Getting People in from the Shadow in Eastern Europe

STORY HIGHLIGHTS

• Shadow economy: sum of people & firms doing business in a country's untaxed and unregulated markets for goods, labor and services; more likely to be men, less educated and working more low-skill jobs
• Convincing people of the benefits of paying taxes and building trust in their governments are fundamental to get informal workers and business owners to turn to formal economy
• Making formal work and business viable through tax incentives, smarter social safety benefits and better regulation is also critical

Even as countries in Eastern Europe battle the effects of the global financial crisis, one aspect of their local economies has come under particular scrutiny – the extent of work and business in the "shadow economy".

What is a "shadow economy" and who is part of it?
Magda makes a good example. She is a hairdresser who works at home, has a select and loyal clientele, and steady income. Magda also does not pay income taxes, and her business is unregistered.
Jacek, Magda’s neighbor, is another example. He owns a small construction business and employs men by the day. He is paid in cash, pays his men in cash and reports only part of what he makes as income to the authorities.
Magda and Jacek are among millions of workers in a similar position who work or run a business by avoiding taxation, and outside the boundaries of social, labor and business regulations.  They make up the shadow economy.
Studies show that people working informally in the shadow economies of the newest European Union members are most likely to be men working manual, casual and low-skill jobs such as construction, transport, agriculture, and light manufacturing.  Most have completed secondary education, and a substantial minority even has some university education.  They are also more likely to be native born.
Measuring the exact size of a country’s shadow economy, however, is challenging.

WHY NOW?
One way to measure it is to look at how many workers and business owners are likely to be informal. Taking those workers who do not have a written work contract and certain types of self-employment as informal allows us to measure informal employment as a share of total employment in a country.
Gauging the shadow economy as a percentage of a country’s gross domestic product (GDP), is one indicator of its size. At its highest, the shadow economy made up 33 percent of Bulgaria’s GDP in 2007, while it was 17 percent at its lowest in Slovakia. The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia fell somewhere in between.
Those numbers have improved slowly since then, but amid the ongoing financial crisis, tackling the issue has taken on a renewed sense of urgency.
With many Eastern European countries struggling to consolidate their fiscal positions, convincing citizens that they can benefit from contributing their fair share of taxes and social security contributions is critical. While this helps shore up countries’ finances, citizens also reap the benefits of participating in the formal sector in the long run through better protection for them, their families, and their businesses.
Not participating in the formal economy brings its fair share of trouble.
For individuals and their families, this could mean less protection, less income security, a lack of legal rights if the need arises, inability to plan for their future, lack of access to health care, and inadequate income in old age.
Businesses would not be able to grow meaningfully or avail of credit or legal protection when they need it. This also takes a toll on society, where there is a substantial lack of financing for public services and goods, making the system underfunded and inefficient in several instances.

EARNING CITIZEN TRUST
“In From the Shadow – Integrating Europe’s Informal Labor” is a report that addresses these issues by providing policy guidance for the European Union’s new member countries.
Governments have to make it viable for people to work or run their business in regulated and taxed markets. This means a friendlier tax system and making it useful to people to accurately report income by making the resulting social and employment protection viable. Low-paying, casual part-time jobs, mostly done in the informal sector, need to become more attractive when done formally. This means granting tax incentives for low-wage earners and designing smarter social benefits that reward formal work.
It is also critical to tweak labor market regulations to encourage companies to employ workers through official channels, by working on minimum wage requirements and the process of hiring workers or letting them go.
But improving structural incentives is not enough.
Changing social norms about paying taxes is most important. Building trust in government is a key factor in convincing citizens paying taxes is useful. Good governance, treating taxpayers respectfully and delivering high quality of public services is essential.
Structural reforms and improvements in institutional credibility may be a long drawn and tough process, but is critical to drawing people in from the shadows.

Source: www.worldbank.org
See also:  Report: Bulgaria Relies Heavily on Shadow Economy

20 years of independence

Have a look at this interesting website about Slovenia's history, created for its 20th anniversary of independence: www.twenty.si. Please find below an overview through time by Dr. Bože Repe.

Path to independence

Since 1550, when the Protestant Primož Trubar penned the word Slovenes for the first time, a common Slovenian national identity has slowly developed. The idea of Slovenia only emerged in 1843, whereas the first national programme was drawn up by a group of a few Slovenian intellectuals in 1848. The Slovenes lived in lands historically ruled over by the Austrians that were marked by a strong regional identity and an ethic mix. The eastern part of the Slovenian territory developed independently in the Hungarian part of the monarchy, with the local Slovenes (Prekmurians) developing their own language. By introducing compulsory lower primary schooling, the Hapsburg Monarchy enabled the Slovenes to survive as a nation, while preventing them from achieving political autonomy. With the downfall of the monarchy, the majority of Slovenes joined the Yugoslav state, although the entire western territory encompassing a third of the Slovenian population remained under Italy, the northern part (Carinthia) under Austria, with the eastern part being divided between Yugoslavia and Hungary, with the former receiving the larger part (Prekmurje) and the latter the smaller one (the Raba region). All minorities were quickly subjected to assimilation, initially and particularly the people of Primorska, under fascist rule. In the Kingdom of Yugoslavia, the Slovenes made economic and cultural gains and also acquired their first university; however, they failed to achieve their main goal: political autonomy. By resisting the German, Italian and Hungarian occupying forces, the Slovenes managed to survive as a nation, achieved a change of the western border and the status of a Republic in the Yugoslav socialist federation. They had their own assembly (parliament), government (executive council), after the Constitution of 1974 a collective republic presidency and after 1946 under all state and republic constitutions a right to self-determination, including the right to secession.

