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Definition of the Shadow Economy

Session Report on Working Group entitled «The Development of Economic and Gender Politics», The European Economic Commission, Geneva, Switzerland, July, 9-10, 2007.

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Definition of the Shadow Economy

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  1. Session Report on Working Group entitled «The Development of Economic and Gender Politics», The European Economic Commission, Geneva, Switzerland, July, 9-10, 2007. Lecturer:Dr. A.N. Toxanova, Doctor of Economics; Director, Department of Macroeconomic of the Institute of Economic Research, Astana, Kazakhstan. Report Theme:Business and the Shadow Economy: Gender Aspects

  2. Definition of the Shadow Economy The shadow economy involves the legal or illegal manufacture of the goods and services, redistribution of incomes based on activities, not taken into account by official statistics. Three Components of Shadow Economy • Incomes and Property, removed from taxation. • Domestic facilities not taken into account by the state • Various criminal business (narcotics and drug-dealing, smuggling, prostitution, illegal manufacture of alcohol and cigarettes, etc.).

  3. Objective and Subjective Reasons -- Growth of Shadow Economy in Transition Countries Objective Factors: • Fast pace and character of economic and state reforms • Imperfection of legal and normative base, caused by a backlog in reform • Insufficient experience work in transition economies, both, the state bodies and economic entities • Rapid increase in number of the enterprises and individual businessmen, • Unreliable financial reporting, low level of accounting discipline

  4. Subjective Factors: • A significant level of corruption within the authorities • Insufficient vigorous actions to struggle against it • Organized Crime Illegal Economic Activities include: • Manufacture of goods and services, sale and distribution (and or possession) are forbidden by the law; • Industrial activity usually revolving around lawfulness and unlawfulness, for example in cases when the manufacturers who are not fully authorized (eg, rendering of medical services by unqualified doctors).

  5. Shadow or Underground Activity basically is lawful, but volumes of it meaningly disappear from tracking for different reasons: • Prevent payment of surtax, or other taxes; • Prevent payment on social insurance; • Concealment of infringements on legalized standards, for example, minimum wages, the duration of the working day, norms of safety, sanitary norms, etc.; • Avoidance of certain administrative procedures, such as filling of statistical questionnaires or other forms of the reporting. Losses From Shadow Economy • Decrease in tax revenues in the budget, both state and local; • Money in the shadow economy penetrates first of all to those spheres where there is absence of control on the part of the state, lack of clarity in the legislation, minimal expense to generate high return on income. • Activities directly forbidden by legislation, such as illegal circulation of weapons, drugs, prostitution, trafficking in persons, sale of stolen property and others. • As the shadow economic activities are illegal, part of these incomes are spent for payoff of civil servants and is another reason and the important factor in the corruption of a society.

  6. Definition of Informal Sector of the Economy • Manufacture carried out within sectors of domestic facilities are the informal sector. • Definition of the term «informal sector» formulates SQUANDERER (the International organization of work) and includes: • Production of goods (and services) primarily with the purpose of job security and incomes of corresponding persons; • Non-legal labor based on casual employment, personal and social communications; • In practice a significant portion of informal manufacturing is for one’s own consumption, however, some part is sold on the market. Methods of a statistical estimation -- unobservable economy: • Direct method • Indirect method • Combined methods.

  7. Direct methods of a statistical estimation at the level of the unobservable economy assume carrying out of additional selective inspections, using administrative sources with the purpose of specification of participation of domestic facilities, separate physical persons and enterprises. The following inspections concern direct methods of estimation at the level of the unobservable economy: • Additional inspections of volumes of manufacture in sector of domestic facilities; • Additional inspections of activity of the enterprises; • Additional inspections in points of unorganized trade; • Inspections using work hours at the enterprises; • Studying the results of tax, financial and other checks behind observances of legality at realization of economic activities.

  8. Indirect methods assume carrying out of additional estimations, to account on the basis of using the indirect data -- studying available information on the economic event. • The following concern indirect methods: • Tracking commodity streams; • Identifying balance of a manpower; • Applying monetary units; • Using population censuses. The combined method is a combination of direct and indirect methods of estimations, and also specialist estimations. The choice of one concrete method for definition concerns the parameters of unobservable activity (whether latent, informal activity) in concrete branches depends on specificity of the given branch, available sources of information, an opportunity of carrying out additional inspections and many other factors. Sources of information for definition on domestic facilities for final consumption include: • Retail trade statistics; • Inspections of budgets of domestic facilities; • Balance of agricultural products.

