Josip Franic

Explaining the Undeclared Economy in Bulgaria: An Institutional Asymmetry Perspective

Abstract This paper proposes a way of explaining the undeclared economy that represents participation in undeclared work as a violation of the social contract between the state and its citizens, and as arising when the informal institutions comprising the norms, values and beliefs of citizens (civic morality) do not align with the codified laws and regulations of a society’s formal institutions (state morality). Drawing upon evidence from 1,018 face-to-face interviews conducted in Bulgaria during 2013, the finding is that the greater is the asymmetry between formal and informal institutions (i.e., citizens’ civic morality and state morality), the greater is the likelihood of participation in the undeclared economy, and vice versa. The outcome is that tackling the undeclared economy requires a focus upon reducing this lack of alignment of formal and informal institutions. How this can be achieved in Bulgaria in particular and South-East Europe and beyond more generally, is then discussed.

Tackling the Propensity towards Undeclared Work: Some Policy Lessons from Croatia

Abstract The aim of this paper is to evaluate contrasting policy approaches towards undeclared work. To do so, evidence is reported from 1,000 face-to-face interviews conducted in Croatia during 2013. Logistic regression analysis reveals no association between participation in undeclared work and the perceived level of penalties and risk of detection, but a strong association between participation in undeclared work and the level of tax morality. It thus confirms recent calls for the conventional direct controls approach, which seeks to deter engagement in undeclared work by increasing the penalties and risk of detection, to be replaced by an indirect controls approach which seeks to improve tax morality so as to encourage greater self-regulation and a culture of commitment to compliance. The implications for theory and policy are then discussed.

Undeclared Work in Croatia: A Baseline Assessment

The aim of this report is to evaluate the extent and nature of undeclared work in Croatia and the policy approaches and measures currently employed to tackle this sphere.Extent and nature of undeclared workIn recent years, there have been substantial efforts to reduce undeclared work in Croatia. Faced with significant deficits in the public budget, the government has sought effective policy responses that would result in increased compliance. Nonetheless, it is hard to know whether these strategies are resulting in a decrease in the prevalence of undeclared work. While some studies of the magnitude of undeclared work suggest that it is continuing to decline in size, others suggest that the trend is in the opposite direction.Examining the nature of the undeclared economy, the 2013 Eurobarometer Survey on undeclared work highlights how much undeclared work in Croatia is for and by close social relations; 57% of the respondents who were carrying out these activities stated that the purchasers were their friends, colleagues or acquaintances. Generally, individuals with a lower level of education are the most susceptible for carrying out undeclared work in Croatia. Men, moreover, are almost three times more likely to work undeclared than women. Nearly one third of people engaged in undeclared work are manual workers, and almost every fourth undeclared worker is unemployed, while about every seventh undeclared worker is retired. Therefore, these three groups, namely manual workers, unemployed people and the retired, represent about 70% of all undeclared workers in Croatia. This will be important when designing policy responses.Turning to the firm level, the findings are that those in agriculture and related industries are the most likely to recognise competition from unregistered or informal firms as a serious obstacle to their business. In addition, small and medium-sized firms are far more likely to identify the existence of the unregistered units in their sector than are large firms. Finally, domestic owned and non-exporting businesses more often witness the presence of unregistered firms and the constraints caused by them in comparison with exporters and firms in foreign ownership.The most common reason for individuals engaging in undeclared activities is the lack of formal employment opportunities, indicating that unemployment is the central issue that requires consideration when combating undeclared work in Croatia. In the case of retired individuals, there are two subgroups highly susceptible to engagement in undeclared work. Those with a small pension find their incentive in an insufficient level of income, while privileged ones, who took early retirement, are often motivated by the surplus of time. The most salient features of the labour market that provide disincentives for formal employment are the high tax burden and benefit traps. From the perspective of businesses, the main obstacles to formalisation are the non-transparency and instability of the tax system, followed by complexity of administrative procedures.An important additional factor fostering informality in Croatia, so far neglected in endeavours to tackle this phenomenon, is the low level of tax morale. Particularly concerning is the fact that young people are the most prone to opportunistic non-compliant behaviour, indicating a possible long-term trend in such a high share of undeclared work. Having in mind that 9% of people surveyed in the European Values Study are highly tolerant of cash-in-hand activities, and 7.1% highly tolerant of tax evasion (with an additional 23.2% and 14.8% respectively tolerant of these activities to some extent), one can conclude that socio-cultural factors play an important role in making decisions about (non)compliance in Croatia.Institutions, policy approaches and measuresA low level of trust in public institutions in Croatia suggests that the government should revise its tactics when tackling undeclared work. So far, repression has been the most prevalent approach. Nevertheless, as Walsh (2012) argues, practicing repression in situations when there is a weak psychological contract between citizens and the authorities can additionally deteriorate the willingness of citizens to comply and consequently result in even higher levels of non-compliant behaviour. Therefore, there is a need to put greater emphasis on an enabling compliance approach, especially on commitment and curative measures, which do not appear to be fully recognised as effective strategies in a Croatian context.An additional problem in this regard is the weak coordination among ministries and various government departments when pursuing the fight against undeclared work. Each of them defines their own separate targets and this often results in an overlapping and/or awkward division of responsibilities. This raises a need for reorganisation of the existing institutional system in order to achieve better efficiency. One viable option is the establishment of a central coordination body, which would harmonise activities in this field. In that regard, one might argue whether a recent reform in the inspection system was indeed a move in a positive direction, or whether it will result in the deteriorated effectiveness of enforcement. A further problem is the weak social dialogue in Croatia in this context characterised by numerous disputes between the government and trade unions. As such, tripartite social dialogue currently has a limited role in tackling undeclared work, therefore representing a further area for the achievement of a significant improvement.

