Explaining Cross-national Variations in the Size of the Shadow Economy in Central and Eastern Europe

Abstract

Cross-national variations in the size of the shadow economy have been variously explained to be a result of: economic under-development (modernization theory); high taxes, public sector corruption and state interference in the free market (neoliberal theory) or inadequate levels of state intervention to protect workers (political economy theory). The aim of this paper is to start to evaluate critically these competing theories by comparing cross-national variations in the size of the shadow economy with the various aspects of the broader economic and social environment denoted as determinants of the shadow economy in each of the theories. The finding is that across Central and Eastern Europe, smaller shadow economies prevail in wealthier, more modern and equal societies and countries with higher levels of social protection expenditure, greater state intervention in the labour market, more effective social transfers and lower levels of poverty. No evidence is therefore found to support the neo-liberal suggestion that decreasing tax rates, de-regulating the economy and cutting back work and welfare expenditure by the state will reduce the shadow economy. The paper concludes by discussing the theoretical and policy implications of the findings.2

Evaluating the multifarious motives for acquiring goods and services from the informal sector in Central and Eastern Europe

“…In the last few years, considerable advances have been made in unravelling the multifarious character of the informal sector across Central and Eastern Europe Polese 2014, 2015;Polese 2014Polese , 2016Williams et al 2013). Until now, however, these studies have largely focused upon those working in informal sector, analysing the diverse array of types of work conducted, ranging from exploitative waged employment through well-paid forms of self-employment to paid favours (Williams 2014(Williams , 2015a, the multifarious demographic and socio-economic characteristics of informal workers and businesses (Davies and Polese 2015;Kukk and Staehr 2014;Likic-Brboric et al 2013;Lukiyanova 2015; Putni š and Sauka 2015; Wallace and Latcheva 2006), and the diverse motives of those working in the informal economy (Morris and Polese 2014).…”

Diaspora and government welfare spending: Do migrant remittances increase public social protection?

“…In a traditional, backward, or underdeveloped economy, the informal or shadow economy is large. Williams (, ) defines the shadow economy in terms of attributes missing relative to the formal economy, being hidden, informal, and unregulated with transactions remunerated through cash in hand. Because transactions are undeclared, taxes and social security contributions are unpaid and SP is inadequate.…”

“…The relative dominance of informal economy, therefore, reduces the supply and increases the demand for SP. As Williams () hypothesizes, the degree of shadow economy decreases with modernization and development.…”

“…The presence of shadow economy reduces tax revenues thus eroding SP finance (Williams, ). Thus, the supply of SP may be limited the larger the size of the shadow economy.…”

“…However, the larger the size of the shadow economy the more the demand for SP is. As Williams () argues, workers in the shadow economy lack “access to the minimum wages health and safety conditions, holiday entitlements and sick leave” (p. 242).…”