Illegitimate economic activities by citizens in Southeast Europe – prevalence and underlying motivations Josip Franić Institute of Public Finance Marie Curie IAPP conference Zagreb, 1 September 2017

Findings presented here based on... 1) Representative survey of 6,019 citizens in Croatia, Bulgaria and FYR Macedonia (approximately 2,000 individuals in each country); conducted during the period Spring-Summer 2015 2) 30 qualitative interviews with under-declared (quasi-formal) workers in Croatia (Spring 2015) + 9 interviews with experts (Spring 2016)

Definitions Undeclared work: any paid activities that are lawful as regards their nature but not declared to the public authorities, taking into account differences in the regulatory system of Member States Quasi-formal employment (envelope wage practices): besides an official declared wage, a formal employer pays a formal employee an additional undeclared wage which is decided on the basis of an unwritten agreement beyond the formal written contract ‘Pulling strings’ - the practice of relying on personal connections (i.e. help from relatives, friends, colleagues or acquaintances) to obtain goods and services outside formal means of conduct in different spheres of life, regardless of the reward/compensation that accompanies the arrangement

A short overview... Table 1 Pervasiveness of illegitimate economic practices in Croatia, Bulgaria and FYR Macedonia, in %   Croatia Bulgaria FYR Macedonia Buying undeclared goods 16.0 17.1 12.3  Paying for services under-the-table 20.0 22.2 12.0  Conducting undeclared work 9.2 9.6 6.1 Quasi-formal employment 6.6 15.3 13.0 Relying on help/favours from other people 30.8 30.1 35.0 Providing help/favours to other people 20.2 15.0 23.9  Source: GREY Survey

Views on the main causes of undeclared work Figure 1 Most frequent reasons to participate in undeclared work from the standpoint of Croatian taxpayers, in % Source: Franic and Williams (2017)

Attitudes towards illegitimate economic activities Figure 2 Toleration of various types of noncompliance in Croatia, in % Source: Franic and Williams (2017)

Attitudes towards illegitimate economic activities (2) Figure 3 Attitudes towards having things done by pulling strings, in % Source: GREY Survey

Attitudes towards illegitimate economic activities (3) Figure 4 Views of taxpayers on importance of connections to achieve certain goals, in % Source: GREY Survey

Purchase of undeclared goods and services – an overview Agricultural products (1/3 of all people admitting purchase without a receipt); house repairs/renovations; hairdresser/beauty treatments; car repairs Main motivations: lower price (stated by 2 out of 3 respondents); faster service; better quality; to help someone who is in need of money Most frequent suppliers of undeclared goods and services: friends, colleagues and acquaintances (almost 40% of cases); other private persons and households High social embeddedness of undeclared transactions Undeclared economy mostly represents a substitute for the regular market

Undeclared work from the supply side House repairs/renovations; domestic services; babysitting; car repairs Most important reasons: normal way of doing things among friends/colleagues/relatives; both parties benefited; to help someone who is in need of money Lack of formal employment mentioned only by every fourth respondent (except for FYR Macedonia) Most frequent buyers of undeclared goods and services: friends, colleagues and acquaintances (more than 50% of cases in Croatia); other private persons and households

Determinants of propensity to conduct undeclared work in Croatia, results of the logit model

Envelope wages 4 types of workers: This type of employment is so normal in our country that you do not even think that it could be any different. It has never occurred to me to go to my boss and start complaining about this. Of course I would like to be completely declared, but I am not sure if this is ever going to happen. (cook, 23) The most important thing for me is the amount of money I get at the end of the month. It is less important how it will be paid. (gardener, 28) Everything was so logical and there was no reason for someone to say: ”Wait people, in this way we are cheating the state“. Who would even start thinking about that? I mean, that would be silly. For us it would have been a more serious offence if someone inside the firm had stolen an eraser or pencil. Yes, that would have been more problematic behaviour from our standpoint. How should one say this - cheating the state is one completely abstract wrongdoing. (former manager, 67) They [the state officials] are stealing from us, so why would not we steal from them? I do not want to give anything to this state. I do not want to and that is the end of the story. (contruction worker, 25)

Envelope wages (2) Figure 5 Predicted probability of a ‘representative’ Croatian worker receiving envelope wages: by tax morale and age Source: Franić (2017)

Pulling strings to have things done Medical services; finding a job; repairs (housing, vehicles) The most important reasons: to receive service without queuing; to reduce price; to improve quality; to get information Friends by far most frequently provide illegitimate help/favour (relatives and neighbours to much lower extent) This practice rarely entails financial remuneration

Undeclared work vs pulling strings Figure 6 Probability to be engaged in pulling string activities in Croatia for a ‘representative’ Croatian citizen depending on their age and participation in the undeclared economy from the demand side Source: Franic and Williams (2017)

Conclusion Tax morale and the perceived commonality of undeclared work (i.e. the lack of vertical and horizontal trust) are key determinants of illegitimate behaviour Deterrence exerts weak influence on behaviour of individuals Social ties play an essential role in unregistered economic transactions Undeclared economy mostly serves as a parallel universe to the declared economy, offering a similar range of goods and services but for a lower price than the formal market Yet, undeclared work has an important role in making ends meet for many individuals

Thank you for your attention http://www.grey-project.group.shef.ac.uk/