I. The Grey Economy and the Reliability of Economic Data
I would like first of all to make some general comments on the general topic of the size and measurement of the grey or hidden or 'non-observed' economy in regard to its implications for the accuracy of national economic statistics. We all are aware that the grey economy is very important component in the economies of Bulgaria and many other countries. But we are also very aware that it is quite difficult to make reliable estimates of its size. The estimate for Bulgaria cited in Dr. Enste's paper ("The Shadow Economy and Institutional Change in EU Accession Countries") is about 36%. Other estimates are for 20-22%, others even lower. There have been a wide variety of estimates for other countries as well. The obvious implication is that with the major uncertainties about the size of the grey economy, one cannot be very confidant about just what the actual GDP of Bulgaria is. And the same applies to many or most of the other countries of the world.
In my opinion this problem of the accuracy, or inaccuracy, of economic observations simply does not receive the attention it deserves. Economists as well as politicians often appear just to ignore it. Many economists want to ignore it because the uncertainties may cast doubt on the validity and usefulness of their econometric studies. Sophisticated statistical techniques using unreliable data will obviously not provide reliable conclusions, which means that economists will often tend to ignore the data problems. They are, as a colleague once noted, in the position of restaurant customers, who would rather not know very much about the conditions in the slaughter houses that produce the meats they are consuming.
Politicians also often want to ignore the economic data problem. In their case it is usually because they just prefer simple, or simplistic, answers and do not want to hear about messy problems. Yet in many cases data problems may be very important for economic policies. An obvious case is the IMF's program for Bulgaria. Many policy discussions and controversies have centered around maintaining tight fiscal policy because of projected deficits in the current account of the balance of payments. Yet we can have very little confidence in the accuracy of either the current account deficit or the GDP figure. The current account balance is the difference between two much larger figures for goods, services, and transfers credits and debits. Relatively small percentage 'errors' in those credits and debits will have very large impacts on the current account balance. With the known problems in customs data, not to mention difficulties in measuring tourist expenditures, the 'true' figure for the current account might easily be off by several hundreds of millions of dollars. And, as we know from the discussions of the grey economy, the 'true' GDP figure might also be substantially different from that officially reported.*
In fact, policy makers, as well as the economists at the IMF and elsewhere, are in much the same position of a businessman trying to run his company without any clear idea even of his bank account, not to mention his total assets and liabilities. It is little wonder that there are many policy surprises: as major uncertainties in national economic data mean major uncertainties in appropriate economic policies. I believe that improvements in data collection and compilation techniques should be a much higher priority than is currently the case.

II. The Grey Economy and the Institutional Setting
I had the opportunity to read Dr. Enste's paper beforehand and found it a very useful survey of the existing literature regarding the causes and extent of the grey or underground economy. I also agree with the major conclusions of his paper. In order to reduce the scope of the underground economy and to keep it low, it is very important that the government be perceived as 'running a tight ship,' that is, thrifty and not given to wasteful programs and expenditures, that the taxation system be seen as fair and uncomplicated, that regulatory measures be kept to a minimum and not be arbitrary, and of course that official corruption be rooted out as much as possible.
I think it is worthwhile to emphasize how infectious the problem or disease of the underground economy is. If people think that 'everyone else' is succeeding in avoiding taxes and regulations, then obviously they will be very tempted to do it themselves. For otherwise they will see themselves not as normal, law-abiding citizens but as 'suckers,' or dummies ('naivnici') who get left behind, giving up their money to the government when others do not. The problem is self-perpetuating and self-reinforcing.
In the case of Bulgaria, the banking crisis and hyper-inflation of 1996-1997 and the privatization process both were important in extending and perpetuating the underground economy. Many people saw their savings and living standards drastically reduced while others, the 'credit millionaires,' made off with millions and now live comfortably abroad or in expensive villas in the suburbs. This massive policy failure on the part of the government obviously almost did not make ordinary citizens more willing to pay their taxes and abide by governmental regulations. This indirect effect of the monetary crisis is still being felt today, long after the reforms of 1997 had cured the immediate crisis.
The often times hasty and chaotic privatization process also contributed to the problem. For many Bulgarians, 'privatization' has become virtually a synonym for corruption. Related scandals continue to the present day and the recent report of the Post-Privatization Control Agency has detailed extensive monetary losses and legal violations from poorly timed, designed and executed privatizations. I might add that I think the World Bank and the IMF share some of the blame in this regard. Their strong pressures for rapid privatization, when the institutional structures were not up to the task of implementing that privatization in a relatively transparent and clean manner, were not helpful. In any case, many ordinary Bulgarians, becoming convinced that the wealthy often hugely benefited from corrupt privatizations, have become willing participants or candidate participants in the underground economy. Again, the indirect effects of the negative perceptions about the privatization process are long-lasting and difficult to overcome.