Informal Economy and Informal Labour in New Member States and Candidate Countries: The Case of Bulgaria Ruslan Stefanov, Center for the Study of Democracy 6 th Colloquium on Cross-Border Crime Crime and Economy and Crime Economy Berlin, Germany, September 2 nd – 4 th, 2004

Introduction Informal Economy – Contextual Issues Informal Economy and Informal Labour in the Enlarged European Union – Grey Flows in the Internal Market Where does Bulgaria Stand – the CSD/Coalition 2000 Index for Measuring the Dynamics of Informal Economy Bulgaria – Some Lessons and Follow Up

The Colors of Hidden Economy undeclared official criminal

How are ‘grey’ and ‘black’ economies interrelated? ‘Grey’ is a breeding ground and a cover for ‘black’ ‘Grey’ areas in EU and Candidate Countries: inviting channels for ‘black’ France and UK entry visa scandals; the transport channels; ‘grey’ employment turned ‘black’ children bearing for sale  The role of the market/state analysis

Undeclared work in CEE – short review Disruption of social and economic order Rapid liberalization and business creation Missing adequate regulation at beginning of transition Part of a bigger and more complex problem of informality

Faces of Undeclared Work in Candidate Countries (1) informal activities (on the example of Romania) They account to 20.4 – 26.6 of total household income (‘safety valve’) Both poor and rich are involved Income is the most important incentive to work informally (“subsistence” and “enterprise” motives) Transition environment stimulates informality From informal secondary activities to formal main activity

Faces of Undeclared Work in Candidate Countries (2) Main constituencies in undeclared work People with more than one job People with free lanced professions, mainly supplying services The poor (long-term unemployed, officially ‘inactive’ persons such as students, retired, housewives, etc.) Illegal immigrants

General Conclusions Undeclared work is a more complex and pervasive problem in Candidate Countries, though general principles apply An adjustment in legislation and institutions is needed to create more opportunities for formal work, while gradually increasing punishment and control over informal activities. These measures have to be sequenced There needs to be a fine balance between administrative and economic measures Particular attention is needed when dealing with ‘poor undeclared labour’, so that policies do not result in destruction of jobs Policy actions have to be persistent and to decrease not increase regulation

Source: Friedrich Schneider Hidden Economy - Bulgaria’s Position in 98/99

23, % Estonia Bulgaria Latvia Romania Slovenia Hungary Poland Lithuania Slovakia Czech Rep. CC 10 Average Shadow Economy Labour Force in Candidate Countries 1998/1999 (% of working age population) Source: Friedrich Schneider, 2002

Informal Economy in Bulgaria Sizable economic factor – estimates range between 21% and 36% of official GDP Creates unfair competition and changes business incentives structureunfair competition Feeds corruption payments Breeding ground and hide-out for organized crime

Barriers to Business (% of companies defining the respective item as a ‘big’ problem to their business) Source: Vitosha Research

Barriers to Doing Business in Bulgaria (% of companies that have rated the problem as “big” in each number of workers category)

Government Action Ministry of Labor and Social Policy registration of labor contacts social security contributions thresholds harder social programs participation criteria tightened inspections  persons have emerged from undeclared work + more than $ 150 mln. increase in social security revenues  critical test for success: reduction of social security payments, tax administration improvement Ministry of Finance customs reform revenue agency  customs revenue increased by 18% and fraud detection by 70%  critical test for success: closure of major sources of informality

The Index Informal Economy Index Business Perceptions Hidden Labor Hidden Turnover Tax Evasion the index has two levels indices assume values from 0 (low informal economy) to 10 (high informal economy) measures dynamics + pinpoints problems areas + attracts public and policy attention

Hidden Economy Index 2003 Dynamics Source: Coalition 2000 XII 2002III 2003XI 2003 Biz Perceptions4.60 (29%)3.96 (24%)3.66 (21%) Informal Work No contracts 3.63 (25%)2.47 (23%)2.21 (23%) Hidden Clause Contracts 4.32 (34%)3.11 (23%)3.31 (23%) Informal Turnover Hiding Taxes Index Total

Index Dynamics Source: Coalition 2000

Index Components’ Dynamics Source: Coalition 2000

The Hidden Economy – Policy Response & Lessons >50% ~35% ~25% 1996/ / /2003 Economic policyAdmin. policy?

Lessons for Policy Concerted administrative action against undeclared work and economic activity produce tangible results, at least in the short run, but… …economic fundamentals matter in the medium to long term, i.e. administrative action has to be coupled with economic restructuring Costs have to be considered very carefully. To ensure compliance the Bulgarian Labour Inspectorate made checks on businesses, which found breaches of labour legislation and labour contract inconsistencies. Such practices are unsustainable in the long-run.

Conclusions Administrative actions have not been supplemented by (promised) economic measures, which undermines their sustainability. Businesses have not been compensated for heightened administrative intervention Some highly symbolic conflicts have not been resolved to ensure credibility and support – closure of duty free shops Though the informal economy has declined it still is substantial and source of corruption and organized crime

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