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
Latvia Lithuania Estonia
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
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
Envelope wages
59,0 %
Unreported employees
20,3 %
Unreported business income
20,7 %
Envelope wages
34,9 %
Unreported employees
20,7 %
Unreported business income
44,4 %
Envelope wages
42,3 %
Unreported employees
19,7 %
Unreported business income
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)
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
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)
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
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)
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
% of payments ‘to get things done’, 2009-2015 (average percentage of revenue paid as ‘bribes’)
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
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
Size of the shadow economy in Latvia, Lithuania, and Estonia 2009-2015
Latvia Lithuania Estonia
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
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)
Size of the shadow economy in the regions, sectors, companies of different sizes
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)
Size of the shadow economy in the regions, sectors, companies of different sizes
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 in the regions, sectors, companies of different sizes
Size of the shadow economy (% of GDP) by sector (average, 2013-2015)
Size of the shadow economy in the regions, sectors, companies of different sizes
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)
Size of the shadow economy in the regions, sectors, companies of different sizes
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
Main determinants of the shadow economy
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
Main determinants of the shadow economy
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)
Statistically significant determining factors (using regression analysis)
Main determinants of the shadow economy
Satisfaction with the State Revenue Service, 2010-2015
Main determinants of the shadow economy
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
Main determinants of the shadow economy
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
Main determinants of the shadow economy
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
Main determinants of the shadow economy
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
Statistically significant determining factors (using regression analysis)
Main determinants of the shadow economy
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!