THE SIZE AND DETERMINANTS OF THE UNOFFICIAL ECONOMY IN CROATIA Prepared by Davor Mikulić Zagreb, Semptember

Scope of the paper Overview of unofficial economy estimates in Croatia and new member states (NMS) – –Exhaustiveness of national accounts results – –MIMIC approach estimates Identification of UE determinants 2

Non-exhaustiveness types (national accouts approach): N1 – Deliberately non-registered (underground ) N2 – Illegal producers N3 – Not required to register N4 – Legal persons not surveyed N5 – Registered entrepreneurs not surveyed N6 – Producers deliberately misreporting N7 – Other statistical deficiencies 3

MIMIC approach (Schneider) Structural model: determine the relationship between an unobservable variable (unofficial economy) and a set of indicators related to UE Indicators: GDP, money in circulation, participation rate Causes: size of government, share of direct taxation, fiscal freedom, business freedom, unemployment rate, government effectiveness 4

5 Estimates of unofficial economy in Croatia

6 Is Eurostat approach conservative? EurostatMIMIC bil. HRK2393 Unofficial economyUE, as % of category GDP3307,028,2 GVA2788,333,5 GVA before UE2559,136,5 Imputed NA items (dwelling rents, FISIM…)30 GVA before imputed NA items22510,341,4 GVA, government units50 GVA - GOV - IMPUTED17513,253,2 GVA, FIN INST16 GVA, LARGE ENT (50+)95 GVA, SMALL UNITS (<50)6436,3146,0 Monetary household income (HBS)12019,377,5

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8 Reference period Adjustment for NOE in national accounts Buehn, Schneider (2012) Ratio Buehn, Schneider (2012) NOE NMS Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovenia Slovakia OECD-EU6,218,66,4 Austria20017,99,71,2 Belgium20023,022,07,3 Ireland19984,016,14,0 Italy200314,827,01,8 Netherlands19951,013,3 Spain200011,222,72,0 Sweden20001,319,214,8 Croatia200010,133,43,3 Comparison of UE estimates

9 Unoffical economy and GDPpc

10 Unoffical economy and corruption

Econometric tests of determinants of UE in new member states Depedent variable: UE NOE (model 1) and UE MIMIC (model 2) Period: Panel data – fixed effects yi,t =α +βXi,t + ei,t (1) yi,t =α +βXi,t + ei,t (1) 11

Determinants of the unofficial economy in economic literature Burdens on the official economy; Public sector services; Tax morality and government controls; Labour market conditions; Structural factors. 12

13 Variable Dependant variable: UE estimates based on MIMIC approach Dependant variable: UE estimates based on Eurostat approach Estimated parameters Constant41.036*** (43.01)5.34*** (2.94) Government spending *** (2.92)0.196 *** (3.98) Index of economic freedom *** (-5.67)0.153*** (4.49) GDP per capita *** (-13.57) *** (-5.41) Freedom from corruption ** (-2.21) *** (-3.12) Adjusted R ,933 Redundant cross section fixed effects LR testF statistics (p-value) *** (0.000)92.24*** (0,000) Number of observation132 Causes of unofficial economy in new EU member states and Croatia

CONCLUDING REMARKS Significant differences in UE in NMS Significant differences in UE in NMS Exhaustiveness of national accounts results in lower estimate of unofficial economy in comparison to MIMIC Exhaustiveness of national accounts results in lower estimate of unofficial economy in comparison to MIMIC Lower variability in MIMIC estimates for individual countries Lower variability in MIMIC estimates for individual countries Government expenses, as broadest indicator of costs government posed to the official economic units, turned to be more significant than revenues Government expenses, as broadest indicator of costs government posed to the official economic units, turned to be more significant than revenues Improvement in overal institutional framework reduces the share of unofficial economy Improvement in overal institutional framework reduces the share of unofficial economy Official and the unofficial economy in NMS are substitutes not complements Official and the unofficial economy in NMS are substitutes not complements Impact of economic freedom is unclear Impact of economic freedom is unclear 14

Thank you! ☺ 15