Shadow Economy: State of the Art
This article represents the current state of the shadow economy in the world. It also contains scientists’ researches. Offers several advanced methods to estimate the amount of the shadow economy. The article also represents modern dynamics methods for reducing the share of the shadow economy, propo...
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Rodina, O.G. Batula, V.F. 2017-09-03T18:52:00Z 2017-09-03T18:52:00Z 2013 Shadow Economy: State of the Art / O.G. Rodina, V.F. Batula // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 150–152. — Бібліогр.: 6 назв. — англ. 1817-3772 https://nasplib.isofts.kiev.ua/handle/123456789/123368 343.37-047.23„20” This article represents the current state of the shadow economy in the world. It also contains scientists’ researches. Offers several advanced methods to estimate the amount of the shadow economy. The article also represents modern dynamics methods for reducing the share of the shadow economy, proposed by European Commission. У статті відображено сучасний стан проблеми тіньової економіки в світі, узагальнено останні дослідження провідних вчених у цій сфері. Запропоновано декілька методів визначення об’єму тіньової економіки, визначено її сучасну динаміку, наведено методи для зменшення долі тіньової економіки, що запропоновані Європейською комісією. В статье отражено современное положение проблемы теневой экономики в мире, проведен обзор последних исследований ученых в этой сфере. Предложено несколько методов определения объема теневой экономики, выявлена ее современная динамика, приведены методы для уменьшения доли теневой экономики, предлагаемые Европейской комиссией. en Інститут економіки промисловості НАН України Економічний вісник Донбасу Management Shadow Economy: State of the Art Тіньова економіка: сучасний стан Теневая экономика: современное положение Article published earlier |
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Shadow Economy: State of the Art |
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Shadow Economy: State of the Art Rodina, O.G. Batula, V.F. Management |
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Shadow Economy: State of the Art |
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Shadow Economy: State of the Art |
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Shadow Economy: State of the Art |
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Shadow Economy: State of the Art |
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shadow economy: state of the art |
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Rodina, O.G. Batula, V.F. |
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Rodina, O.G. Batula, V.F. |
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Економічний вісник Донбасу |
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Інститут економіки промисловості НАН України |
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Тіньова економіка: сучасний стан Теневая экономика: современное положение |
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This article represents the current state of the shadow economy in the world. It also contains scientists’ researches. Offers several advanced methods to estimate the amount of the shadow economy. The article also represents modern dynamics methods for reducing the share of the shadow economy, proposed by European Commission.
У статті відображено сучасний стан проблеми тіньової економіки в світі, узагальнено останні дослідження провідних вчених у цій сфері. Запропоновано декілька методів визначення об’єму тіньової економіки, визначено її сучасну динаміку, наведено методи для зменшення долі тіньової економіки, що запропоновані Європейською комісією.
В статье отражено современное положение проблемы теневой экономики в мире, проведен обзор последних исследований ученых в этой сфере. Предложено несколько методов определения объема теневой экономики, выявлена ее современная динамика, приведены методы для уменьшения доли теневой экономики, предлагаемые Европейской комиссией.
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1817-3772 |
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https://nasplib.isofts.kiev.ua/handle/123456789/123368 |
| citation_txt |
Shadow Economy: State of the Art / O.G. Rodina, V.F. Batula // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 150–152. — Бібліогр.: 6 назв. — англ. |
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2025-11-25T23:52:49Z |
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| fulltext |
150
Економічний вісник Донбасу № 4 (34), 2013
Inroduction. Each year there are enormous
numbers of cash transactions in the market without the
government’s observes and regulations. This phenomenon
was known as the “underground economy” and “shadow
economy” [1]. As shadow economic activities are a fact
of life around the world, most societies attempt to control
these activities through various measures like punishment,
prosecution, economic growth or education. Gathering
statistics about who is engaged in shadow economy
activities, the frequencies with which these activities are
occurring and the magnitude of them, is crucial for
making effective and efficient decisions regarding
the allocations of a country’s resources in this area.
Unfortunately, it is very difficult to get accurate information
about these shadow economy activities on the goods and
labor market, because all individuals engaged in these
activities wish not to be identified. Hence, the estimation
of the shadow economy activities can be considered as a
scientific passion for knowing the unknown [2].
