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States and States of Informality in Europe: Current and Future Perspectives
On 4 September 2014 in Sofia, the Center for the Study of Democracy (CSD) in cooperation with the Sheffield University Management School (UK) and the Institute of Public Finance (Croatia) organised an international Marie Curie conference on tackling the Informal economy and undeclared work in Europe. Participants from the three institutions presented the findings from their background research on the state of the gray economy in Bulgaria, Croatia and Macedonia, as well as possible measures for dealing with it.

Professor Colin Williams from Sheffield University delivered the keynote speech and set-out the conceptual framework for tackling undeclared work. He outlined the advantages and the disadvantages of undeclared work for all involved parties - the employee, the employer, the government and the end customer, and what makes the practice attractive. The outlined policy approaches for tackling the issue include increasing the direct control by stepping up deterrent measures, providing more incentives for both employers and employees to declare work, and indirect control, such as fostering a culture of commitment which aligns the values of the citizens with the formal rules and regulations. When discussing the current state of the policy approaches throughout Europe Professor Williams pointed out that deterrence was viewed as the most important measure throughout the continent, with the exception of the Nordic countries. In the latter commitment was seen as the most important, while it ranked last in the rest of the continent. Professor Williams also noted that one of the biggest issues is the lack of common system of measuring the effect of the applied measures, such system is needed in order to understand which policy measures are most effective in the various contexts and what combinations and sequences of measures should be used for reaching the desired results.

Ms. Rositsa Dzhekova, Analyst in the Security Program at the Center for the Study of Democracy and a Marie Curie Research Fellow at the University of Sheffield, presented a baseline assessment of the current state of the undeclared economy in Bulgaria. Both direct and indirect methods of estimation show the shadow economy represents nearly a third of the country’s total GDP, which is well-above one and a half times the EU average. Based on a number of sources there was a general decline between 2002 and 2007 followed by a slight increase afterwards. The findings suggested that the increase occurred through a shift in the instances of undeclared work, for example from working without a contract to receiving part of the wages in envelopes, which spiked in 2013. Ms Dzhekova pointed out that the current focus of the Bulgarian government on punitive and corrective measures has produced some results in the area of reducing tax evasion and registration of labour contracts, but their sustainability was uncertain due to the lack of efforts to stimulate voluntary compliance and to change the attitudes of the general public. Ms. Dzhekova concluded that one of the main issues was the lack of systematic evaluation of the effect of implemented or planned measures and the lack of an integrated approach to implementing countermeasures.

Mr. Josip Franic, from the Institute of Public Finance (Croatia) and a Marie Curie Research Fellow at the University of Sheffield, provided a baseline assessment for the gray economy in his home country. With a size of the shadow economy of nearly 28.4% of the total GDP, Croatia is second in the EU only to Bulgaria and faces a big challenge especially due to the high unemployment rate of over 17% and the social acceptability of the phenomenon. Mr. Franic outlined the latter as an especially worrisome since it is seen as a sign of a low tax morale, which meant that the citizens have low trust in their government. This was confirmed by the broadly accepted belief that high social security contributions are not proportionate to the potential future benefits. In a similar fashion to the Bulgarian case deterrence was the main method for tackling the issue employed by the Croatian authorities, followed by preventative measures. Some examples for the latter include online services, and a “name and shame list” for employers who have not paid social contributions for more than 3 months. A voucher scheme for seasonal occasional work in agriculture was introduced as a means of moving services in the formal economy.