Independence

The decision on a completely independent country came to fruition in the second half of the 1980s and was confirmed at a plebiscite in December 1990 after the first multi-party election in the spring of the same year. The reasons underpinning such a decision were Yugoslavia's inability to introduce democratic changes and exit a serious economic crisis resulting from an ineffective economic and political socialist system, and to join the European Economic Community, later the European Community and the European Union. Parallel to this, the historical Slovenian fear of the Germans and Italians faded. Slovenian independence only became a reality after long-winded political conflicts with the Federation and, finally, with a successfully executed armed resistance in a ten-day war against the Yugoslav army. The world’s superpowers including the EU did not look favourably upon Slovenia’s independence and the disintegration of Yugoslavia. This is why Slovenia’s plight for international recognition was difficult and, at first, extremely uncertain, being dependent on countless international circumstances at the end of the Cold War.

Multi-party democracy, a market economy system

The difficulties accompanying the creation of the Slovenian state were complex and multi-layered. The independence process was also combined with an attempt to establish a multi-party democracy and a market economy system. The State of Slovenia was born at a time when the functions of classical nation-states have been exceeded and have, in Europe at least, lost many of them (defence, economic and monetary systems, national currencies, national law, human rights…). Its elites were weak due to its small size, which quickly became apparent in all areas. Sympathy for the young state and its historical traumas was far from what politicians and the population had expected. This explains why so many frustrations emerged during various blockages in the EU accession process and upon joining NATO, combined with a certain stance that Slovenia can be self-reliant. The uncritical mimicry of Western countries on one hand and distancing from all Yugoslavia-related contents on the other were the prevalent characteristics of the first decade of independence. The fact that a Slovenian democracy was established out of the nation’s historic urge to catch the perfect moment to establish a state remains clearly evident today. Even though during the plebiscite Slovenia granted residents from other republics of former Yugoslavia permanently residing within its boundaries all pertaining rights, this promise has not been fulfilled in its entirety. The majority were granted Slovenian citizenship, yet over 24,000 people who did not apply for it or failed to obtain it for other reasons were simply “erased” from the central civil register. A rectification of these injustices is in progress as part of the 20th anniversary of the independent state of Slovenia. No nation from the region of former Yugoslavia has so far been granted the status of a national minority. They are free to associate in cultural associations.

The “Slovenian style” transition, which long seemed to be a success, today reveals a relatively murky side. Regional segmentation was substituted by fragmentation into small municipalities, few of which exemplify development drive. The formerly exaggerated egalitarianism was substituted by extreme individualism, and the key success criteria are political power and wealth. The end justifies the means.

Joining the EU

Can the dark side of the transition process overshadow all positive features of Slovenia’s independence and 20 years of independent national development? Certainly not, from a historian’s point of view. Here, it needs to be immediately pointed out that the Slovenes (too) frequently feel miserable, even though they ought not feel that way according to objective indicators, and that their sense of the injustices, be they actual or imaginary, they have (supposedly) been subjected to is overdeveloped. This is partly a historical feature and partly a feature of the character of the people. Historic breaks are unique. They are not gentle, they create new individual and collective injustices in the desire to rectify the old ones, stir up the social strata, and establish new elites for decades, even centuries ahead. But historical facts paint their own picture. There are less than 200 countries in the world. The Slovenes are one of several thousand nations that have managed to establish their own country. Since 1992, Slovenia has also been a member of the UN. There are stronger nations in Europe that have not been so successful. After all, Slovenia’s entire population could be easily housed in a reasonably-sized suburb of a large European city. In 2004, Slovenia joined the European Union and presided over it in the first half of 2008 as the first of the new member states to do so.

Member of the EU

The status of an independent state offers Slovenia a considerably better position than it would have had if, given the favourable development of events, Yugoslavia had actually reformed itself and entered the EU as a single state. In this case, Slovenia would have only been one of its regions. Currently, Europe shows the will to together resolve the global financial crisis and retain the established integration levels. One can only hope it will pass this test. At the same time, nation-states still represent a significant protection factor. Slovenia has already overtaken the average EU GDP, and even overtaken some of the older member states, while still somehow managing to retain its social state model. It is a modern state with a well-diversified education system along with developed, widely accessible information technologies and good road connections (and a terribly out-dated railway system). It is one of the ecologically better developed states, has a low crime rate and offers its inhabitants a comfortable and quality life.

