The hidden economy is a widespread phenomenon throughout the Western Balkans and manifests itself in various sectors, among which the agricultural, services, real estate and construction industries. Country-specific sectors include the footwear and garment industry in Albania, as well as call centres and construction workers in Kosovo*. In Montenegro, under-reporting of the number of employees and envelope wages are wide-spread, while private tutors and unregistered tourist guides are ever more popular in Bosnia and Herzegovina.
The COVID-19 crisis has shed new light on the problem of informality in the Western Balkans. Lockdowns imposed by governments during the pandemic created a rapid spike in unemployment, thus increasing the risk of people seeking undeclared work as a survival strategy. What is more, enterprises employing undeclared workers will not be able to benefit from the emergency and recovery government measures, IPA funds, or the immediate EU support for the Western Balkans.
The lack of healthcare coverage of fully undeclared workers poses a serious threat to their health and the general public during the COVID-19 crisis. According to SELDI’s Hidden Economy Index, 60% of the employed in Kosovo* claim to have no healthcare insurance. SELDI’s data also shows that every tenth employed in the Western Balkans has no social security coverage.
Between 2016 and 2019, hidden employment has increased in five out of the six Western Balkans countries. Serbia is the only country which shows a decline in hidden employment levels since 2016, while Kosovo* remains the country with the highest hidden employment share. According to 45% of the businesses in North Macedonia and 72% of those in Albania, corruption is the most important factor for the existence of the hidden economy. The perception that tax authorities and the public system are corrupt has cultivated a high tolerance towards tax and social security evasion in the region.
The EU Commission has criticised Western Balkans countries for focusing almost exclusively on inspections and controls, rather than providing incentives in their efforts to counter the hidden economy. Still, a number of countries have taken steps in the right direction. Montenegro is about to launch a system for issuing fiscal invoices electronically, while Bosnia and Herzegovina has introduced an obligatory submission of VAT declarations in electronic format. Awareness raising campaigns include the “Take a Receipt and Win” lottery in Serbia, and “My VAT” cash prizes lottery in North Macedonia. It remains to be seen whether these measures will produce fruitful results in the quest for formalisation.