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!
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