Abstract
This report presents estimates of the size of the shadow economy in Moldova and Romania during the years 2015–2016. The estimates are based on surveys of entrepreneurs in both countries, following the method of Putniņš and Sauka (Journal of Comparative Economics 43:471–490, 2015). The components of the shadow economy captured by this approach include misreported business income, unregistered or hidden employees, and ‘envelope’ wages. Our findings suggest that both Moldova and Romania exhibit high levels of bribery, which is influenced by the number of unregistered companies. The results of this chapter highlight the importance of focusing on different forms of entrepreneurship particularly in transition economies.
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Notes
- 1.
This definition corresponds to what the Organisation for Economic Co-operation and Development (OECD), in their comprehensive 2002 handbook ‘Measuring the Non-observed Economy’, as well as the System of National Accounts (SNA 1993) refer to as ‘underground production’. It is also consistent with definitions employed by other researchers (e.g. the World Bank study of 162 countries by Schneider et al. (2010)). We elaborate further on the components of the unobserved economy in Sect. 2.
- 2.
- 3.
Even when asked indirectly, some entrepreneurs choose not to answer sensitive questions about shadow activity. One way to avoid providing truthful answers to such questions is by simply answering ‘0’ to all of them, suggesting that no shadow activity of any kind has taken place during the past 2 years. We view it as much more likely that these responses reflect avoidance of sensitive questions as truthful opinions and therefore treat these cases as non-responses, in order to minimise the downward bias in estimates of shadow activity.
- 4.
Sauka (2008) used the following approach: in the follow-up survey (1 year after the initial survey), respondents are ‘reminded’ that in the initial survey they stated that, for example, the degree of involvement in underreporting business income by ‘their firm’ (not by ‘firms in their industry’ as formulated in the initial survey) was, for example, 23%. Each respondent is then asked whether the degree of underreporting in their companies is the same this year and if not, to what extent it has changed. The conclusion from using this method is that respondents tend to state the amount of underreporting in ‘their firm’ when asked about ‘firms in their industry’.
- 5.
Sauka (2008) uses both face-to-face and phone interviews and concludes that willingness to talk about sensitive issues like tax evasion in Latvia does not differ significantly between the two methods.
- 6.
Two caveats are worth noting: (1) because we do not measure shadow activity in the state (public) sector, our estimates refer to private sector shadow activity as a percentage of private sector domestic output; and (2) we do not measure the ‘black economy’, i.e. illegal goods and services.
- 7.
In deriving the formula, we make the simplifying assumption that wages of unreported employees are on average equal to those of reported employees.
- 8.
For example, suppose in a given economy wages amount to 80 and corporate income amounts to 20, resulting in true GDP of 100. Suppose that wages are underreported by 50% and corporate income is underreported by 10%, resulting in an official reported GDP of 40 + 18 = 58. In this example the shadow economy is 42% of true GDP, i.e. (100–58)/100. A weighted average of the two underreporting proportions accurately estimates the size of the shadow economy: (0.8)(50%) + (1–0.8)(10%) = 42%. However, neither of the two underreporting proportions themselves correctly represent the size of the shadow economy (50% and 10%) nor does an equal weighted average: (0.5)(50%) + (1–0.5)(10%) = 30%.
- 9.
For example, consider the previous footnote, replacing the two sources of income with two firms: a large one that produces income of 80 and a smaller one that produces income of 20.
- 10.
Instead of asking the question directly, i.e. whether respondents think it is justifiable to cheat on tax if one has the chance (as in the WVS survey), we phrase the question indirectly, for the same reasons that we phrase the other questions related to tax evasion indirectly.
- 11.
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Acknowledgements
We are grateful to the Centre for Sustainable Business at SSE Riga for the generous financial support that made data collection in Moldova possible as well as to the National Scientific Research Institute for Labour and Social Protection for funding data collection in Romania within the project PN 16440102 entitled ‘The impact of labour market institutions on informality. Micro and macro approaches’. We would also like to extend our gratitude to all entrepreneurs who agreed to participate in the interviews.
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Appendices
Appendices
1.1 Appendix 1: Questionnaire Form Used in Moldova and Romania
1.1.1 Entrepreneurs’ Satisfaction with the Business Climate/Informal Entrepreneurship in Moldova and Romania
My name is … from …. We are conducting a survey aimed at understanding entrepreneurs’ satisfaction with the entrepreneurship climate in Romania and Moldova. The main interest of the study is to find out how various policy initiatives implemented within the country and entrepreneurs’ satisfaction with the business climate influence entrepreneurial behaviour, including tax avoidance.
