'Shadow' economy looms large

Apr 25, 2002
Vessela Sergueva

Black market or "shadow" economies are booming in ex-communist Europe, where they represent over a third of gross domestic product on average, amid lax and corrupt bureaucratic and legal systems, according to experts. More than a decade after the collapse of communism, and with much of the region preparing to join the European Union, poor workers and children are notably forced to earn their living outside legal economic systems.

And politicians in some ex-communist states all too often turn a blind eye to the parallel economy, notably because it reduces pressure on them to find legal solutions to poverty.

"The principal beneficiaries are politicians and bureaucracy," said Tatiana Nenova, a World Bank expert at a conference in the Bulgarian capital Sofia on the shadow economy in transition countries.

"The informal sector reduces the need from poverty-combating programs," she said, while lamenting that: "People in the informal economy are the first to be hit by worsening economy conditions."

According to a study presented to the conference, the shadow economy represents on average 38 percent of GDP in 22 ex-Soviet and Balkan countries, compared to 16.7 in Western European countries.

The record is held by Georgia, where the shadow economy represents 53.2 percent of the country's GDP. At the other end of the spectrum, leading EU candidate the Czech Republic only makes 12.6 percent of its GDP from the black market.

In comparison, within the OECD countries, Italy has the biggest shadow economy in relative terms, with 27 percent of GDP, while the smallest is Switzerland where only 8.6 percent of GDP is generated illegally.

"Countries with more corruption and briberies have a higher share of the shadow economy of official GDP," said Erhard Busek, coordinator of the Balkans Stability Pact launched after the 1999 Kosovo war to promote reform in the region.

"A bit of corruption exists everywhere, but the shape of corruption is shocking for foreign investors," he added.

Black markets have flourished as impoverished countries in the region grapple with the huge task of transforming communist-era centrally planned economies into Western-style free markets.

In the decade from 1990, the biggest surge in the size of the shadow economy was in Ukraine, where it grew by 21.8 percent against an average of 11.9 in ex-Soviet states.

Over the same period, the parallel economy grew by 5.8 percent on average in Central and Eastern Europe.

A worrying trend is that children as young as five are drawn into the parallel economy, said Bulgarian sociologist Tania Chavdarova, adding that 6.5 percent of 5-17-year-olds work up to 13 hours a day for pittance wages.

Bureaucracy tends to drive people into the shadow economy, the Sofia conference heard.

Out of 110 countries studied by the World Bank, the country where an entrepreneur needs to provide the fewest documents to set up a company was Australia, while Belarus was at the other end of the spectrum requiring 20.

"The increase of taxes and social security burden and the inefficiency of the judicial system influence the shadow economy," said Friedrich Schneider, an economics professor from Linz in Austria.

"Countries with less democratic governments are the most bureaucratic," said Nenova. Busek said the key to the problem was political will. The Stability Pact was working to promote "administrative reform, greater transparency in public institutions and, above all, the political will to remove corrupt officials," he said.

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