Study „Shadow Economy Index for the Baltic Countries 2009 ... · Study „Shadow Economy Index...

Study„Shadow Economy Index for the

Baltic Countries 2009-2015”Dr. Arnis Sauka

Director of the Centre for Sustainable Business at the Stockholm School of Economics

Authors of the study

Dr. Tālis J. Putniņš, SSE Riga and UTS Business School, [email protected]

Dr. Arnis Sauka, SSE Riga, [email protected]

Since 2009:

What is the size of the shadow economy in Latvia, Lithuania, and Estonia?

What are the main determinants of the shadow economy?

What can be done to reduce the shadow economy?

Latvia Lithuania Estonia

2014 23,5% 12,5% 13,2%

2013 23,8% 15,3% 15,7%

2012 21,1% 18,2% 19,2%

2011 30,2% 17,1% 18,9%

2010 38,1% 18,8% 19,4%

2009 36,6% 17,7% 20,2%

Shadow Economy Index for the Baltic countries (% of GDP)

all legal production of goods and services that is deliberately concealed from public authorities.

According to OECD (2002), World Bank (2010), SNA (1993)

Shadow economy:

“Direct survey method”: interviews with company owners/ managers in the Baltic countries

Entrepreneurs as experts

(i) They know best and (ii) can share information about the size of the shadow economy

The Index does not include ‘black economy’

Study

Since March/ April 2010

In 2016 about 2015 and 2014

About 500 telephone interviews in Latvia, 500 in Lithuania, 500 in Estonia every year

Random sampling, Orbis database

Partial panel data

The same respondents (1/3) + other company owners/ managers selected randomly (2/3)

Interviews performed by SKDS

Study

The Index is based on the revenue approach in measuring GDP (there are also size and expenditure approaches):

GDP = gross income of the employees + gross income from the firms’ economic activity

The Index is calculated in 4 stages

Study

Underreporting of business income (profits)

Underreporting of the number of employees

Envelope wages

% of revenue spent on payments ‘to get things done’: bribery

% of the contract value paid to secure a contract with the government: corruption

Key components of the shadow economy

Since 2015, we also measure the proportion of unregistered enterprises in Latvia, Lithuania, and Estonia

Non-observed or unreported economy = Shadow economy + Unregistered enterprises + Black economy

Novelty

Probability of being caught and the consequences

Tolerance towards:

Tax avoidance

Bribery

Experience of the owner/ manager; and other

Sector and region

Company size

Satisfaction of entrepreneurs with:

Tax policy

SRS performance

Business legislation

Government support

Determining factors

Questions regarding shadow activity are sensitive, even if asked indirectly

‘In your sector’ rather than ‘in your company’

Consequent approach in asking the questions in the survey

Excluding inconsistent responses

Methods to increase reliability of the results

Size of the shadow economy in Latvia, Lithuania, and Estonia2009 – 2015 Results


2015-2014 -2,2% +2,5% +1,7%

2015 21,3% 15,0% 14,9%

2014 23,5% 12,5% 13,2%

2013 23,8% 15,3% 15,7%

2012 21,1% 18,2% 19,2%

2011 30,2% 17,1% 18,9%

2010 38,1% 18,8% 19,4%

2009 36,6% 17,7% 20,2%

Shadow Economy Index for the Baltic countries (% of GDP)

0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %

45 %LV

LT

EE

2015201420132012201120102009

17,7

36,6

20,2

38,1

19,4 18,9

30,2

23,8

15,719,2

21,1

18,817,1 18,2

15,3

23,5

13,2

12,5

21,3

15,0

14,9

Dynamics of the shadow economy in the Baltic countries2009-2015

Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015

Components of the shadow economy in 2015


Envelope wages

59,0 %

Unreported employees

20,3 %

Unreported business income

20,7 %

Envelope wages

34,9 %


20,7 %


44,4 %

Envelope wages

42,3 %


19,7 %


38,0 %

LVEE

LT

0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %LV

LT

EE

2015201420132012201120102009

11,1

31,7

15,9

33,7

16,6 16,0

26,5

19,9

11,815,7

16,7

11,4

19,9

10,5

7,5

21,7

9,4

6,79,7

13,010,3

Underreporting of business income,2009-2015 (average share of revenue in % that companies conceal from the government)


0 %

2 %

4 %

6 %

8 %

10 %

12 %

14 %

16 %LV

LT

EE

2015201420132012201120102009

7,4

14,6

9,6

14,6

9,7 9,7

11,610,3

8,18,1

9,7

7,97,3 7,6

6,4

9,6

7,6

5,4

9,6

6,6

5,7

Underreporting of the number of employees, 2009-2015 (average share of the employees in % working without a contract)


