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

2. 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

3. The Colors of Hidden Economy
official
criminal

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

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

6. 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 – registration of labor contacts & social security contributions thresholds
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
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.

7. 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

8. 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

9. 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

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

11. 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.