  9. Inspections carried out by the applicable agency of the Republic of Kazakhstan has noted the following. - Large and average size retail trade organizations hide approximately 15-18 % of proceeds from the general officially data taken into account volume, small trade enterprises - up to 30%; - Real payments exceed the official data by more than half, including those of noncredited proceeds - on 20-25 %, fictitious contracts - approximately 14%, simple payment - 4-6 %; - For concealment of proceeds, cash is used primarily. Second is price manipulation. Sales without a cash register as well as various manipulations with cash registers are also used to a lesser degree; - The most widespread form of calculation is cash (approximately 50-60 % of payments); Aside from taxi drivers and hired sellers there are numerous positions not taken into account in the labor market including handymen, loaders, security guards, managers and others under the new Tax Code. This category of workers, as a rule, do not pay taxes. Many of them are persons without the certain residence and citizenship and or are registered on labor exchanges as an unemployed. They also may have a criminal background.

  10. During transition to a market economy attitudes toward the informal employment have considerably increased. The most typical forms: 1. Street traders; 2. Services of the population on construction, repair and tailoring, footwear, and also fine commodity manufacturing; 3. Private services - cleaning, washing, food preparation; 4. Tutoring, individual lessons; 5. Brokerage, intermediary activity; 6. Taxi and busing business; The share of the economy living in the shadow depends on three parameters: · Degree of state regulation of market processes, · taxation level · level of corruption.

  11. In developing countries to estimate the shadow economy one uses indirect methods - for example, "the demand of cash" i.e. when high volume cash is difficult to explain with usual reasoning, compare to presence of other factors forcing the enterprises to live in the shadow. In global practice it is considered, that if demand for cash grows, so the shadow sector grows. Austrian economist Fredric Schneider (University of I. Kepler, Linz) is based on the assumption, that work in shadow sector is paid by cash, while legal work - basically non-cash (thru "electronic money"). Due to demand for cash it is possible more - less precisely to estimate volumes and dynamics of shadow economy.

  12. In less developed countries they use "the method of physical expenses", comparing current consumption and volume of output. The "Superfluous" current consumption speaks about presence of shadow sector in economy. In this case can appear, high consumption and material capacity of domestic production comes as a results of not completely considered level of the shadow economy. Method to account for volumes of unobservable economy of the Ministry of Statistics and the analysis of Byelorussia. The volume of latent economic activities pays off on the basis of the data on quantity of subjects of small business which have been taken into account in the statistical register, actual quantity of the subjects who have presented the state statistical reporting of small business and labor productivity for one occupied on the subjects who have presented the state statistical reporting of small business (in a section of branches of economy).

  13. The analysis of shadow economy in the different countries Shadow economy in Germany If in 2003 the level of shadow economy of Germany made up 17,5 % from the official gross of national product, in 2004 - 16,4 %, and in 2005 - 15,6 % which is lower than in 2000. The reason of such change of the tendency of development are, in opinion of Schneider, strict and effective measures on expansion of regulation of a labor market, the edition of laws within the framework of reform of a labor market and employment (the law on protection against of dismissal, the law on working hours, new rules of reception by unemployment benefits, etc.) which in 2004-2005 have already appreciably decreased the shadow sector.

  14. Shadow economy in Austria. The shadow sector in Austria has increased for 2003-2004 for 2,22 %. If to mean, that official the gross national product of Austria has grown for this time only on 2 % it turns out, that the shadow sector grew faster, than official economy. The main reason of such growth of shadow economy follows, in F. Schneider's opinion, to count a high level of taxes and decreases in social payments. These measures have been accepted by the Austrian authorities the last years for restoration and updating of the country budget. Shadow economy in Switzerland. The level of shadow sector economy of Switzerland has increased for 2003-2004 of all on 0,3 %. It means, that the shadow economy in Switzerland grows much more slowly, than official economy, the growth which has made 1,5 %. In view of entered more strict legislative measures on struggle against shadow economy and on partial improvement operating conditions on conducting domestic facilities in official sector of economy, the volume of shadow sector economy of Switzerland was reduced to 2,3 %.

  15. Shadow economy in other countries OESR. For comparison of the sizes of shadow sector economy in the German-speaking countries with a situation in other countries OESR, F. Schneider cites the statistical data on the basic tendencies of development of shadow economy in the countries OESR The sizes of shadow economy (in % from the official sizes of gross national product) in 21 country OESR in 2005.