I would like to emphasize that we are only interested in your expert opinion and in no way are we indicating, for instance, that your company is involved in any type of tax avoidance activities.
The interview will last approximately 15 min. We guarantee 100% confidentiality as neither your name nor your company’s name will appear in the data analysis. Data will be analysed using a computer programme without any reference to the data source. If you are interested, we can also send you the summary of the survey results once the survey is complete.
If the respondent hesitates or says ‘no’:
This survey is very important for fostering knowledge about entrepreneurship in (Romania/Moldova). By participating in this survey, you are helping to improve such knowledge. All your answers will be 100% confidential and no one will be able to trace them back to you or your company. Moreover, we are interested in your expert opinion, and what you say will be attributed to the industry or your competitors, not your firm.
1.1.1.1 Questionnaire Form
1.1.1.1.1 External Influences
-
1.
Please evaluate your satisfaction with the performance of the State Revenue Service with regard to tax administration.
1
2
3
4
5
Very unsatisfied
Unsatisfied
Neither satisfied nor unsatisfied
Satisfied
Very satisfied
-
2.
Please evaluate your satisfaction with the government’s tax policy in (insert country).
1
2
3
4
5
Very unsatisfied
Unsatisfied
Neither satisfied nor unsatisfied
Satisfied
Very satisfied
-
3.
Please evaluate your satisfaction with the quality of business legislation in (insert country).
1
2
3
4
5
Very unsatisfied
Unsatisfied
Neither satisfied nor unsatisfied
Satisfied
Very satisfied
-
4.
Please evaluate your satisfaction with the government’s support for entrepreneurs in (insert country).
1
2
3
4
5
Very unsatisfied
Unsatisfied
Neither satisfied nor unsatisfied
Satisfied
Very satisfied
-
5.
Tax avoidance is tolerated behaviour in (insert country).
1
2
3
4
5
Completely disagree (Entrepreneurs do not tolerate involvement in tax avoidance)
Disagree
Neither agree nor disagree
Agree
Completely agree (Entrepreneurs highly tolerate involvement in tax avoidance)
-
6.
Bribing is tolerated behaviour in (insert country).
1
2
3
4
5
Completely disagree
Disagree
Neither agree nor disagree
Agree
Completely agree
1.1.1.1.2 Government Policy and the Amount of Informal Business
-
7.
Please estimate the degree of underreporting business income (in percent) by firms in your industry in 2016_______ % and in 2015 _______ %.
-
8.
Please estimate the degree of underreporting number of employees (% of actual number of employees) by firms in your industry in 2016_______ % and in 2015 _______ %.
-
9.
Please estimate the degree of underreporting salaries paid to employees by companies in your industry (for instance, if in reality an employee receives EUR 400, but the reported salary is EUR 100, then underreporting is 75%; if EUR 400 and EUR 200, then underreporting is 50%). Firms underreported actual salaries by approximately ____ % in 2016 and ____ % in 2015.
-
10.
On average, approximately what percent of revenue (turnover) did firms in your industry pay in unofficial payments to ‘get things done’ in in 2016_______ % and in 2015 _______ %.
-
11.
When other firms in your industry do business with the government, approximately how much of the contract value do firms typically offer in unofficial payments to ‘secure’ the contract? (year 2016)_____%.
-
12.
In some industries, in addition to registered companies such as yours, unregistered enterprises also operate but do not report any of their activity to authorities. In your opinion, what percentage of your industry’s total production of goods/services was carried out by unregistered enterprises in 2016?_____% in 2015? _____%.
-
13.
For a typical company in your industry, what would you say is the approximate probability (0–100%) of being caught if the company were to:
-
(i)
Underreport its business income? ______%
-
(ii)
Underreport its number of employees? _____%
-
(iii)
Underreport the amount it pays to employees in salaries? _____%
-
(iv)
Make unofficial payments to ‘get things done’? _____%
-
(i)
-
14.
If a company in your industry was caught for deliberate misreporting, what would typically be the consequence for that company?
