Behind the informal economy: estimating, explaining,counteracting Guoda Steponaviciene, Lithuanian Free Market Institute The Informal Economy in the EU Countries. Round Table, Sofia, April 18-20, 2002

Estimating. Nature of the object. The very nature of informal economy is to escape from being measured, therefore both the definition and methodology shall be treated only as a way of approximation more than elsewhere in the economy. Informal activities are particularly flexible in reacting to changes in the regulatory framework. Every new prohibition or regulation widens the very notion of shadow economy. It is universally recognized that official statistics fail to reflect the whole national economy. Informal economy exists in all countries, although in transition economies there are some additional reasons for it to exist.

Estimating. Definition Informal economy here - economic activities that either are illegal or, if legal, go unreported (or partly unreported) so as to avoid taxes or state regulation. Illegal economy is any activity banned by law. Economy of households is not included in the concept.

Estimating. Official statistics LDS presented its estimates of informal economy only for It accounted for 23.4 percent of GDP. Of this, 16 p.p. for economic reasons and 7.4 p.p. for statistical reasons. Illegal activity was excluded from the analysis. The main method was anonymous opinion poll of tax inspectors, the staff of the state social insurance fund and population interviews. Salaries and wages were adjusted on the assumption that ones in private enterprises could not be lower than in state-owned entities.

Estimating. LFMI survey LFMI has conducted a survey of macroeconomic variables since It is a regular, semi-annual survey. Informal economy is one of the indicators under investigation. The survey is based on the expert consensus paradigm that originates from the theory of rational expectations. The theory states that market participants use all available information to make estimates and forecasts. It is the expectations of market participants that determine their actions and the direction of economic development. Survey participants include managers, financial analysts and other persons selected from successful businesses.

Estimating. LFMI survey results

Explaining The roots of shadow economy are in the burden of taxes and regulations. Other factors are:, the quality of state administration and services, the volume of cash transactions, price differences in neighbouring countries and the general economic situation. Under favorable business conditions the risk of going informal does not pay off.

Counteracting Minimum regulations Simple and efficient administration Equal and transparent rules, small bureaucracy Clear procedures for tax and other business disputes Reasonable fines Property and business security Legal stability Corporate development (brand name, publicity) General level of income

Lithuanian Free Market Institute Our motto: if you don't create a free market, a black market will emerge LFMI is an independent non-profit organization established in 1990 to advance the ideas of individual freedom and responsibility, free market and limited government