The Shadow Economy in Europe, 2011 - HotNews.ro - Actualitate

22 Pages·2011·2.17 MB·English

Friedrich Schneider, Ph.D.
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The Shadow Economy
in Europe, 2011
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Friedrich Schneider, Ph.D.
Dr. Schneider is one of the leading experts on the shadow economy.
He has published multiple articles and books on the shadow economy. He
is a professor of economics and the chair of the Department of Economics
at Johannes Kepler University of Linz in Austria.
A.T. Kearney
A.T. Kearney is a global strategic management consulting firm known for
helping clients gain lasting results through a unique combination of strate-
gic insight and collaborative working style. The firm was established in 1926
to provide management advice concerning issues on the CEO’s agenda.
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in major business centres in 37 countries, including 25 offices in Europe.
A
t an estimated €2.2 trillion, Europe’s shadow economy is signifi-
cant. It ranges from 8 percent of GDP (gross domestic product) in
Switzerland and Austria to more than 30 percent in some Central
and Eastern European countries. Governments have devised clear objec-
tives to reduce this “other” marketplace, but the range of causes makes
finding a solution a complex task. A new study explores the structure and
impact of the shadow economy and evaluates the role that electronic
payments can play in reducing it.
The “shadow economy,” a blurry area of commerce More people are inclined to work outside
that includes legal activity hidden deliberately from the normal, legal framework as the global econ-
public authorities, is a part of everyday life almost omy continues to struggle. Therefore, it’s impor-
everywhere. A painter offers his work at a lower tant to understand the positive and negative
price by doing it outside the official economy and effects of the shadow economy, so countries
avoiding taxes. A bar owner accepts €5 for a glass can take the right steps toward capturing lost
of wine and doesn’t report the sale to authorities. revenues, protecting workers, and providing for
A construction company doesn’t report income to their citizens.
the government to avoid meeting legal standards, Within this context, A.T. Kearney and Fried-
such as minimum wage or safety regulations. rich Schneider, Ph.D., professor of economics
Although the exact size of the shadow economy and chairperson of the Department of Economics
is difficult to ascertain, our estimates put it at about at Johannes Kepler University in Linz, Austria,
€2.2 trillion in Europe in 2011.1 This is 5 percent conducted a study to explore the structure of
higher than the €2.1 trillion in 2007, and a full the shadow economy in Europe and identify
rebound from the shadow economy’s pre-crisis size. measures to reduce it. Dr. Schneider divided the
In Germany and France, this economy is about shadow economy into 12 industry sectors in six
one-eighth the size of the countries’ official GDP, European countries. A.T. Kearney analyzed the
but in less-developed Eastern European nations, data and evaluated the range of solutions used
such as Bulgaria, Croatia, Lithuania and Estonia, in countries around the world. The firm also
it’s 30 percent or more. explored which industry subsectors could benefit
1 Friedrich Schneider. “Size and Development of the Shadow Economy of 31 European Countries and 5 other OECD Countries from 2003 to 2011,”
September 2011 (http://www.econ.jku.at/members/Schneider/files/publications/2011/ShadEcon31.pdf). The calculation is for 2011 and encompasses
the 27 countries of the European Union plus Croatia, Norway, Switzerland, and Turkey, and OECD members Australia, Canada, Japan, New Zealand,
and the United States. The 2011 GDP estimates are taken from Eurostat.
A.T. Kearney | THE SHADOW ECONOMY IN EUROPE, 2011 1
most from the use of electronic payment systems practices governments are using to reduce the
to reduce the size and impact of the shadow effects of the shadow economy.
economy (see sidebar: About the Study).
The study, first completed in 2008, was The Size of the Shadow
updated in 2010 and 2011 to include more The shadow economy is the realm of legal business
insights into the impact of the global economic activities performed outside the purview of author-
crisis on the shadow economy, and to explore new ities. It doesn’t include illegal activities and crimes,
About the Study
Measuring the shadow economy is ine the relationships between this Country analysis. We selected
a complex science, and explaining all economy and several input factors, six focus countries with relevant
of the approaches would fill a science such as the share of direct taxation or shadow economies (Germany, Italy,
book. This overview provides a brief the social security burden. The model Poland, Romania, Spain and Turkey)
look at the methods we used in this consists of observed and unobserved and then divided each shadow econ-
study to measure the shadow econ- variables and specifies causal relation- omy into 12 sectors, based on our
omy of six countries: ships among the unobserved variables. research and questionnaires. We used
Direct. We analyzed publicly our own estimates to compare
available information about the Breakdown by Industry undeclared work against under-
shadow economy, such as information Segments reporting.