  16. The level of shadow economy by the end of 1990s in the majority of the countries of OESR started deceasing. The average index of shadow sector on the countries OESR in 1999/2000 has made 16,8 %, and by 2005 it will decrease up to 15,6 %. 1997-1998 was a period when the sizes of shadow economy in the majority of the countries of OESR were at their largest, then a level of shadow economy in 18 countries (except for Germany, Austria and Switzerland in which growth of shadow economy proceeded) gradually decreased.

  17. Experience of the various countries on development and use of tools by decreasing in volumes of shadow sector in trade and in construction, comprehensible for Kazakhstan Total value of the global shadow sector is at a minimum 8 billion dollars of the added cost annually, not getting in accounted in reports of enterprises and in official statistics, both the separate states, and the international organizations. Thus, the size the global shadow economy is comparable to economy of USA - the countries which have the largest gross national product in the world. The factors determining the scales and dynamics of "shadow" economy: 1) Weight of the taxation; 2) The sizes of the received income; 3) Duration of working hours; 4) Scales of unemployment; 5) A role of public sector.

  18. Many western experts consider the basic and even the unique reason of development "shadow" economythe tax pressure. The factor, it appears, not unique, but rather essential. It is possible to formulate a conclusion: prevalence of "shadow" activity to a great extent depends on the general condition of economy, a standard living of the population and restrictions proceeding from the state. Some economists consider that high taxes are not a principal cause of leaving in a shadow. So Johnson, Kaufman and Shifer consider that institute aspects are even more important at transition in shadow sector. In there own research of less advanced countries, transitional countries and advanced countries they draw a conclusion, that a key determinant at transition in a shadow is the quantity of regulations. When the laws and legislation are weak, representatives of authority are make decisions and are not controlled. It entails corruption, which in turn, forces business to live in a shadow.

  19. Difference between the shadow economy of the West and less developed countries: • In the West countries in shadow sector basically entails small firms, and earnings from activity are used as an additional source of income • In less developed countries migrants from countryside are unable to find a job in legal sector and they compelled to extract the basic means through the shadow economy. Universal corruption and pockets in legislation contribute to it, and a major part of economic activity appears discourteous by official authorities. Share of shadow economy in countries of Eastern Europe in gross national product, % Source: information of Eurostart

  20. Part of shadow economy in the countries of the Commonwealth of Independent States (CIS) and the Baltic countries in gross national product, %

  21. Share of the unobservable economy in gross national product in the Republic of Kazakhstan The shadow economy in Kazakhstan is non-uniformly submitted in various branches. According to Agency of the Republic of Kazakhstan on statistics, the general share of shadow economy makes over 20 % in gross national product, including construction - 2,2 % Source: Agency RK on statistics

  22. Offers on suppression of shadow economic activities - Simplification; i.e. optimization of legal institutes by elimination of duplication and unnecessary laws; - Decentralization; i.e. transfer of the legislative and administrative responsibility from central to the regional governments to seek to solve real life and essential problems; - Reduce State Control; i.e. growth of the responsibility and opportunities for private citizens and narrowing of the state. For the future it is necessary to change procedures of acceptance of new laws to not repeat a mistake of the past. It assumes: - The publication of pending law (bills) for their open discussion; - The analysis of pending law (bills) in terms costs of benefit to discipline the government and to reject imperfect law/bills before their publication;

  23. Gradation of shadow economy • Very high (60-80 %), • High (30-60 %), • Average (20-30 %) • Low (5-20 %). The estimation for our country as of the beginning of 2005 has made hardly more than 20 % from the gross national product. Basic principal causes of informal economy in Kazakhstan: - Unreal high tax loading, - The imperfect labor legislation, - Problems with registration of business, - Complexities with reception of the necessary official information, - Rigidity of administration and application of laws and rules,

  24. Gender aspects of informal economy The purpose of gender equality in economy is to express equal access to resources, and increase the competitiveness of women on a labor market. Today women can find work faster in the informal or unregistered sector. Trade, has become a place, where women have found a unique source of income and existence for the family. Especially great is the share of self-employment of women in agrarian sector where she achieves 60 %. Women are more compelled into this business than men. Engaging in business it was noted that 32,7 % of respondents were men and 46,9 % were women, both upon being compelled into business. According to other sociological research roughly 70 % of women - businessmen are ready to refuse business in exchange taking care of the family or for stable and well paid hired work. President BISAM Central Asia Leonid Gurevich)