0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %LV

LT

EE

2015201420132012201120102009

15,0

34,0

19,5

35,5

19,6 19,4

29,1

25,2

17,1

22,1

26,5

15,817,4

19,3

15,5

17,917,7

15,2

20,3

13,6

12,2

Envelope wages, 2009-2015 (average share of salaries in % which is paid by the employers, but concealed from the government)


% of payments ‘to get things done’, 2009-2015 (average percentage of revenue paid as ‘bribes’)


0 %

2 %

4 %

6 %

8 %

10 %

12 %

14 %

16 %LV

LT

EE

2015201420132012201120102009

5,8

10,4

10,1

10,8

9,3 8,9

12,9

10,5

10,3

8,7

14,0

5,6 5,5 5,64,7

12,7

7,6

3,0

10,2

9,8

3,4

0 %

2 %

4 %

6 %

8 %

10 %

12 %LV

LT

EE

201520142013201220112010

2,2

9,5

5,9

3,7

10,9

5,6

11,5

4,5

6,6

7,68,1

6,27,5

8,6

3,4 5,0

4,9

% of the contract value paid to secure contracts with the government, 2010-2015



2015 5,2% 7,3% 5,8%

2014 5,6% 5,2% 6,3%

2013 5,4% 6,2% 7,6%

Proportion of unregistered enterprisesin the Baltic countries, 2013-2015

Size of the shadow economy in the regions, sectors, companies of different sizes


0 % 5 % 10 % 15 % 20 % 25 % 30 % 35 %

Rīga

Kurzeme

Vidzeme

Zemgale

Latgale

18,2

14,7

15,6

28,9

29,0

Size of the shadow economy (% of GDP) by region in Latvia (average, 2013-2015)


0% 2% 4% 6% 8% 10% 12% 14% 16%

14,6

13,6

14,9

14,5

12,1

Vilnius

Kaunas

Klaipėda

Šiaulai

Panevėžys

Size of the shadow economy (% of GDP) by region in Lithuania (average, 2013-2015)


0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Harju maakond

Ida-Viru maakond

Jõgeva maakond

Järva maakond

Lääne maakond

Lääne maakond

Lääne-Viru maakond

Põlva maakond

Pärnu maakond

Rapla maakond

Saare maakond

Tartu maakond

Valga maakond

Viljandi maakond

15,516,5

40,8

20,2

15,5

18,518,5

3,1

12,8

18,3

9,5

26,514,5

12,520,1

Harju maakond

Ida-Viru maakondHilu maakond

Jõgeva maakondJärva maakond

Lääne maakondLääne-Viru maakond

Põlva maakondPärnu maakondRapla maakondSaare maakondTartu maakond

Valga maakondViljandi maakond

Võru maakond

Size of the shadow economy (% of GDP) by region in Estonia (average, 2013-2015)


Size of the shadow economy (% of GDP) by sector (average, 2013-2015)


0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %

45 %

LV

LT

EE

ConstructionServicesRetailWholesaleManufacturing

11,9

19,7

12,5

19,0

13,011,6

24,9

40,0

19,9

15,3

21,6

16,7 16,6 17,220,1

Size of the shadow economy (% of GDP) by firm size (number of employees) (average, 2013-2015)


0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

LV

LT

EE

200+51-20021-5011-206-101-5

21,8

28,5

15,7

29,1

15,9 15,9

20,2

26,2

21,722,1

15,6

11,0

14,2

21,819,3

14,2 14,112,7

Main determinantsof the shadow economy

Greater probability of being caught not paying taxes and more serious consequences fewer entrepreneurs getting involved in shadow economy activities

Statistically significant determining factors (using regression analysis)

Main determinants of the shadow economy

0

10

20

30

40

50

60 LV

LT

EE

76-10051-7531-5011-301-100

16,2

7,6

1,0

7,9

2,47,5

10,5

42,6

52,6

21,7

8,3 7,19,7 11,0

28,5

14,8

24,326,3

LVLTEE

Probability of being caught

Probability of being caught for underreporting business profits, 2015


0 %

10 %

20 %

30 %

40 %

50 %LV

LT

EE

Company willcease operations

Serious fine,risk insolvency

Serious fine,affects competitiveness

A small fineNothingserious

7,84,02,3

14,9

10,3

39,142,1

13,9

25,0

29,7

19,2

25,6

29,8

17,6 18,6

Consequences if caught for deliberate misreporting, 2015


Dissatisfaction more shadow activity

Involvement in shadow economy is greatly determined by dissatisfaction with:

Business legislation (greatest effect)

Performance of SRS

Tax policy

Government support (least effect)



