Global crisis could reverse decline in hidden economy

The hidden economy continued its downward path in 2008, according to the latest regular survey of the Centre for the Study of Democracy. The study covers a period of seven years and is based on the methodology and surveys of Vitosha Research. In 2008, the hidden economy index had declined by 32% compared with 2002, due to a reduction in all of its components. However, there is a risk that the informal economy may expand again in the context of the global economic crisis.

On 27 February 2009, the Centre for the Study of Democracy (Център за изследване на демокрацията, CSD), in cooperation with the Friedrich Ebert Foundation, organised a seminar entitled ‘The informal economy in Bulgaria in a crisis’. At the seminar, the latest findings of the ‘hidden economy index’ survey in 2008 were presented.

About the study

In 2002, CSD and the research agency Vitosha Research constructed a hidden economy index. The aim is to set a time series for the observation of the hidden economy. The index does not measure the size of the undeclared economy but its dynamics or trends through quarterly nationally representative surveys – one for Bulgarian companies and one for the country’s adult population. The data are collected by means of face-to-face interviews.

The hidden economy index for companies is composite and includes four sub-indices:

  • business perceptions;
  • hidden employment;
  • hidden turnover;
  • hidden taxes.

Main findings of business survey

Decline in hidden economy index

According to the survey results (in Bulgarian, 1.7Mb PowerPoint presentation), the hidden economy index shows a slight decrease in 2008, compared with the previous year, from 2.85 to 2.6 on a scale from zero to 10 (Figure 1). The decline is registered in the dimensions of hidden employment, turnover and taxes, although the value for business perceptions in this area has increased since 2006. Overall, the 2008 index decreased by 32% compared with 2002, from 3.85 to 2.6. This is largely due to the measures undertaken by the government and the social partners to tackle the informal economy, mainly in the field of hidden employment (BG0307101F, BG0406202T, BG0607069I, BG0701029I, BG0711039I, BG0809039I, case studies on tackling undeclared work). Nevertheless, the results show that the proportion of the grey economy in recent years continues to be very high, amounting to between 20% and 35% of gross domestic product (GDP).

The index dynamics reveal that in 2007 – the first year of Bulgaria’s membership of the European Union – the overall index increased from 2.5 to 2.85, compared with 2006, due to the change in the ‘leading’ component of the index from hidden employment to hidden turnover, ignoring the aspect of business perceptions. This change signalled a need for rebalancing policy responses focusing on hidden turnover. According to the authors, the findings might reflect reform fatigue on the side of the government following intensive EU accession efforts in 2006, as well as the rising concern of the business community regarding unfair competition from the informal economy.

Figure 1: Trends in hidden economy

Trends in hidden economy

Note: The indices assume values from zero (no hidden economy) to 10 (high proportion of hidden economy).

Source: Nonchev, A., Hidden economy index, presentation, 2009

Trends in hidden economy

Undeclared work

The sub-index ‘hidden employment’ generalises the business representatives’ perceptions of the extent of the practice of employing workers without an employment contract or on a contract with ‘hidden clauses’ – in other words, receiving a higher remuneration than that stated in the contract. The findings show that, while the index for employment without a contract has decreased since 2006, the index for employment with undeclared income presents an opposite trend (Figure 2).

Figure 2: Trends in hidden employment

Trends in hidden employment

Source: Stefanov, R., Hidden economy index, presentation, 2008

Trends in hidden employment

Figure 3 shows that, in 2007, the proportion of managers reporting that there were no employees without an employment contract in their sector of economic activity doubled compared with 2002, from 21.2% to 44.7%. According to 28.6% of the respondents, up to 10% of employees had no employment contract, while the remaining 26.7% of those surveyed considered the proportion of employees in this situation to be over 10%.

Figure 3: Employed without labour contract in respective sector (%)

Employed without labour contract in respective sector (%)

Source: Nonchev, A., 2009

Employed without labour contract in respective sector (%)

Some 32.8% of the survey respondents believe that no employees in their sector are working under a contract with ‘hidden clauses’ (Figure 4). However, 23.8% stated that, in their sector, up to 10% of the employees hold such a contract and 12.6% considered that this was the case for more than half of the employees.

Figure 4: Employed with hidden clauses in labour contract in respective sector (%)

Employed with hidden clauses in labour contract in respective sector (%)

Source: Nonchev, A., 2009

Employed with hidden clauses in labour contract in respective sector (%)

Impact of economic crisis

The study authors have warned of a danger that an overall increase might be found in the hidden economy due to the global financial crisis, which has already increased pressure on Bulgaria’s economy, as well as on company and household income. For example, the recession has fuelled unemployment rates and reduced foreign investments. This difficult economic situation will no doubt encourage employers and workers to hide income and will mean a greater risk of fraud in relation to value-added tax (VAT).

Commentary

The results of the regular studies on the hidden economy index give important feedback to policymakers and companies on the effectiveness of measures to curb the informal economy. The measures that have been introduced have resulted in a decline in the undeclared economy. However, the current economic crisis is challenging the successes already achieved and calls for new policy responses.

References

Nonchev, A., ‘Hidden economy index’, PowerPoint presentation at the seminar ‘The hidden economy in a crisis: New trends and methods of measuring’, 27 February 2009, available online at: http://www.csd.bg/fileSrc.php?id=2688.

Stefanov, R., ‘Hidden economy index’, PowerPoint presentation at the roundtable ‘The informal economy in Bulgaria: Policy responses in an economic crisis’, 3 December 2008, available online at: http://www.csd.bg/fileSrc.php?id=2602.

Nadezhda Daskalova, Institute for Social and Trade Union Research (ISTUR)

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