The Shadow Economy in Europe and Bulgaria How Payment Systems Help Limit the Shadow Economy Study Results Presentation October 2010 Prof. Dr. Friedrich Schneider Department of Economics
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Shadow economy is legal business with added value, conducted illegally Definition of shadow economy Sector
Official
Household
Irregular
Criminal
Practice
• legal
• legal
• legal
• illegal
Execution
• Legal
• legal
• Illegal1)
• illegal
Example
• "Normal" economy • Neighbourly help activities etc.
• Moonlighting: • Burglary, robbery, craftsmen, material drug dealing, etc.
Shadow Economy In Europe typically ~2/3 of the shadow economy
Components
In Europe typically ~1/3 of the shadow economy
Undeclared Work
Sales Underreporting
Mass phenomenon – estimated 30-35% of the working population is moonlighting (executing 2+ jobs)
Retail or commercial transactions not reported – partly connected to undeclared work (purchase of material)
1) Related income not declared to authorities Source: A.T. Kearney and Prof. Dr. F. Schneider
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With €2,200 bn and an average 22% of economic activity, the shadow economy in Europe is sizeable Size of shadow economy in relation to total GDP – 2009 (in € bn)1) 2,409
EU-27 average: 22%
1,907
1,563
42% 37%
32%
1,521
27%
27%
26%
25%
18% 15% 15%
15%
355 339 221 170
Ger- France UK many
29
20%
9%
8%
58
1,051 20%
60
293
45
19%
441
275 274 42
19%
14% 14% 13%
12% 11% 572 10% 352
35%
33%
22%
40%
38%
23
223 171 164 32 24 21
Ne- Switz- Bel- Swe- Nor- Aus- Den- Fin- Irether- er- gium den way tria mark land land lands land
Western Europe
335 205
237 59
310 168 33
Italy Spain Gree- Porce tugal
146
Turkey
84
137 116 93 43 26 24 12 63 16 45 10 35 13 34 9 27 8 19 5 14
Po- Czech.Roma- Hun- Slov. Cro- Slove- Bul- Lithu- Latland Rep. nia gary Rep. atia nia garia ania via
Southern Europe
Estonia
Eastern Europe Shadow economy Official GDP
1)
EU-27 (without Cyprus, Luxemburg, Malta), plus Norway, Switzerland and EU candidate countries; size of the shadow economy calculated with the MIMIC and currency demand method Source: Data Prof. Schneider, A.T. Kearney analysis
Shadow economy as percentage of GDP 3 A.T. Kearney 10/09.2010/40329d
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Bulgaria’s shadow economy has been consistently among the highest in Europe Evolution of the Shadow Economy in Bulgaria as % of GDP 34,12
33,88
34,38
28,90
n Penetration decrease during the preparation for EU accession
25,24 21,88
39,7%
n Shadow economy at persistently high levels
n Contained increase during the financial and economic crisis: 40,4% 38,2%
37,1%
37,5%
37,7%
§ Slower GDP growth: H1 2010 GDP lower than H1 2009 § Unemployment increase from 6.3% to 9.1% in 2009, with only a slight recovery in 2010
2005
2006
2007
Estimated Shadow Economy as % of GDP
2008
2009
2010E
n International experience postcrisis: slight increase in the shadow economy as a result of fiscal and austerity measures
Nominal GDP in Mio EUR Source: BNB, NSI, Prof. Dr. F. Schneider
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The basic structure of the shadow economy is comparable across countries Industry structure of the shadow economy in Europe1) n Manufacturing, Wholesale/Retail and Construction – sectors with the highest share of shadow economy in Europe n Hotels/ Restaurants, Transportation, and Agriculture – consistently relevant shadow economy sectors n Free professions – high value-added services, typically with significant share of underreporting n Household services – sectors with high penetration of undeclared work n Gas & Water Supply, Electricity, Mining – regulated industries with virtually no shadow economy Average Distribution 1) Based on focus countries – Germany, Spain, Italy, Poland, Romania and Turkey Source: A.T. Kearney analysis, Prof. Dr. F. Schneider
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The shadow economy is driven by a series of factors, which can be clustered in four areas Drivers for the shadow economy Objective advantages/need • Tax rates and social security premiums • Complexity of tax/labour regulations • General economic situation
Lack of "guilty conscience" • Perceived quality of state institutions • Perceived value of state benefits • Sociocultural factors
Shadow economy
Opportunity/ease to participate • Cash-based transactions • Available time
Source: A.T. Kearney, several studies
Low risk • Danger of detection • Possibilities to be tracked • Possible penalties
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Cash is a key enabler of the shadow economy Correlation of shadow economy vs. number of electronic payments2) Share of shadow economy (% of GDP) 50
40
30
20
10
Correlation: ~ -0.68
EU-27 average Bulgaria Romania
Latvia
Lithuania Malta Cyprus Greece Slovenia Hungary Poland Spain Italy Portugal Slovakia Belgium Denmark 1) Sweden Czech Republic Ireland Germany France Finland United Kingdom Netherlands Austria
Especially for B2C sales underreporting, the use of cash creates or eases the opportunity to underreport
0 0
50
100
150
200
250
300
350
Average # of electronic transactions/ inhabitant/year 1) Estimate 2) EU-27 2009 (no data available for Luxemburg) Source: ECB, Interbanks card center, Prof. Schneider, A.T. Kearney analysis
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Promoting electronic payments helps to reduce the shadow economy Increase in electronic payments – simulation n Leverage of the MIMIC model used to evaluate the size of the shadow economy n Isolation of the effect attributed to the development of electronic payments per capita n Simulation of the shadow economy size with all input factors unchanged except for electronic payments
Shadow economy reduction through electronic payments1) Electronic payments increase
+5%
+10%
+15%
-2-3%
n Test of three different scenarios for the increase of electronic payments as basis for the further calculation
1) Selected European countries; simulation for four consecutive years; average of year-on-year changes Source: Simulation results Prof. Dr. F. Schneider, 2009
-4-6%
-6-9%
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