from anonymous surveys. Researchers The study broke down the shadow Sector analysis. We selected
found that survey participants were economy by industry segments to the three sectors with the highest
surprisingly honest and provided compare it to the official economy. share of sales underreporting, based
important details about the shadow This was difficult, because the Euro- on our estimates, and split them
economy. pean economy has different industry into 30 subsectors, based on official
Indirect. We used macro- classifications from the questionnaires. categories. As detailed question-
economic indicators of the real As a result, the researchers were naires weren’t available for each
economy to discern the shadow forced in some cases to exercise their subcategory, we used information
economy’s impact. Such approaches own judgment when dividing up on industry sub-sectors and
must rely on macroeconomic fig- industries, and some activities, such researcher judgment to produce
ures that often aren’t dependable or as entertainment and some house- an educated estimate.
suffer from systematic failures. These hold services, couldn’t be placed into Addressable areas. We identi-
figures include discrepancies between official categories. fied the most promising subsectors
national expenditures and income As there is no official breakdown for electronic payments by analyzing
statistics, differences between the of the GDP per industry segment, we the suggested amount of shadow
official and actual labor force, statis- used GVA (gross value added), which economy concentration (based on
tics on transactions and currency is the value of the goods or services the sector analysis), the size of the
demand, and comparisons between minus the cost of inputs used to pro- subsectors, and the potential impact
electricity consumption and the duce them. The difference between of payment systems. We determined
output of the real economy. GVA and GDP is mainly in the treat- this impact by deriving the number
Model or latent estimation. We ment of taxes and subsidies on prod- of low-value payments, current pen-
used a statistical technique called ucts or services. etration of electronic payments, con-
MIMIC (multiple indicators, multi- The following three-step approach venience of electronic payments,
ple causes) to create a structural model was used to evaluate areas most likely profit margins, and the share of
for the shadow economy and exam- to be helped by electronic payments: undeclared work.
2 THE SHADOW ECONOMY IN EUROPE, 2011 | A.T. Kearney
such as drug dealing, smuggling, money laundering economy.2 Undeclared work is widespread in
or embezzlement, or household enterprises that, construction, agriculture and household services,
by law, don’t need to be registered with the govern- such as cleaning, babysitting, elderly care and tutor-
ment. Figure 1 shows the extent of the shadow ing. According to a recent study by Dr. Schneider,
economy in the European Union by size and per- in Europe’s more developed economies, such as
centage of GDP. Germany, Italy and France Germany, 30 to 35 percent of the population has
account for about 40 percent of Europe’s shadow taken on second and even third jobs and doesn’t
economy. In Eastern Europe, the shadow economy declare the additional income to tax authorities,
is much larger in relation to the official economy costing the country billions of euros per year.
than it is in Western Europe. For example, Turkey, The other one-third comes from under-
with an official GDP of €553 billion in 2010, has reporting, which occurs primarily when cash-based
a shadow economy of about €156 billion. businesses, such as small shops, bars and taxis,
The shadow economy can be divided into report only part of their income to avoid some of
two parts. “Undeclared work,” which refers to the tax burden. This is common in cash-based
wages that workers and businesses don’t declare to businesses that require little documentation, such
the government to avoid taxes or documentation, as a bar owner taking money for a drink and not
accounts for about two-thirds of the shadow documenting it, or a plumber receiving cash for
Figure 1
The shadow economy in relation to total GDP
Western Europe Southern Europe Eastern Europe
2,477
s
n
o
billi€ 1,933 33%
1,697 1,549 28% 30% 30% 30% 27% 29%
25% 25%
23% 24%
22% 1,063
17%
19% 19% 16%
15% 15%
14% 14% 14% 17%
13%
11% 11% 588 399 554 EU-27 average: 19.5%
8% 8%
344 218 182 5910% 32 61353523474731223286 332342518020156 338 206 5823033173 157 9035424145361222398935144611661236827518414
Germany France U.K. Netherlands Switzerland Belgium Sweden Norway Austria Denmark Finland Ireland Italy Spain Greece Portugal Turkey Poland Czech Rep. Romania Hungary Slovak Rep. Croatia Slovenia Bulgaria Lithuania Latvia Estonia
Notes: Data for EU-27 (no shadow economy data on Cyprus, Luxembourg or Malta), plus Norway, Switzerland and EU candidate Shadow economy SShhadow economy
countries in 2010. The size of the shadow economy is calculated using the MIMIC and currency demand method. aass percentage of GDP
Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis Official GDP
2 The exact division between undeclared work and underreporting is just an estimate, as the data does not exist to draw a scientific conclusion.