“System D.” The fact that the shadow economy
is on the rise in the middle of a global financial crisis
should be no surprise to economists.
A recent post on Steven Levitt and Stephen Dubner’s
Freakonomics blog discussed the growth of the shadow
economy across the world. Freakonomics: “In 2009, the
OECD concluded that half the world's workers (almost
1.8 billion people) were employed in the shadow economy.
By 2020, the OECD predicts the shadow economy will
employ two-thirds of the world’s workers. This new
economy even has a name: ‘System D’.”
In a recent article for Foreign Policy magazine,
Robert Neuwirth argues that “the $10 trillion global black
market is the world’s fastest growing economy – and its
future”. Neuwirth discusses that the phrase “System D”
comes from a slang phrase used in French-speaking Africa
and the Caribbean. The “D” stands for the French word
“debrouillard”. Neuwirth: “To say a man is a debrouillard
is to tell people how resourceful and ingenious he is”.
Thus, self-starting entrepreneurs who go out on their
own for business purposes without being regulated by
bureaucracy and / or without paying taxes are part of
“l’economie de la debrouillardise”, or “Systeme D” on
the street. Neuwirth writes that System D is a global
phenomenon, transporting products across the planet
ranging from machinery to computers to mobile phones.
Neuwirth explains that based on estimates, the total value
of System D globally is close to $10 trillion. In comparison,
the US has a GDP of $14 trillion. Thus, were System D
a sovereign nation, it would be an economic superpower –
the second largest economy in the world.
Aside from the legal aspects of the black market,
the shadow economy has negative implications in terms
of tax revenue. In a July 2010 article from Bloomberg
Businessweek, Chris Prentice discussed how the rise of
the shadow economy affects tax revenue for nations.
Based on estimates, Prentice quotes Austrian
economist Friedrich Schneider, “Taxation and regulation
increased in most countries over the past 10 years…
reducing the tax burden is the best policy measure to
reduce the shadow economy, followed by a lessening of
fiscal and business regulation” [3].
Model-based methods to estimate shadow economy.
Model-based methods use statistical tools to estimate the
shadow economy as an “unobserved” variable. Three
such methods are most widely used in the literature: i) the
currency demand method (Feld and Schneider, 2010;
Schneider and Enste, 2000); ii) the electricity consumption
method (e.g. Kaufmann and Kaliberda, 1996; Johnson et
al., 1997); and iii) the multiple indicators and multiple causes
(MIMIC) model (e.g. Schneider, 2007; Vuletin, 2008):
i. The currency demand method assumes that cash
transactions account for the bulk of informal transactions
(e.g. Schneider, 1997 and Johnson et al., 1998). The
crucial assumption underlying this method is that a change
in the size of the shadow economy (or the amount of
money demand) is caused by changes in taxation and
government regulations. As a first step, a money demand
equation - where the dependent variable is typically the
ratio of cash holdings to current and deposit accounts -
is estimated as a function of the most known determinants
of money demand (e.g. real income, interest rates,
payment habits etc.), as well as the tax burden and
government regulation. In turn, an estimate of the size
and development of the shadow economy can be
calculated by comparing the development of cash when
taxes and government regulations are at their lowest
values among the countries included in the analysis, with
the development of cash at the higher levels of taxation
and regulations.
ii. The electricity consumption method relies on the
fact that economic activity and energy consumption have
been observed to be highly correlated. Assuming that
electricity consumption can be used as a proxy for total
(i.e. formal and informal) economic activity, the
difference in the growth of official GDP and GDP
predicted on the basis of electricity consumption can,
therefore, yield an estimate of the shadow economy (e.g.
