reduce the hidden economy, such as business incubators that promote formal registration. He also recommended that CSOs, including SELDI, pressure formal institutions to change, improve tax fairness, as well as promote early intervention (e.g. tax education programmes).
SELDI members and CSOs representatives also shared their experience and research on the topic. Dragana Ilić, Legal Advisor for Business Relations, National Alliance for Local Economic Development (NALED) shared her experience in drafting the Serbian National Program for Combating the Shadow Economy, underlining the benefits from including over 100 participants in the process - businesses, taxpayers, employers. Ana Mickovska-Raleva, Policy Analyst, Center for Research and Policy Making (CRPM) presented the results from two population surveys, noting that 37.3% of employees in Macedonia are fully or partially undeclared. Brunilda Kosta, Researcher at the Albanian Center for Economic Research (ACER) shared that smaller businesses are often excluded from the policy dialogue, state capture is considered a serious issue, and the new bankruptcy law is yet to be adopted. She recommended application of a comprehensive social policy and more extensive use of technologies, including electronic payments. Josip Franic, Researcher at the Institute of Public Finance, Croatia described the micro- and macro-level predictors significant for hidden economy participation such as gender, age, size of the company, tax morale, occupation, employment rate, at-risk-of-poverty rate, government effectiveness, rule of law, perceived judicial independence, inequality of income distribution, corruption, and the trust in government. He also presented the key findings of a GREY project survey in Croatia, Bulgaria and Macedonia. According to the results, the employer suggested the under-declaration in 61.3% of the cases on average for the three countries, in 24.2% of the cases it was a joint idea, and 8.7% it was at the suggestion of the employee.
All participants agreed that working in the hidden economy in SEE is often socially embedded, culturally and educationally predetermined, and not simply a matter of a rational choice maximising personal benefit. Hence, an effective anti-hidden economy policy should not be purely economic or fiscal, but a comprehensive social policy.
Agenda of the morning session (Adobe PDF, 176 KB)
Agenda of the afternoon session (Adobe PDF, 89 KB)
Presentation by Ruslan Stefanov, SELDI Coordinator and Marie Curie Research Fellow at University of Sheffield (Adobe PDF, 823 KB)
Presentation by Prof. Colin Williams, Sheffield University Management School, University of Sheffield (Adobe PDF, 1.12 MB)
Presentation by Dr. Peter Rodgers, Lecturer in Strategy and International Business, Sheffield University Management School, University of Sheffield (Adobe PDF, 559 KB)
Presentation by Ana Mickovska-Raleva, Policy Analyst, Center for Research and Policy Making (CRPM) (Adobe PDF, 723 KB)
Presentation by Brunilda Kosta, Researcher at the Albanian Center for Economic Research (ACER) (Adobe PDF, 654 KB)
Presentation by Josip Franic, Researcher at the Institute of Public Finance, Croatia (Adobe PDF, 649 KB)