Nothing serious
A small fine
A serious fine that would affect the competitiveness of the company
A serious fine that would put the company at risk of insolvency
The company would be forced to cease operations
1
2
3
4
5
1.1.1.1.3 Company/Performance/Value Creation
-
15.
What is the approximate percentage change in your operating profit, turnover, and total employment in 2016 compared to 2015?
1. Operating profit
2. Turnover
3. Total employment
Change (increase or decrease in %) compared to 2015. For example: +20%, −15%, 0 (no change)
-
16.
What was the approximate operating profit of your company in 2016?
EUR__________
-
17.
What was the approximate turnover of your company in 2016?
EUR__________
-
18.
Approximately how many employees are currently employed at your company (full time equivalent, including you)?
_________ employees
-
19.
In what year did your company start operating?
Year________.
-
20.
What is the main activity (i.e. sector) that your company is engaged in?
⃞ Manufacturing
⃞ Wholesale
⃞ Retail
⃞ Services (please specify______________________________)
⃞ Construction
⃞ Other (please specify______________________________)
-
21.
What is the place in (insert country) where:
-
(a)
Your company is located (headquarters/main office):
(Place: town/city) ______________________ Postal code _________________________
(To be provided by the vendor in case the respondent cannot answer)
-
(b)
Your company does most of its business:
(Place: town/city) ______________________ Postal code _________________________
(To be provided by the vendor in case the respondent cannot answer)
-
(c)
Your company is registered:
(Place: town/city) ______________________ Postal code _________________________
(To be provided by the vendor in case the respondent cannot answer)
-
(a)
1.1.1.1.4 Attitudes/Tax Morale/Barriers to Business
-
22.
For each of the following statements, please indicate on a scale of 1 to 5 whether you agree (1 means you completely disagree, 5 means you completely agree):
Strongly disagree
Disagree
Neither/nor
Agree
Strongly agree
(a) Businesses such as yours contribute a lot to growth of the (insert country) economy and society in general
1
2
3
4
5
(b) Companies in your industry would think it is always justified to cheat on tax if they have the chance
1
2
3
4
5
(c) Being a member of the local community is important to me
1
2
3
4
5
-
23.
As I list some factors that can affect the current operations of a business, please tell me if you think that each factor is no obstacle, a minor obstacle, a moderate obstacle, a major obstacle, or a very severe obstacle to the current operations of this establishment.
No obstacle
Minor obstacle
Moderate obstacle
Major obstacle
Very severe obstacle
(a) Tax administration
0
1
2
3
4
(b) Tax rates
0
1
2
3
4
(c) Trade and customs regulation
0
1
2
3
4
(d) Business licencing and permits
0
1
2
3
4
(e) Functioning of the judiciary/courts
0
1
2
3
4
(f) Uncertainty about regulatory policies
0
1
2
3
4
(g) Corruption
0
1
2
3
4
(h) Anticompetitive practices of other competitors
0
1
2
3
4
(i) Political instability
0
1
2
3
4
Thank you!
1.2 Appendix 2: Observed and Non-observed Components of GDP
Notes on some of components 1–7 follow. Income refers to both business income and employee income. Illegal production (3) includes production of goods/services that are illegal regardless of who produces them (e.g. narcotics, prostitution) and production of goods that themselves are legal but the production is illegal because it is carried out by an unauthorised producer (e.g. unlicensed surgeons, unlicensed production of alcohol). Goods/services that are produced legally (2) can still involve breaches of the law at the registration or reporting stage (e.g. intentional underreporting of profit to evade taxes). Most of the income generated from producing legal goods is reported by registered firms and therefore fully captured in official GDP (6). However, some proportion of income is intentionally hidden from authorities either by not registering the enterprise (5) or by misreporting wages or company earnings (7). Following other studies, we refer to the latter (7) as the ‘shadow economy’ and use the term ‘non-observed’ economy in a broader sense, referring to illegal goods/services, activities of unregistered enterprises, and the shadow economy (Fig. 31).
Observed and non-observed components of GDP. Source: Authors’ own figure
1.3 Appendix 3: Regression Results
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Putnins, T.J., Sauka, A., Davidescu, A.A.M. (2019). Shadow Economy Index for Moldova and Romania. In: Ratten, V., Jones, P., Braga, V., Marques, C.S. (eds) Subsistence Entrepreneurship. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-030-11542-5_7
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