Bulgaria: Fall in share of informal economy
The share of the informal or grey economy fell below 30% in 2016 according to an innovative composite index called 'Towards the economy of light’ created by the Bulgarian Industrial Capital Association in partnership with two high-level social partners. Reasons for the decline include the country’s fight against the informal economy and the increase in exports.
Composite index to measure the informal economy
A project by the Bulgarian Industrial Capital Association (BICA) on the restriction and prevention of the informal economy, funded by operational programme Human Resources Development 2007–2013, collected and analysed data on the informal or grey economy in Bulgaria (that is, on activities, jobs and workers not covered by the state). The project was carried out in partnership with the Confederation of Independent Trade Unions in Bulgaria (CITUS) and the Bulgarian Industrial Association (BIA).
The project uses a composite index (CI) – called the ‘Towards the economy of light’ – based on a sociological component (surveys carried out between March and April 2017) and a statistical component (data from the National Statistical Institute).
The sociological component collected survey data from both employees and commercial enterprises regarding the following: the share of main and additional work with labour contracts on full wages, proper declaration of taxes and custom duties, and issuance of cash receipts for services and goods. The statistical component covered data about the share of money, VAT, informal employment, excise and export.
The BICA report (PDF) presents the latest results, comparing indices from 2010–2011 until 2016. The full list of indicators with data for 2015 and 2016 are given in the annex (PDF). The method used to derive the actualised CI (PDF) is explained in an earlier BICA report.
Reasons for decline in informal economy
The informal economy in Bulgaria declined considerably in 2016, while the CI, which shows the ratio of the declared economy, has increased gradually every year since 2010 (with the exception of 2014). The current change of the index by almost three percentage points (from 68.92% in 2015 to 71.88% in 2016) is, according to BICA, a record increase since measurements were first gathered in 2010–2011.
Among the reasons for the decline in the informal economy are:
- measures taken in the fight against Bulgaria’s grey economy;
- measures to reduce the administrative burden on businesses;
- the country’s financial and economic stability;
- increased exports;
- the reduction in the migratory flow along Bulgaria’s borders.
The analyses distinguish between internal (national policies and measures) and external (geopolitical processes) factors contributing to the shrinkage of the informal economy which BICA believes will accelerate over the coming years. BICA also believes that the country’s political stability in 2015–2016 had a positive influence on business and that the local, parliamentary and president elections, as well as referendums during this period, did not cause any negative effects on entrepreneurs’ behaviour, such as the exodus of their business into the informal sector.
Between 2015 and 2016, many changes in the legal framework and law enforcement were implemented, which BICA feels has had a positive effect on the reduction of the informal economy. For example, amendments to the Access to Public Information Act by the government aim to increase access to public information and a wide-ranging introduction of open data. Facilitating digital access to public information leads to an increase in public awareness and thus helps to prevent illegal and grey practices in the public domain.
Other contributory factors include linking commercial websites to the National Revenue Agency, recovery of the investigative functions of customs, introducing measuring instruments for alcohol and fuel producers, and the strengthening and better coordination of labour inspections. In 2014, VAT measures were introduced: namely fiscal control of goods with high fiscal risk, VAT reverse charges and cash accounting. It is hoped that these measures will yield some of the positive effects – including revenue from this kind of tax – into the future.
Another positive factor is the revival in Bulgarian exports, but the results would be better without the continuing energy inefficiencies related to the non-market and privileged position of electricity producers from renewable energy sources and from cogeneration, as well as the ‘American power plants’, and without the continuing delay in the liberalisation of the energy market.
Room for improvement
Conversely, BICA maintains that the policy of minimum statutory wage increase leads to overvaluation of the work of the lowest qualified workers at the expense of average and highly qualified workers, and also hampers the recruitment of low-skilled workers, sending them to the informal sector or to social welfare.
Based on individual indicators of the CI, the most widespread and problematic manifestations of the informal economy in 2016 in Bulgaria are:
- fictitious labour contracts;
- losses from smuggling and VAT fraud;
- non-issuance of fiscal invoices (receipts) in the service sector.
Indicators that show the most problematic developments from the statistical component of the CI are the trade with non-EU countries and informal employment. The labour market indicator that decreased in 2016 was ‘Main employment contract on full wage’, while ‘Additional employment contract on full wage’ grew marginally (by 0.01 after weighing) compared with 2015 (see annex). The most likely cause for this is the pressure on the employment of low-skilled workers due to the disproportionate increase in the minimum wage which, according to BICA, has created the feeling of ‘greying’ the labour market.
The surveyed period shows that economic growth and the revival of the Bulgarian economy have encouraged entrepreneurs to ‘go towards the light’, a positive trend that has become apparent since 2015. The main factors for the positive trends in the change of the CI on the ‘Towards the economy of light’ index in 2016 could be defined internally as financial and economic stability, with some measures to improve the business environment in the country and to curb the grey economy, and externally as the growth of the European and world economy which is reflected in increasing the volume of the Bulgarian exports, as well as the decrease in the migratory pressure on Bulgaria’s borders.
In particular, there was strengthening of the government’s measures in the struggle to reduce the informal economy over the period 2011–2013 and such initiatives undoubtedly lead to positive results. As a result, the CI increased between 2015 and 2016, reaching a record high value of 71.88 points in 2016. Analysing the change of the two components of the CI, BICA concluded that the increase in its value reflects not only the objective statistical data taken into account by the statistical sub-index, but also the opinion of the entrepreneurs and employees and their assessments for the dynamics and share of the informal economy (the sociological sub-index of the CI).
Recognised as an innovation at European level (PDF), the CI ‘Towards the economy of light’ index generated considerable interest at the 9th General Assembly of the International Coordination Council of Employer Organisations held in Yerevan, Armenia. Employers from Europe and Asia expressed their willingness to use the CI to measure and help prevent the informal economy.