Mr. Lyubo Mishkov, a PhD student in the University of Sheffield - School of Management and a Marie Curie Research Fellow at CSD, in cooperation with Mr. Franic and Ms. Dzhekova presented the baseline assessment for the state of the undeclared economy in FYR Macedonia. One of the biggest issues the country faces is its high unemployment rate, which has just recently fallen to 28.4%. Some of the main underlying reasons for it are the widespread corruption and uncertain business environment. Using the same estimate as for the other two countries the team cites a size of the shadow economy of nearly 47% for 2011, markedly higher than both previous instances. Especially worrying are the findings of a survey from the same year, which show that nearly half of the interviewees will accept an undeclared job and will keep silent, which is viewed as a symptom of a widespread public acceptance. Regarding the measures for dealing with the issue the focus is mainly on detection and control, with some efforts on prevention just starting to emerge in the recent years - such as a ‘One-stop-shop’ system for company registration, electronic submission of tax returns. The team ended their presentation with the conclusion that culture changing measures and measures for enabling formalisation of the undeclared firms and workers and particularly scarce.

The second panel of the conference presented the lessons that the three countries can learn from some of the older EU members. The first speaker was Dr Piet Rennoy from the Regiopan Institute (Netherlands). As the third smallest undeclared economy in the EU at 9.5%, the Netherlands faces different types of problems, which were generally magnified after the accession of new countries to the EU. Some of them include dodging minimum wages regulations by imposing fines or requiring longer working hours and bogus contracts which then lead to abuses in the workplace or other abuses related to not understanding the work regulations and the rights that workers have. In his presentation Dr Rennoy outlined that in order to prevent such types of crimes the government of the Netherlands is mostly relying on preventive measures such as stepping up inspections or awareness raising campaigns. He noted that one of the shortcomings of the latter was that they were aimed only at people who understood Dutch and a good part of those who were being abused were foreign nationals who didn’t understand the language.

Dr. Sigrid Rand, a Senior Researcher from Goethe-Universität Frankfurt am Main. Dr. Rand outlined the main types of workers who were at the highest risk of undeclared work - those employed in small businesses, self-employed and workers who were posted from other countries and who paid their social security contribution in their sending and not in the host country. Around 20% to 25% or all undeclared work happened in the household services and was done mainly by German women or foreign citizens. Some of the measures which have currently been undertaken are an enactment of minimum wage restrictions and government payments for those who had been out of a job for a certain period, the goal of the latter was to minimize their incentive to engage in undeclared work.

The third speaker in the panel was Ms. Natasa Vidmar from the Ministry of Labour in Slovenia. As a newer member of the block it faces problems that aren’t much different from those faced in the three countries from the Balkans. As in their cases it relies mainly on deterrent measures such as strict penalties and constant inspections. Some of the interesting examples of such measures given by Ms. Vidmar included that according to the most recent legislation undeclared work can not be advertised in any way, even on online boards. In the sphere of preventive measures the legislation allows for short term contracts where only the health care tax is paid for someone working less than 40 hours a week. Some of the main examples of undeclared work that were cited included companies changing ownership and thus sidestepping their social contribution payments and employing illegal immigrants, while keeping their documents for the duration of their work.

The third panel of the conference included representatives from the academia and from the government and was on the topic of ways of measuring and tackling the undeclared economy in Bulgaria. The first speaker was professor Tanya Chavdarova from the Department of Sociology at the Sofia University. Professor Chavdarova presented some of the issues of the so called “envelope wages”. Firstly at the core of the problem there is a dual agreement between the employee and the employer that may involve such things as paying only part of the salary in an official manner, working longer hours or not using the full extent of the vacation days. According to the measurements that have been presented, this practice has been on the rise since 2003 and it is already so embedded in the culture that it is seen as a normal procedure and has been socially legitimized as something that has to be done due to the lack of choice in Bulgaria. Her findings also suggested that the practice is prevalent in the smaller cities compared to the capital. Some of the recommendations for tackling the problem include better understanding of the regional aspects, stepping up efforts for civic education in the secondary schools, and conducting in-depth study of the interdependence between Minimum Social Insurance Thresholds and the National Minimum Wage.

The second speaker in the panel Mr. Milen Kolev, from the National Statistical Institute, outlined the methods which were being used in order to measure the undeclared economy by the national statisticians, which are in line with those used in the EU. They include both quantitative analysis of macro data, surveys with experts, household surveys, fiscal accounts, etc. and such information is regularly provided by the institute in the gross value added and GDP estimates. According to NSI in 2013 the undeclared economy was about 13% of GDP.