  25. The social responsibility of women in business is higher, than men. Here is how was estimated the parity of ethics and business -- in an interview of a 28-year woman entrepreneur from Russia Gulnara Tabakchi, she showed the typical position case for women businessmen: «I do not want stolen capital. I can make it by myself. I will never have the such capitals. I’m very skeptically concerned with casual money so that I even do not try to act. It will be worse then. The more you give, the more you receive...». Stability and even known conservatism of ethical standards is a necessary condition of survival for which a woman-leader is held accountable. That fact is rather paradoxical, that women - entrepreneurs who, by their answers, in 8 cases from 10 have gone through their own business practice such phenomenon as a threat for a life, they continue to assert, as in a situation of blackmail and threats they are not inclined to change their ethical standards, whether in business or in private life.

  26. All business women reply to the question: «What will you prefer, high profit provided that you should risk your ethical principles, or small, but the "fair" income under condition of preservation of your human face», - had a unequivocal position: «business woman keep the business, has no right to operate with the accepted norms and standards., what would arrive were not expected in the long term». To a greater degree women, rather than men, are focused on a long strategy in business, which also makes profitable observance with ethical standards, which were accepted in the developed business environment. Research shows, that men to a greater degree aspire to escalating personal potential while women are focused on ethical values where honesty and responsibility take the highest positions in system of values of the person (businessman).

  27. Regional female business to a greater degree, than central, is compelled to follow ethical standards because of dialogue in business and the unprofitability of unethical acts in conditions of the closed settlement where the scale of own affair and prospects of there survival depend on the ability to follow ethical standards. «Business in a province cannot be depersonalized», - approves one of the woman – entrepreneur, and with it is difficult not to agree with her. The contribution of female business in becoming of new ethical model of business is obvious. The ethical principles which works in business, essence different models of one culture. The general principles of this model: - It is necessary to avoid unethical steps in business; - Humane management is more reliable than assertive management; - The strategic purposes are easier to reach being guided on ethical principles.

  28. The budget is the most important political tool of any control system. With the help of the government (state) budget the political management forms social and economic development, builds priorities and defines the criteria of distribution based on needs of a society. However the state budgets are not gender-neutral on the influence - they differently influence to a life of men and women, as from the point of view of incomes, and charges. Gender consideration aspect is in all development cycles of the state budget - «gender budgeting» - thus becomes an important tool giving an opportunity to estimate influence of a state policy on position of citizens of both sexes and to redistribute incomes and charges so that to reduce a social and economic inequality between men and women. Application in practice of gender budgeting becomes extremely important so that the countries, regions and municipal educations could overcome a gender neutrality of the budgets - which in practice frequently are "gender-blind", aggravating a gender inequality.

  29. The Gender budget possesses side benefits that promotes an increase in responsibility, of the transparent and efficiency. Unfortunately, gender budgeting has not received yet the universal distribution: which is estimated as especially technical question to those who struggle for equality of the rights of women and men, it is not considered as a political priority by many of those who actually are engaged in development, realization and controlling of execution the budget.

  30. Gender strategy of Kazakhstan According to Kazakhstan’s Strategy of gender equality of (Republic Kazakhstan for 2005-2015) the further development of business and self-employment among women is expected; as is professional retraining of women, to training to administration and management of business. Measures on development of small and average business among women will be improved by financial support of business, wide development of consulting and marketing services. Wide development will occur through micro credit. Micro credit programs will be included in regional plans of social and economic development. The needs of women in the workforce will be taken into account while carrying out of the further transformations in economy. This special attention will be given to development of female employment in agriculture, including in sphere of processing agricultural products.

  31. Integral change of the state economic policy is supposed to take into account gender aspects that will give to it the character of socially focused business. To the basic characteristics of a socially focused business concern: - Strengthening motivation of labor activity and business, the investment in "human capital"; - Distribution and development and strengthening institution of family in family business, during this epoch of global information. Creation of a wide network of workplaces "in-home" with the free schedule of work and new forms of a division labor, creation of "virtual family firms"; - Replacement of "power" and "command" methods of decision making to problems in sphere of management of the business by economic methods with the development of social partnership a and spirit of mutual aid. Change in the working conditions in the labor legislation, giving to women an opportunity to solve questions of simplicity in their work and a choice of a trade. Also will be applied changes in the application of advertisements with unreasonable preferences on a particular sex.

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