Changing attitude about working in the shadows

Feb 12, 2004
By Aleksei Gunter

TALLINN - When Rapla county food inspectors warned a private entrepreneur about the necessity of getting a food production permit for his tiny meat-processing workshop last year, the man did not seem to care. Why bother with the red tape if it affects the bottom line, he reasoned. But last week, after receiving information about suspicious meat products ending up in a local shop, the inspectors took more forceful action and raided the underground workshop.

What they saw was enough to make their stomachs roil. Meat-filled pastries, canned meat-products, pate and "sult," a favorite Estonian meat-jelly, were made in atrocious sanitary conditions, according to the Rapla county department, and now the lackadaisical owner faces a fine of 1,150 euros, equal to one month's revenue for the illegal meat processor.
The continued existence of such underground businesses on a wide scale - even three months before EU accession - raises questions as to the size, and significance, of corruption and the shadow economy in Estonia.
In a recent survey, the Estonian Institute of Economic Research claimed that in 2003 Estonia moved four positions down the list of countries of most corrupt countries, from 25th to 29th.
"Corruption and shadow economy-wise, Estonia is on the middle level in the world. However, we have good neighbors in the north to learn from," said Marje Josing, director of the Estonian Institute of Economic Research.
The top four positions in the rating were taken by Finland, Denmark, New Zealand and Iceland, while the bottom of the barrel was occupied by Argentina, Indonesia, Venezuela, Russia and Poland (49th to 45th respectively).
Josing said that high level of corruption alone "steals" at least 1 percent of GDP growth annually.
Still, during the year-long survey, in which Estonian businesspeople estimated the level of different types of corruption, bribery and tax-fraud were seen as minimal. Only 12 percent of the respondents had been asked for a bribe in 2003, and nearly half of those agreed to "grease a palm." The top five types of officials who asked for a bribe were traffic police, healthcare service workers, local municipality officials, general state officials and customs workers.
The average sum of a bribe in 2003 comprised 3,200 kroons (204 euros), though bribes themselves varied from 10 euros to 1,277 euros. "Bribes to the medical workers were most probably caused by the long queues to specialist doctors," Josing suggested, stressing the report's positive aspects. "We see from the results that corruption is a problem, but the general trend is positive. The state has seriously improved its administrative capability when it comes to collecting taxes," she said.
But the shadow economy is alive and well and injuring the state's offers. Because of the so-called "envelope salaries" - cash payments evasively handed to employees regardless of the obligatory social and income tax - the government lost 102 million euros in uncollected taxes last year.
"Companies pay envelope salaries because otherwise they would not be competitive on the market. The usual scheme provides an employee with a basic salary that is paid legally, and the rest is paid in cash," said Evelin Ahermaa, researcher from the Institute.
However, every second employee who receives envelope salary regrets it, according to the survey. The government currently provides extra payments to people who joined the second pillar of the pension reform program and agreed to transfer 2 percent of their legal income to a pension fund. Besides, when getting a mortgage loan or credit card, only taxable legal income is considered by lenders.
Interestingly, attitudes toward shadowy products are changing. If in 1999 40 percent of respondents preferred cheaper, illegal products, then in 2003 only 12 percent did so.
Yet the share of consumers who would occasionally buy an illegal product such as a pirated CD or Russian cigarettes smuggled into Estonia remains at a worrying 46 percent level.
As to the open markets, the main sources of illegal goods that were once full of knock-off PlayStation CDs and Levi's jeans, they are now more focused on smuggled alcohol and cigarettes that are usually also available from private apartments where the smugglers live, Ahermaa said.
Meanwhile, the government isn't sitting complacent and is polishing up its anticorruption strategy.
"Taking into account our Soviet past, Estonia's position in the corruption rating is not bad," said Minister of Economic Affairs and Communications Meelis Atonen. "The police should obviously lower corruption among its personnel. As to software piracy, maybe the software manufacturers should have a more flexible price policy," he added.
Dishonest traffic police officers are difficult to catch because they use third-party mediators to collect agreed-upon bribes, according to the internal control division of the Estonian Police Department.

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