Dr. Stefan Petranov, the Head of the Economics Department at the University of Sofia, presented the changes which took place in the legislation in relation to the shadow economy in the past 10 years and what their effect was. The general trend was positive towards reducing the share of the gray economy and transforming parts of it to the formal sector. Dr. Petranov gave examples for that in the increasing relative share of people with social security benefits in the labour force. The proposed driving force behind the trend was a combination of an improvement of the labor inspections, accumulation of experience, and the lowering of the tax rates that took place during the period.

Mr. Nikolay Petkov, the Director of the Risk Management Department at the National Revenue Agency (NRA), gave examples of the model which the Agency uses in tackling the undeclared economy. He gave two examples of areas where changes were implement and results were seen. The first one was with the fuel market, where after implementing a link between the sellers and the NRA and stepping up the controls there has been a reduction of the risky traders with nearly 48%. The second example concerned the “envelope wages” were similar measures were taken, but the results were not satisfactory.

Ms. Elka Dimitrova, the Director of the Labour Policy Directorate and the Ministry of Labour and Social Policy, presented the findings from a recent survey conducted by the Ministry. The main conclusion was that employers know how to take advantage of the system, but the employees do not due to the lack of information or perceived self-interest from their side. Some of the more interesting findings included that around a third of all companies currently do and will continue insuring their employees on the minimum wage thresholds even they change. Also that from the employees point of view working without a contract was seen as having less restrictions and being able to switch jobs easily or continuing claiming unemployment benefits while receiving some income.

The last session of the international conference included a lively roundtable discussion on the ways of dealing with the undeclared economy in Bulgaria, Macedonia and Croatia. It involved a presentation from Ms. Dzhekova, Mr. Mishkov and Mr. Franic of an Assessment of the Transferability of Policy Measures towards Undeclared Work. It set out a methodological approach on how to evaluate the transferability of policies between countries and presented case studies for Bulgaria and Croatia. The cases included both assessment of the legislative measures for deterrence and prevention, but also the fit between social, economic, political and ideological contexts. Some of the recommendations for Bulgaria included implementation of a legal definition for undeclared work, which is currently missing and a coordinated approach at strategic and operational level, which would probably involve a national strategy of counteracting the issue. Some of the specific measures that provoked discussions included sending Notification letters from Tax and Customs Board (an example from Estonia) to companies for discrepancies in their stated labour expenses and the national average. That type of measurement has achieved a 40% success rate in the country, but in order for it to function it required a trust in the government and its redistributive justice.

Agenda (Adobe PDF, 173 KB)

Presentation by Prof. Colin Williams, Sheffield University Management School (Adobe PDF, 685 KB)
Presentation by Rositsa Dzhekova, Marie Curie Research Fellow, Vitosha Research/ Sheffield University Management School (Adobe PDF, 914 KB)
Presentation by Josip Franic, Marie Curie Research Fellow, Institute of Public Finance, Zagreb/ Sheffield University Management School (Adobe PDF, 396 KB)
Presentation by Lyubo Mishkov, Marie Curie Research Fellow, Sheffield University Management School/Vitosha Research (Adobe PDF, 393 KB)

Presentation by prof. Tanya Chavdarova, Department of Sociology, Sofia University (Adobe PDF, 521 KB)
Presentation by Milen Kolev, Department of Macroeconomics Statistics, National Statistical Institute (Adobe PDF, 213 KB)
Presentation by Dr. Stefan Petranov, Head, Department of Economics, Sofia University (Adobe PDF, 239 KB)
Presentation by Nikolay Petkov, Director, Risk Management Department, National Revenue Agency (Adobe PDF, 906 KB)

Roundtable discussion presentation by Rositsa Dzhekova, Josip Franic, Lyubo Mishkov (Adobe PDF, 1338 KB)

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