New survey blames high rate of people working in hidden economy in Balkan region on mistrust in state institutions – and unfair tax systems that penalise those on low incomes.

The hidden employment vary among the different Balkan countries, from one fifth in Croatia to four fifths of all employed people in Kosovo.

A lack of trust in institutions and unfair taxation systems in Southeast Europe have contributed to the widespread problem of the “shadow” economy and undeclared work, a recent survey by the Sofia-Based Center for the Study of Democracy, CSD, for the Southeast Europe Leadership for Development and Integrity, SELDI, has concluded.

According to the preliminary results of the study, presented at an international conference in Sofia on September 2, the rates of hidden employment vary among the different Balkan countries, from one-fifth in Croatia to four-fifths of all employed people in Kosovo.

In Bulgaria, around 17.5 per cent of people work in the informal sector, which is significantly higher than the average rate for the European Union.

“The reason for the shadow economy is that we are witnessing weak institutions in the countries in Southeastern Europe. The bond between what people consider fair and what really happens is been broken, which leads to a shadow economy,” Professor Colin Williams, from the University of Sheffield, said.

According to Professor Arnis Sauka, from the Stockholm School of Economics in Riga, the shadow economy in the Balkans most often comes in the form of working without contracts or the partial declaration of income from employment.

In Macedonia, 37.3 per cent of employees have their social security contributions paid by employers on contracted wages that are lower than the actual wage they receive, Marija Risteska, Director of the Center for Research and Policy-Making, CRPM, in Skopje noted.

She explained that the ongoing political crisis in Macedonia has contributed to a worsening of the problem with the shadow economy in 2016.

In Bulgaria, the hidden employment level is difficult to estimate, as most people do not work completely in the shadow sector, but declare part of their income and receive the rest in an “envelope”.

The number of people in Bulgaria who work without any contracts at all is very low, at around 1 or 2 per cent of all employed, Ruslan Stefanov from CSD said, while in Turkey and Kosovo non-contractual employment is far more widespread.

To resolve the problem of undeclared work and income, Balkan countries need to address the reasons for its existence, not fight the consequences, Professor Williams said.

He said that what has led to the widespread shadow economy is the general lack of trust in state institutions and the feeling that taxation systems are unfair, as the biggest tax burden falls on people with lower wages – despite the overall low tax rates.

Balkan Insight

5 September, 2016