A.T. Kearney | THE SHADOW ECONOMY IN EUROPE, 2011 3
his services at a private household without issuing factors that drive the shadow economy. In some
a receipt or declaring the income. cases, the benefits are shared between the payee
The shadow economy reached its all-time high and payer. A typical example is the tradesman who
of €2.2 trillion in 2007. Although it declined offers a cash discount to a customer. The customer
because of the economic and financial crisis— saves money on the work and the tradesman saves
slightly in 2008 and more significantly in 2009— money on the taxes. Undeclared work is difficult
the shadow economy has recovered and is rising to quantify, as it’s in the best interest of both sides
again. Governments indicate that the past two to remain hidden. In other instances, the benefits
years have brought setbacks in their efforts to rein are realized by only one side, usually the one
in the shadow economy, as unemployment and receiving payment. The bar owner who doesn’t
stagnating living standards have reduced compli- declare a beer sale, for example, might still charge
ance and created more incentives to engage in full price for the beer.
shadow activities. Recent hikes and
planned increases in value added tax
(VAT), personal income tax, social secu-
More people are inclined to
rity contributions, and corporate profit
tax have brought the shadow economy
work outside the normal, legal
back to pre-crisis levels. The only posi-
tive development is that the shadow framework as the global econ-
economy has grown at a slower rate than
the GDP. However, further increases are omy continues to struggle.
likely in 2012, especially in light of
recent economic turmoil and concerns
about a possible double-dip recession.
The research for this paper breaks down the Four main factors influence the size and scope
structure, scope and effects of the shadow econ- of the shadow economy in any given location:
omy in Europe. The study includes a scientific Savings. By working outside the active econ-
analysis of the shadow economy for a wide range omy, participants can avoid taxes and possibly
of industries in Germany, Italy, Poland, Romania, social security payments, circumvent tax and labor
Spain and Turkey. regulations, and sidestep paperwork. A strong
We examined various solutions proposed and causal relationship exists between a country’s tax
implemented by different countries and evaluated rate and the size of its shadow economy. “Saving
the role that electronic payments can play in money” by not paying the full taxes and, thus,
reducing the shadow economy. We divided each boosting the available personal income draws
industry into sub-categories and examined each people into this other economy, especially during
one to determine which areas would be most an economic downturn.
promising for electronic payments. Lack of a “guilty conscience.” The shadow
economy often is considered to be a normal part
What Lurks in the Shadows of society. This attitude is prevalent in places
It’s important to understand exactly who benefits where the perceived quality of state institutions
from such transactions when considering the and benefits is low, and in some Eastern European
4 THE SHADOW ECONOMY IN EUROPE, 2011 | A.T. Kearney
countries where there is little confidence in the in the shadow economy would likely vanish if
state. The benefits of the shadow economy also are forced to exist in the official economy. Indeed, in
immediate, while state benefits are usually indirect, Germany, more than two-thirds of services offered
collective or deferred. in the shadow economy would disappear or would
Ease of participation. Paying with cash makes be performed by customers themselves.3
it easier not to declare work. Since cash payments These positive factors make it difficult to
cannot be traced, they are used for both unde- quantify the exact toll the shadow economy takes
clared work and underreporting. Many Europe- on a country’s official economy. In any case, the
ans do additional undeclared work on the side and shadow economy is large and can’t be ignored by
receive payments in cash. any government, particularly in times of eco-
Low risk of detection. Participating in the nomic crisis.
shadow economy is illegal, but the less chance
there is of getting caught, and the lower the The Search for Solutions
penalties, the more people will consider the risk Governments are under pressure as slow growth
worthwhile. and high unemployment take their toll on fiscal
The difficulty of reducing the shadow econ- budgets. As a result, many European countries are
omy stems in part from its ambiguous role in debating the shadow economy and measures to
society. The shadow economy certainly has nega- curb it. When we originally studied this other
tive effects. For example, governments lose revenues economy in 2008, we interviewed more than 20
from income tax and social security contributions, public officials in Europe, including ministers of
and they cannot enforce safety rules outside the finance, tax authorities, and association leaders, to
official economy. This other economy also pro- determine measures used to limit the shadow
motes behaviors that have a negative impact on economy.4
society. These include inequality of competition, For this 2011 update, we explored the measures
which occurs when shadow services are signifi- introduced during the past decade and assessed
cantly cheaper than those from the official econ- their impact and effectiveness. We compared ideas
omy. It also promotes a “free-ride” attitude among among different countries and discussed possible
some citizens, who take official benefits without new measures in view of each country’s past track
paying for them. record and level of development. We also built on
Some of these negatives are offset by other, a broad database of more than 150 measures from
more positive factors, at least in terms of unre- around the world, including more than 120 from
ported work. For example, much of the money Europe.5
ends up benefiting the economy as a whole. The The findings reveal that most countries focus
study estimates that about two-thirds of shadow- foremost on curbing undeclared work and creat-
economy income is spent in the official economy. ing credible laws and penalties. Other measures
This boosts national economic growth and amasses focus on tax fraud, a crime that certainly is related
VAT, which makes up for at least part of the lost to the shadow economy but that isn’t considered
revenues. Additionally, many of the services offered part of the shadow economy. The broad spectrum
3 Friedrich Schneider. “Shadow Economies Around the World: What Do We Really Know?” European Journal of Political Economy, Vol. 21/3, September
2005, pp. 598-642.