Evaluating the policy approach towards the undeclared economy in FYR Macedonia

This paper evaluates how the undeclared economy is being tackled in FYR Macedonia. Reporting the findings on the extent and nature of the undeclared economy in this country, FYR Macedonia is shown to have the largest undeclared economy of all European countries and such work is prevalent across all sectors and business types. Examining how the undeclared economy is being tackled, it is revealed that there is a need not only to move away from the current fragmented approach by establishing a single agency or committee to better coordinate the fight against undeclared work in FYR Macedonia but also for a shift away from the current focus upon deterrents and for more attention to be paid to a wider range of measures that enable undeclared work to move into the declared economy. Unless such an approach is pursued then it is likely to remain difficult to make further headway in tackling undeclared work.

Beyond a Deterrence Approach towards the Undeclared Economy: Some Lessons from Bulgaria

Abstract Until now, the undeclared economy has been tackled in Balkan countries by increasing the penalties and risk of detection so as to deter participation. Recently however, calls have been made for a new more indirect approach that improves tax morale in order to foster a culture of commitment to compliance. The aim of this paper is to evaluate these contrasting policy approaches. Reporting evidence from 1018 face-to-face interviews conducted in Bulgaria during 2013, logistic regression analysis reveals no association between participation in undeclared work and the perceived level of penalties and risk of detection, but a strong association between participation in undeclared work and the level of tax morale. The paper concludes by discussing the theoretical and policy implications of the findings.

Tackling undeclared entrepreneurship in a transition setting: the case of Croatia

This article argues that informal entrepreneurship in Croatia is part of a wider problem of undeclared work arising from incongruence between formal and informal institutions. It is therefore argued that settings similar to the one Croatia finds itself in should focus on indirect approaches that seek to improve the tax morale of enterprise owners, as well as its citizens more generally. Specific recommendations emphasising the improvement of formal institutions (such as improving administrative capabilities and increasing transparency) as well as awareness raising and knowledge improvement of citizens are outlined as based on the identified problems.