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.
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