Kaufmann and Kaliberda, 1996; Lackó, 1998; Schneider
and Enste, 2000). 5 This approach has been employed
widely to measure the shadow economy, particularly for
UDC 343.37-047.23„20”
O. G. Rodina,
PhD (Economics)
V. F. Batula,
Donetsk National Technical University
SHADOW ECONOMY: STATE OF THE ART
O. G. Rodina, V. F. Batula
151
Економічний вісник Донбасу № 4 (34), 2013
O. G. Rodina, V. F. Batula
countries whose data collection lags behind the rest of
the world and hampers more data-intensive methods to
measure shadow economy.
iii. The Multiple Indicators Multiple Causes (MIMIC)
method hypothesises that the size of the shadow economy
can be modelled as a latent variable. Even though this
variable is unobservable, its causes (e.g. an increase in
the tax and regulatory burden) and effects (e.g. an
increase in demand for cash or electricity) can be
observed (Feld and Schneider, 2010; Dell’Anno and
Schneider, 2008). In practice, the basis of the MIMIC
model is a system of simultaneous equations. While one
set of equations models the effects as a function of the
latent (shadow economy) variable, the other set of
equations models the shadow economy as a function of
the causal variables. After estimating the system, a
measure of the size of the shadow economy is obtained
from the fitted values of the latent variable [4].
The dynamics. Many obstacles must be overcome
to measure the size of the shadow economy and to analyze
its consequences on the official economy, although some
progress has been made. This article it is shown that
although it is difficult to estimate the size of the shadow
economy, it is not impossible. We have demonstrated
that with the various methods – the currency demand
method, the electricity consumption method, the Multiple
Indicators Multiple Causes (MIMIC) method some
insights can be provided into the size and development
of the shadow economy of countries. Each approach
has its specific strengths and weaknesses and can provide
specific insights and results. The general impression from
the results of these estimates is that, for all countries
investigated, the shadow economy has reached a
remarkably large size. Although the different methods
provide a rather wide range of estimates, there is a
common finding that the shadow economies of most
transition and all investigated OECD countries have been
growing over the past decade. The same can be said for
the labor market in the shadow economy, which is
attracting growing attention due to high unemployment
in European OECD countries [5].
In a recent study Schneider calculated the size of the
shadow economy in 31 European countries including Malta.
In 2011, according to Schneider, the average size of the
shadow economy in these countries was 19.3% of official
GDP. Malta’s black economy’s size is calculated at 25.8%
of GDP – significantly higher than the average for these
countries. The smallest shadow economy is to be found in
Switzerland with 7.9% of official GDP, while the highest is
in Bulgaria with 32.3%.
Conclusion. Based on the Schneider study, shadow
economy has been decreasing since the highest level of
23.2% in 2003. This decrease would seem to be due to
the fact of the recovery from the world wide economic
and financial crises. The only exception is Greece, where
the recession of the official economy is so strong, that it
even reduced the demand of the shadow economy
activities due to the severe income losses (Fig. 1).
The size of the shadow economy can be reduced by:
• Reducing the financial attractiveness of
undeclared work through better design of tax and benefit
systems, and stricter controls in the social protection
system with regard to the performing of undeclared work:
– ensuring adequate levels of income support,
recognition of the link between rights and contributions,
by controls on welfare beneficiaries and adequate financial
sanctions for tax and social security fraud;
– areas to watch include (i) the taxation of overtime,
(ii) the respect of minimum wages or wages set by
collective agreements and their possible role as levels of
reference for envelope wages, (iii) tax distortions between
the status of employee and self-employed, and (iv) the
Fig. 1. Size of the shadow economy of 31 European Countries in 2012, % of GDP
Source: Schneider, F. (2011), “Size and development of the Shadow Economy from 2003 to 2012: some new facts”
152
Економічний вісник Донбасу № 4 (34), 2013
O. G. Rodina, V. F. Batula
reduction of fiscal burden on low skilled jobs.
• Administrative reform and simplification, with a
view to reducing the cost of compliance with regulations:
– further improvement of labour law and
administrative systems to better cope with short-term
needs and shortages in the labour market;
– sector-specific approaches to transform undeclared
work into regular work (especially in hotels and restaurants,
agriculture, home services);
– enforcement of the Community acquis on the
free movement of workers;
– further exploiting the possibilities of e-government,
online registration and exchange of information between
administrative databases;
• Strengthening the surveillance and sanction
mechanisms, with the involvement of labour inspectorates,
tax offices and social partners:
– exemptions from the practice of written labour
contracts should be limited to the minimum;
– sector-specific solutions to control and regularise
undeclared work with the involvement of the social
partners;
– cooperation between the various bodies in charge
of tax, labour, and immigration, as well as on the
enforcement of legislation and sanctions.