Satisfaction with the State Revenue Service, 2010-2015


0 10 20 30 40 50 60 70 80 90 100

LV2010LV2011LV2012LV2013LV2014LV2015

LT2010LT2011LT2012LT2013LT2014LT2015

EE2010EE2011EE2012EE2013EE2014EE2015

Unsatisfied

Neither nor

Satisfied54,6 27,6 17,863,0 24,0 13,0

62,0 24,4 13,665,0 25,6 9,464,9 26,8 8,3

66,8 25,1 8,1

50,7 26,8 22,663,5 21,8 14,7

46,1 35,3 18,664,0 35,3 9,5

60,7 26,4 10,250,6 33,6 15,8

57,9 28,9 13,356,9 30,0 13,1

60,4 22,1 17,558,4 23,6 17,9

42,7 36,5 20,741,9 36,4 21,7

Satisfaction with the government’s tax policy, 2010-2015


0 10 20 30 40 50 60 70 80 90 100

LV2010LV2011LV2012LV2013LV2014LV2015

LT2010LT2011LT2012LT2013LT2014LT2015

EE2010EE2011EE2012EE2013EE2014EE2015

29,4 23,8 46,825,6 27,0 47,4

40,2 19,0 40,843,6 24,4 32,0

39,0 31,3 29,749,0 32,1 18,9

24,4 37,1 38,525,4 34,3 40,3

15,6 42,2 42,222,0 36,8 41,2

18,0 31,1 50,921,7 26,2 52,1

25,6 24,2 50,315,5 22,3 62,2

17,6 21,7 60,722,2 16,8 60,9

11,4 18,2 70,55,7 18,6 75,7

Unsatisfied

Neither nor

Satisfied

Satisfaction with the quality of business legislation, 2010-2015


0 10 20 30 40 50 60 70 80 90 100

LV2010LV2011LV2012LV2013LV2014LV2015

LT2010LT2011LT2012LT2013LT2014LT2015

EE2010EE2011EE2012EE2013EE2014EE2015 36,4 36,2 27,4

41,2 31,2 27,651,6 22,6 25,851,2 30,0 18,8

48,0 37,9 14,150,6 36,5 12,9

31,1 49,5 19,432,6 33,8 33,6

22,2 45,7 32,123,7 42,9 33,3

18,4 42,1 39,524,4 37,5 37,9

30,0 34,2 35,825,3 39,4 35,3

29,2 29,2 40,632,0 28,1 39,9

25,1 34,9 40,017,7 44,2 38,2

Unsatisfied

Neither nor

Satisfied

Satisfaction with the government’s support to entrepreneurs, 2010-2015


0 10 20 30 40 50 60 70 80 90 100

LV2010LV2011LV2012LV2013LV2014LV2015

LT2010LT2011LT2012LT2013LT2014LT2015

EE2010EE2011EE2012EE2013EE2014EE2014

18,4 33,6 48,011,2 30,8 58,0

27,0 33,6 39,426,6 34,2 39,2

24,9 34,9 40,132,6 38,0 29,4

14,4 36,1 49,517,2 33,1 49,7

18,2 40,2 41,715,5 30,4 54,1

11,7 28,0 60,211,9 27,4 60,7

16,0 29,7 54,313,9 27,2 58,9

13,8 30,6 55,718,5 18,4 63,1

11,7 21,4 66,98,2 24,3 67,5

Unsatisfied

Neither nor

Satisfied

Greater tolerance towards involvement in shadow economy greater involvement in shadow economy

Smaller firm size greater involvement in shadow economy

In Latvia, the Russian speaking community gets involved in shadow economy more often



Main conclusions

In contrast with the long-term trend, the shadow economy in Lithuania and Estonia increased in 2015. Latvia saw a modest decrease in the shadow economy in 2015.

The decrease of the shadow economy in Latvia is due to a decrease in the two key components – envelope wages and unreported revenue.

Shadow economy in Latvia is still considerably higher than in Lithuania and Estonia.

Main conclusions

In all three Baltic countries, however, particularly in Latvia, the construction sector has large shadow economy.

Enterprises in the three Baltic countries are still relatively satisfied with the work of SRS, but not satisfied with the government’s tax policy and its support to entrepreneurship.

Activity of unregistered enterprises in the Baltic countries in 2015 accounted for 5-7 % - this is also a significant problem since some of the taxes here are not paid at all.

Main conclusions

Our results indicate that especially in Latvia the policy makers have to continue the work aimed at reducing the shadow economy.

Reforms in combatting shadow economy should focus on misreporting of business income, as well as the construction sector.

Main conclusions

In Estonia, the major component of the shadow economy is unofficial ‘envelope’ wages, which make up as much as 60% of the total shadow economy.

In terms of bribery, Lithuania stands out from the other two countries as having the highest level, and has witnessed an increase in 2015 in both general business bribery and specifically government bribery.

Main conclusions

Thank you!

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