4 Interviews took place in September 2008 by telephone and in person.
5 Eurofound, 2009. “Measures to tackle undeclared work in the European Union.” Dublin: European Foundation for the Improvement of Living and
Working Conditions.
A.T. Kearney | THE SHADOW ECONOMY IN EUROPE, 2011 5
of enforcement measures falls under two umbrellas, Positive enforcement (indirect and direct).
negative and positive.6 Some of the most powerful measures to curtail the
Negative enforcement. All new regulations, shadow economy are considered indirect. Primary
controls and penalties to limit the shadow econ- among these measures is revamping the tax and
omy by the force of law are considered negative social security systems to make them simpler and,
measures. These include identification cards for in some cases, cheaper. In Germany, for example,
construction workers, the forced use of electronic the government introduced “mini-jobs” reform,
payments, onsite visits by public authorities, or simplifying the red tape and taxes to encourage
tax audits by inspectors. These measures tend to be lower-wage workers, such as household servants,
unpopular, and their success depends on reliable to join the official economy. In the past several
enforcement and solid penalties. years, some Eastern European countries, including
The Decreto Bersani is a sweeping law passed Slovakia, Bulgaria and Romania, have introduced
in Italy in 2006 that imposed strict penalties on flat-tax rates for individuals and corporations and
shadow economy activities. It’s an example of reduced social security contributions to discourage
a powerful enforcement technique. Under this law, tax evasion.
the government can close a retailer temporarily Some countries use direct incentives to encour-
that fails to issue a sales receipt three times in age participation in the official economy, such as
a five-year period or it can shut down construction Belgium’s system of vouchers offered to workers in
sites if government inspectors find employment household jobs, or the Czech model of reduced
irregularities. Italy brought in €9.1 billion in addi- VAT rates for maintenance and repairs in private
tional tax revenues by enforcing receipts at retail- households. On top of the benefits of document-
ers along with other measures the government ing and legalizing income streams, the measure
added in 2009. also encourages homeowners to invest in their
More common measures include monetary homes by using specialists rather than opting for
penalties and the loss of benefits for shadow econ- do-it-yourself.
omy participants. In Poland, for example, compa- Some countries have produced strong results
nies that are caught employing undeclared workers by improving the lines of communication between
lose their eligibility for EU or government subsidies citizens and governments. In Denmark, the gov-
and must return any funding already granted ernment sponsored a marketing campaign designed
to them. In Portugal and Italy, doctors, lawyers and to illustrate the costs of the shadow economy
other professionals have been prosecuted following to citizens. It showed the harm caused by lost
probes by tax authorities of differences between tax tax payments and asked, “What if everyone
declarations and apparent living standards. worked undeclared?” In Portugal, the “Ask for
In 2011, Spain’s government launched a cam- a receipt” campaign sought to raise public aware-
paign against the shadow economy. As part ness about the impact of sales underreporting.
of broader measures, parliament approved a law Italy followed in 2011 with a message aimed at
that sharply increases fines for social security emphasizing the importance of tax revenue for
transgression. To highlight enforcement of the social life: “If everyone pays their tax, tax repays
measure, the Spanish government publicized everyone.” The results were promising througout
in the media the fines it imposed. the campaign, but long-term changes in behavior
6 European Foundation for the Improvement of Living and Working Conditions.
6 THE SHADOW ECONOMY IN EUROPE, 2011 | A.T. Kearney
require persistent communication. Such campaigns shadow economies than those with minimal levels
might have less effect in countries where the of electronic payments, such as Bulgaria and
shadow economy is an entrenched part of doing Romania. In his research, Professor Schneider
business. Still, they can bring the shadow econ- found that increasing electronic payments by 10
omy to the public’s attention and provide a forum percent can lead to a decline in the size of the
for reporting incidents. shadow economy by up to 5 percent. The conve-
Of the leaders interviewed, most understood nience of electronic payments and heightened
that enforcement was contingent not only on public awareness can bring behavior shifts within
measuring the shadow economy but
also on measuring the success of ini-
tiatives to curtail such economies.