• Trans-national cooperation between Member
States, and Awareness raising activities:
– increasing awareness among the public on the
risks and costs to society linked to undeclared work,
particularly as far as sanctions are concerned; social
partners have a key role to play in this respect;
– informing citizens about the positive effects of
full payment of taxes and about the insurance nature of
social security contributions [6].
Most studies of the shadow economy focus on the
influence on the allocation of resources and the loss of
revenue for the state. But the impact on official
institutions, norms, and rules is even more important.
The shadow economy can be seen as an indicator of a
deficit of legitimacy of the present social order and the
existing rules of official economic activities [5]. The
informal economy is complex as it involves a number of
different activities, making measurement a challenge. With
few exceptions, existing empirical research into the impact
of policies on informality tends to be conducted at the
national level, and can be criticised for relying on unreliable
proxy variables – such as self employment – or model
based estimates that already take into account the impact
of tax and regulatory settings [4].
References
1. Sim Wan Jie, Huam Hon Tat, Amran Rasli, Lee
Thean Chye: Underground Economy: Definition and
Causes, Business and Management Review Vol. 1(2), April
2011, pp. 14 – 24, http://www.businessjournalz.org/
articlepdf/BMR_1205.pdf. 2. Schneider, F. (2006):
Shadow Economies of 145 Countries all over the World:
What do we really know?, Working paper, Paper to be
presented in “Hidden in plain sight: Microeconomic
measurements of the informal economy: Challenges and
opportunities”, September 4 – 5, 2006, London, UK.
3. Rabinowitz, M.(2011) : Rise of the Shadow Economy:
Second Largest Economy in the World , Forbes, http://
www.forbes.com/sites/benzingainsights/2011/11/07/rise-
of-the-shadow-economy-second-largest-economy-in-
the-world/. 4. Andrews, D., A. Caldera Sánchez and
Å. Johansson (2011), “Towards a Better Understanding
of the Informal Economy”, OECD Economics Department
Working Papers, No. 873, OECD Publishing, http://
dx.doi.org/10.1787/5kgb1mf88x28-en. 5. Schneider F.;
Enste D. H. : Shadow Economies: Size, Causes, and
Consequences, Journal of Economic Literature, Vol. 38,
No. 1 (Mar., 2000), pp. 77 – 114, American Economic
Association, http://www.jstor.org/stable/2565360.
6. European Commission : http://ec.europa.eu/
europe2020/pdf/themes/06_shadow_economy.pdf
Родіна О. Г., Батула В. Ф. Тіньова економіка:
сучасний стан
У статті відображено сучасний стан проблеми
тіньової економіки в світі, узагальнено останні дослі-
дження провідних вчених у цій сфері. Запропоновано
декілька методів визначення об’єму тіньової економі-
ки, визначено її сучасну динаміку, наведено методи
для зменшення долі тіньової економіки, що запропо-
новані Європейською комісією.
Ключові слова: тіньова економіка, тіньовий ри-
нок, економічна активність, система “Д”.
Родина О. Г., Батула В. Ф. Теневая экономи-
ка: современное положение
В статье отражено современное положение про-
блемы теневой экономики в мире, проведен обзор
последних исследований ученых в этой сфере. Пред-
ложено несколько методов определения объема тене-
вой экономики, выявлена ее современная динамика,
приведены методы для уменьшения доли теневой эко-
номики, предлагаемые Европейской комиссией.
Ключевые слова: теневая экономика, теневой
рынок, экономическая активность, система “Д”.
Rodina O. G., Batula V. F. Shadow Economy:
State of the Art
This article represents the current state of the shadow
economy in the world. It also contains scientists’ researches.
Offers several advanced methods to estimate the amount of
the shadow economy. The article also represents modern
dynamics methods for reducing the share of the shadow
economy, proposed by European Commission.
Key words: shadow economy, shadow market,
economic activity, system “D”.
Received by the editors: 12.11.2013
and final form 04.12.2013
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