The Slovenes

Of course and in spite of the anniversary, some self-criticism is in order: completely discerning the consequences of local community development from global development is never possible. The Slovenes have some character traits that need to be considered in any assessment: the “obsession for possession” results in the majority of family investments being made in their own houses and apartments. Since the early days of motorisation in the 1960s, owning a car has been considered a status symbol. Janez Menart, one of the most talented Slovenian poets of the second half of the 20th century then stated: “In a lovely Zastava 750 the Gent rides about, while his belly’s busy rumbling on some sauerkraut”. Slovenian motorisation has increased tenfold and modernised since then, but the mentality remains the same. Slovenes reveal no considerable sense of humour (unless the joke concerns one of the nations of former Yugoslavia). The average Slovene is quite conservative, but simultaneously exemplifies no problems with globalisation. You will find them all over the world and, similarly, all modern artistic and other trends quickly find their way to Slovenia. In sports, the results far exceed the size of the nation.

Another Slovenian characteristic is that children become independent comparatively late due to accommodation being relatively inaccessible and other economic reasons. The “prolonged adolescence” in Slovenia extends into the thirties. This immaturity is a characteristic which could be symbolically transferred to the state itself. Frequently and despite it being 20 years of age, Slovenia is also still on the path to true independence. The endeavours to achieve the so-called third national consensus on the future course of the nation (following the plebiscite, gaining independence and joining the EU) have so far not borne fruit.

In fact, the Slovenes create most of their own problems. This phenomenon has frequently occurred in Slovenian history. However, at present, the existence of the Slovenian nation is not at risk by others, but chiefly depends on itself and its own resourcefulness. If Slovenes manage to overcome this uncertainty, the content of the state they have fortunately managed to create, partly due to their own ingenuity and partly due to favourable historical circumstances, might see a more opulent future.

Dr Božo Repe

Slovenian gas discovered

The Slovenian Minister of Economy, Darja Radic, said that natural gas had been found in Slovenia's north-eastern region of Pomurje. The find is very encouraging, especially in the light of supply interruptions caused by recent unrest in North Africa, she pointed out.

"We have started drilling in Pomurje, research has been made and we already have the first find," Radic said about a find in Petisovci made by a British company.

Slovenia is currently getting gas from Algeria and Russia and the minister believes that a third, local source of gas would be the best way to secure stability of supply.

Asked about the South Stream pipeline project of Russian gas giant Gazprom which is supposed to run trough Slovenia, Radic said the project was "interesting" but that nothing had been decided yet. "It is not certain yet whether the project will be implemented or not," she said.

Slovenië ratificeert NATO akkoorden Albanië en Kroatië

Slovenia's parliament ratified the NATO accession of Albania and Croatia on Monday, paving the way for the alliance’s enlargement in the Balkans.

Slovenia’s ratification was keeping NATO officials on their toes. The border dispute with Croatia has already posed big problems in Zagreb’s path towards European Union membership, with Slovenia blocking Croatia's EU accession talks in December. Many in NATO feared that Slovenia might do the same for Croatia’s membership in NATO, leaving both Albania and Croatia out and overshadowing the summit marking the 60-th anniversary of the alliance.

The protocol for Albania was backed unanimously in the Slovenian parliament. Croatia's passed by a large majority although nationalist parties called for a boycott.

Slovenian Prime Minister Borut Pahor said before Monday's vote that the NATO membership issue was different from the EU accession process.

"Slovenia's national interests are not endangered by the debate on Croatia's accession to NATO," he told deputies and urged them to back the ratification.

Source: BalkanInsight

Balkan Reforms Lag, Economic Freedoms Weak

Economic freedoms in the Balkans are suffering because of bloated governments, state monopolies, inconsistent regulations and widespread corruption, said the 2009 Index of Economic Freedom report, which stressed that further economic and fiscal reforms were crucial at a time of global recession.

Out of all Balkan countries, Bulgaria was the front runner coming in at 56th place. There was respectable showings by Albania at 62nd place, Romania at 65th and Slovenia at 68th place, which however managed the biggest gains in economic freedom in Europe, improving its score by 2.7 points in 2008.

Macedonia and Montenegro placed in the middle tier, ranking 78th and 94th respectively. The biggest laggards of the region were Serbia at 109, Croatia at 116 and Bosnia-Herzegovina at 134, just ahead of Ethiopia.

"Business freedom, government size, monetary freedom, investment freedom, and freedom from corruption are weak," the report said of Serbia, while on Croatia it noted that its "overall weakness stems from its outsized government", while "in addition to high levels of government spending, the government's presence in other key areas of the economy is considerable."

Bosnia's position at the bottom of the European pile, ahead only of Russia, Ukraine and Belarus, was due to the "inefficient and high government spending, weak property rights, and widespread corruption" that "hold down overall economic freedom...and discourage entrepreneurial activity."

"As a result of sluggish privatization of state-owned enterprises, the private sector's contribution to GDP has grown rather slowly," the entry on Bosnia added. "Bureaucratic and non-transparent regulatory systems remain a problem for foreign investors and domestic entrepreneurs."

The report said the low flat tax rates of 10 to 15 percent – among the lowest tax rates in the world – along with strong focus on privatization and internal structural reforms were a driving force for strong growth in Macedonia, Montenegro and Serbia in 2008.

source: BalkanInsight.com