Reducing the Hidden Economy in Bulgaria – Policies, Impact and Lessons Ruslan Stefanov Project Coordinator Federal City Council Washington D.C., April 19th, 2004

The Bulgarian Path Hidden economy declined steadily since 1997 Public-private partnership and international (incl. U.S.) support a key factor for success Challenges - need for further attention

The Colors of Hidden Economy official criminal

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

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

Public-Private Action The Private Sector – 2001/2002 – series of high-profile public and policy events critical test for success: mechanisms for keeping government on the right track Ministry of Labor and Social Policy – 2003 - registration of labor contacts & social security contributions thresholds 300 000 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 – 2003 - customs reform & revenue agency customs revenue increased by 18% and fraud detection by 70% critical test for success: closure of major sources of informality Most of the actions taken by the Ministry of Labor and Social Policy and the Ministry of Finance were prompted by CSD reports delivered at two international conferences in April and November 2002, which showed that informal economy and its connections to illegal activities hamper the economic development of the country. Here I have briefly presented the major actions taken by the government and the results the administration claims to have achieved CSD put two critical test for long-term success of such actions. It seems government has failed to achieve them so far.

The Index 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

Index Dynamics What we see is a reverse in business response to government policies. While strong administrative pressure from the MLSP resulted in a steady fall in all components of informal economy in the beginning of 2003, failure on the side of the government to deliver on promises to lower tax and social security burden and to act aginst major sources of informality (duty free shops) results in a revision of business policy on informality. Though the reversal is still small it might be expected to pick up. Source: Coalition 2000

Index Components’ Dynamics These are components of the Informal Labor (spending of hidden revenue) and Hidden Turnover (sources of hidden revenues) Sub-Indices. It would be expected that Informal Employment and Corruption payments go up whenever Hidden Turnover goes up. Source: Coalition 2000

The Hidden Economy – Policy Response & Lessons 2002/2003 1999/00 1996/97 >50% ~35% ~25% Economic policy Admin. policy ?

THANK YOU Informal economy is a dynamic phenomenon, which illustrates the degree of compliance of informal social relations to formally imposed rules. Government measures to counter informal economy have to take account of this notion to be sustainable in the long run.