Revamping the tax and social
Yet measurement can be elusive.
Tangible results could be discerned
security systems to make them
in just 10 percent of government
actions, either because the govern-
simpler and, in some cases,
ment action was too recent or it was
one of many variables in play.
cheaper are powerful ways to
Our research also reveals that
underreporting hasn’t been broadly curtail the shadow economy.
addressed in Europe. In fact, while
evaluating more than 120 measures
used to curtail the shadow economy
in Europe, we found that just a quarter focused on a considerable share of the population, particu-
sales underreporting. Even fewer measures consid- larly those who are “unconscious participants” in
ered the increased use of electronic payments. the shadow economy and receive no benefits from
merchants who underreport sales.
A World of Electronic Payments In reviewing measures used by countries
Cash is perhaps the most important enabler of the worldwide to curb shadow transactions, electronic
shadow economy, because it’s easy to use and diffi- payments produce tangible results. For example,
cult to trace. For example, bar owners or taxi drivers the Mexican government established a fund to
who deal primarily in cash can hide part of their subsidize the cost of electronic payment terminals
earnings easily from the government. Thus, elec- at small shops, leading to a 200 percent rise in
tronic payment systems make participating in the terminal penetration and a more than 300 percent
shadow economy more difficult, as these systems increase in POS (point-of-sale) transactions in five
produce documentation of the transactions. years. Colombia and Argentina instituted a sales-
In fact, as shown in figure 2 on the following tax discount for retail purchases made using elec-
page, a strong correlation appears to exist between tronic payment cards. South Korean tax authorities
the prevalence of electronic payments in a country offer their citizens a lump-sum refund if card
and its shadow economy. Countries with high lev- usage exceeds 20 percent of individual gross
els of electronic payment usage, such as the United income for credit cards and 25 percent for debit
Kingdom and the Netherlands, have smaller cards. South Korea has seen a phenomenal increase
A.T. Kearney | THE SHADOW ECONOMY IN EUROPE, 2011 7
in card usage in the past 20 years, from less than than €5,000. France and Turkey have similar lim-
5 percent of private consumption expenditures its on cash transactions, and Bulgaria followed
in the early 1990s to 25 percent in 2000 and more suit in 2010 with a law limiting cash payments
than 50 percent in 2009. at €7,500. Greece mandated receipts for corner
Europe seems to be waking up to the ways that stores, taxicabs and other traditionally cash-only
electronic payments can combat the shadow econ- businesses in 2010, and is planning to require
omy. However, aside from Italy’s Decreto Bersani, electronic payments for amounts above €1,500
most are limited in scope and primarily depend as of January 2012.
on strict controls and penalties for enforcement. Positive reinforcement measures developed to
The most frequent examples include mandatory encourage behavior by society still are limited, but
card terminals in sub-sectors commonly part increasing since we first published this report in
of the shadow economy, for example, taxis, 2008. Visa Europe recently launched a subsidized
restaurants and doctors. terminalization fund to increase POS penetration
More than 10 EU member states have banned among small- and medium-sized merchants in
surcharges on card payments during implementa- traditionally cash-driven industries. First reports
tion of the Payment Services Directive. In 2010, show impressive results. Some countries, including
Italy introduced compulsory electronic payment Singapore and the United Kingdom, have begun
for business-to-business transactions of more sending government payments electronically,
Figure 2
Countries with more electronic transactions have smaller shadow economies
Share of shadow economy (% of GDP)
40%
EU average = 156
35% Correlation: –0.77
Bulgaria
30% Romania Lithuania Estonia
Malta
Cyprus
25% Greece Latvia
Poland Hungary Slovenia
Italy
20% Spain Portugal
Belgium
Czech Republic Sweden
Finland
15% Slovak
Germany Denmark
Republic Ireland
France U.K.
10%
Austria Netherlands
5%
0%
0 50 100 150 200 250 300 350
Average number of electronic transactions per inhabitant per year
Notes: Data is for 2010. No data is available for Luxembourg.
Sources: European Central Bank, Interbank Card Center, Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis
8 THE SHADOW ECONOMY IN EUROPE, 2011 | A.T. Kearney