Comments on the Shadow Economy and Institutional Change in EU Accession
Countries-A Two Pillar Strategy for the Challenges Ahead

First of all let me thank the Center for the Study of Democracy for organizing this conference, inviting many speakers and contributors from the academia and policymaking and let me thank for the invitation been given to me to share my comments before this audience.
When I was invited to participate at the conference I recalled that there are always economic topics as corruption, rent seeking, corporate and public governance, shadow economy etc. that because of the sharp public interest may be considered continuously attractive. I believe that was not the case for the CSD for organizing this conference. The organizers deserve to be congratulated for the good choice of speakers and contributors they made and let encourage them to continue
working hard on the same topic after the conference is finished.

Going back to the subject, at the moment when I took my first glance over Dr. Enste's paper I said to myself "what an important topic is that for country like Bulgaria". Going back couple of years ago when my BNB colleagues Kalin and Niki (Kalin Hristov, Nikolay Nenovsky) wrote their paper on the shadow economy they opened the floor for debates. They were able to convince that this subject is vital not only for general policy making but it is also critical for the central bank currency supply management. The approximate estimation of the shadow economy given in their paper was significant in terms both of GDP and demand for currency contribution. I am sure that was just the beginning and this is not the only applied work on the shadow economy in Bulgaria done in last few years.

There is no doubt that despite the significant economic progress Bulgaria has made during the last 5 years, shadow economy remains still policy and research challenge. Dr. Enste's paper is an important effort to address some questions that were not asked before. The paper consists of five main parts. In the first part the author proposes a definition of shadow economy and makes a distinction between other forms of illegal activities such tax evasion and illicit work. This gives focus of the research and defines the main subject. In the second part the subject is analyzed from evolutionary point of view applying different theories for the behavior of the government. The general equilibrium model, the "Leviatan State" model and new political theory approach are used.

In part three the main causes of the increase of the shadow economy are identified. The author points out: the rise of tax burden and social security contributions, the forced reduction of the working time and the decline in civic virtue and loyalty towards public institutions as main reasons for emergence of shadow economy in general case. Also, some of the specific causes in Eastern Europe are mentioned. Although, Eastern Europe doesn't depart much from the general case I would like to see more details analyzed here and I will make some suggestions later on. In part four the effects of the shadow economy on the official are identified. The author mentions some positive and negative outcomes various researchers have found. Among positive ones is the effect on consumer expenditures, some increase in indirect tax revenues, limits of the expansion of the government, and signaling effect on the political elite for lack of legitimacy. Negative evidences are the effect on the economic growth, reduction in the public services provision in the economy and reduction in the consumption efficiency of the public services. The last part of the paper suggests two possibilities for policy in order to prevent shadow economy from expansion. The first option is to achieve effectiveness of the moral suasion by encouraging freedom of speech and society reaction against shadow economy. However, my comment here is that it is easier to be suggested and much more difficult to implement into policy given some peculiarities in Eastern Europe.

Second, option is to discourage the "exit" toward shadow economy. The comment made above is relevant here as well.

Finally let me confess that I enjoy very much the way the author attacks the subject. Unlike, many researchers he uses different perspective attacking the problem. Instead of blaming the shadow economy or trying to convince how much it is bad for the welfare of the society he applies more balanced approach. This makes his efforts much more productive and beneficial for policy makers.

My suggestions for topics for further research are linked with the two behavioral proposals made in the text. I do agree that the two-pillar strategy to cope with the shadow economy is relevant and may be successful. However, I would like to see in details how this suggestion could be converted in policy under pre existing conditions in Bulgaria. For example I will mention without claim for completeness that instability of the value system, existence of general political uncertainty and short horizon in decision making, complemented with ineffectiveness of the executive and justice system as well as existence of huge manipulation power in media are the main hurdles here. Finding solution given these conditions makes task harder and challenging. However I hope it is a good direction for the CED researchers and its affiliates to go in the future.
Thank you for your attention!