Size of grey economy remains high in Bulgaria, Romania ALL - 2008/8/25
Analysts have urged policy makers in Bulgaria and Romania to take measures that will encourage more people in their countries to join the formal economy.
(Dnevnik, Mediapool - 30/07/08; Sofia Echo, Dnevnik, Mediapool, Center for the Study of Democracy - 27/05/08; Report on Informal Employment in Romania, OECD, July 2008)
Some 200,000 people work in construction in Bulgaria, according to the state National Statistical Institute. [Getty Images]
The EU's two newest members, Bulgaria and Romania, still have large informal economies. Construction and tourism are among the sectors most prone to gray market activity, analysts say.
Some 200,000 Bulgarians work in construction, according to the state National Statistical Institute (NSI). Officially, the average monthly wage in the sector is 211 euros. But that figure is profoundly misleading, insists Georgi Anegelov, senior economist at the Open Society Institute in Sofia. In reality, no construction worker in the country is paid less than 500 euros, he said. This means the tax and social security systems are losing nearly 665m a year, he added.
According to Angelov, the situation in the hotel and restaurants sector, which employs more than 100,000 people, is the same if not worse. No waitress or a hotel maid would ever agree to work for the mere 161 euros quoted in the official statistics as the average net monthly salary in the sector in the first quarter of 2008, he said. Thus, the sector's hidden revenues amount to at least 250m annually.
Meanwhile, a policy brief released by the Centre for the Study of Democracy (CSD) earlier this year named agriculture and services -- particularly repairs, private education and healthcare -- as being associated with informal economy activities. "Research has also shown that there are also considerable grey pockets in manufacturing, in particular in excise industries (alcohol and cigarette production and fuels), textiles and transport," the Sofia-based think-tank said.
Although some of the measures taken by the Bulgarian authorities over the past few years have helped reduce the share of the country's shady economy, it remains a key constraint to investment and growth, the group warned.
The aim of the tax and social security reforms was to offer businesses disincentives for underreporting of revenues and for tax and social security liabilities evasion, Finance Minister Plamen Oresharski told participants in a CSD-organised discussion on grey economy in late May.
As part of those reforms, the corporate tax was cut to 10% and the social security burden from 43% to slightly above 30%.
The size of the shadow economy in Bulgaria in 2002-2003 was around 40% of GDP, an OECD report on informal employment in Romania, issued in July, showed.
Hidden revenues of hotels and restaurants businesses totalled at least 250m euros annually, experts say. [AFP]
The tax and social security reforms carried out by the Bulgarian government have helped reduce its extent by about 30% in recent years, with a five-year low in 2006, according to the CSD. However, a rebound was observed in the first year of Bulgaria's EU accession, as well as a shift in shady activities from undeclared work to hidden turnover.
According to Bulgarian analysts, the size of the country's informal economy currently stands at between 20% and 35% of GDP. In some sectors more than 50% of the actual value of transactions is said to be kept off-the-books.
"The main challenge for reducing the size and the scope of the grey economy in Bulgaria is strengthening the rule of law -- the enforcement of regulations," the CSD report said. "Probably the most important test in this respect is the severing of illegitimate links between high-ranking government officials and grey businesses, i.e. defeating loops of companies, in particular in the excise and public-contract-heavy industries such as alcohol and cigarette production, construction and infrastructure, energy, etc."
The OECD report shows that, as in Bulgaria, informal activities are concentrated to a great degree in the construction, hotels and restaurant industries. Other affected sectors include retail trade, transportation, repair and maintenance services, agriculture, health and education.
The study also shows that the size of the shadow economy in Romania was slightly smaller than that in Bulgaria in 2002-2003, standing at 37% of GDP -- well above Croatia, the Czech Republic, Hungary, Lithuania, Poland and the Slovak Republic.
In terms of incidence of undeclared work, Romania is at the top of the Central and Eastern European countries, followed by Bulgaria, the 83-page paper said, describing the levels of informal employment in the two Balkan nations as "quite high".
According to the OECD report, the largest percentage of workers without a labour contract is found in wholesale and retail, where the figure reaches 22%. Manufacturing and construction come next, with 21% and 15% respectively. In agriculture and public administration, the percentage is lower than 10%.
Strict labour regulations and lengthy administrative procedures serve as further disincentives for employers to register their workers, according to the OECD. [File]
"Overall, informal employment on its own or in combination with other activities appears to be an important livelihood strategy for many households, as it helps to supplement income from other sources," the 30-nation Paris-based organisation said. "Nevertheless, this is not without potential risks related to the lack of health and pension coverage, unemployment and uncertainty."
High tax levels are cited as the main reason for employers not registering a business and workers, or for workers not declaring part or all of their earnings. Other factors seen as leading people to opt for informality, rather than formality, include the lack of trust in public institutions, the negative perception of the role of the state, partial understanding or underestimation of the benefits derived from social security, according to the OECD.
Entrepreneurs in Romania have also listed the burden of administrative procedures, complicated and strict regulations and lengthy commercial registration procedures as other factors that often lead them to bypass the formal structures and operate in some informal way.
High payroll taxes and social security contributions are mentioned as constraints in registering workers. Strict labour regulations and lengthy administrative procedures serve as further disincentives for employers to register their workers, according to the OECD.
Romania has made a serious effort to reduce the size of the grey economy, the report said, citing steps such as introduction of a flat tax rate, reform of the labour code, a higher minimum wage and national campaigns against informal work. But these measures are not enough, it indicated.
"Addressing the issue of informal employment is of primary importance for the Romanian government," the OECD said.