Economic Bulletin

, Volume 34, Issue 6, pp 19–24 | Cite as

The informal economy in eastern Europe: The example of the Ukraine

  • Ulrich Thießen


Electricity Consumption Budget Deficit Informal Economy Cash Holding Cash Balance 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    The informal economy is defined here as those activities considered in national accounting terms to be value added but which are not covered in the official statistics and the taxation system. For details see Daniel Kaufmann and Aleksander Kaliberda, “Integrating the Unofficial Economy into the Dynamics of post-Socialist Economies: A Framework of Analysis and Evidence”Policy Research Working Paper, No. 1691, World Bank, December 1996, pp. 9 ff.Google Scholar
  2. 2.
    Cf. Istvan Dobozi and Gerhard Pohl, “Real Output Decline in Transition Economies-Forget GDP, Try Power Consimption Data!,Transition Newsletter, vol. 6, no. 1-2, World Bank, Washington D.C., 1996, pp. 17–18, and Kaufmann and Kaliberda op. cit. “Integrating the Unofficial Economy into the Dynamics of post-Socialist Economies: A Framework of Analysis and Evidence”Policy Research Working Paper, No. 1691, World Bank, December 1996, pp. 9 ff.Google Scholar
  3. 3.
    For west Germany the figure was 0.776 during the same period.Google Scholar
  4. 4.
    Cf. Dobozi and Pohl, op. cit. “.Google Scholar
  5. 5.
    Given the high degree of uncertainty on this point, some authors have expressed doubts as to the value of electricity consumption for determining the course of actual GDP. Cf., for instance, Vincent Koen, “Flawed Conclusions”,Transition Newsletter, vol. 6, no. 4, World Bank, Washington D.C., 1996, p. 11.Google Scholar
  6. 6.
    It is assumed that a decline in overall GDP of 1% is associated with a cut in electricity consumption of just 0.85%. Output falls more than electricity consumption.Google Scholar
  7. 7.
    In 1992 and to some extent in 1993 the price of electricity rose sharply against that of other sources of energy. This was followed by a fall to below the initial level with respect to coal and gas and to just above the initial level in the case of oil. Since around 1994 there have been only marginal fluctuations in these relative prices.Google Scholar
  8. 8.
    This figure is the median of an estimation of 10 to 15% for the unofficial economy as a share of total GDP (i.e. including unofficial activity) in the Soviet Union in 1989. Cf. Janine Braithwaite,From Second Economy to Informal Sector: The Russian Labor Market in Transition, unpublished, World Bank, Washington D.C., 1994.Google Scholar
  9. 9.
    This reflects the conservative assumptions chosen.Google Scholar
  10. 10.
    If the electricity consumption indicator is used to evaluate other eastern European countries and a decline in energy efficiency in the course of transformation since 1990 is assumed (an elasticity of electricity consumption, with respect to real GDP of 0.85) in order to determine the lower limit for the size of the unofficial economy, a greater relative size of the unofficial economy than in the Ukraine, is found in those countries suffering political disorder (Aserbaidschan and Georgia). For Russia the lower limit of the unofficial economy is estimated by this method to account for more than 40% in 1995. According to this approach only Uzbekistan of all the eastern European countries had a figure of less than 15% in 1995. Shares of between 20% and 35% were recorded for the eastern central European countries and Estonia, Lithuania and Belarus. Cf. Kaufmann and Kaliberda op. cit. pp. 17 f. For a classification of the eastern European countries into groups of varying degrees of energy efficiency see, for instance. D. Gray, “Reforming the Energy Sector in Transition Economies: Selected Experience and Lessons”World Bank Discussion Paper 296, Washington D.C., 1995.Google Scholar
  11. 11.
    To this end, those variables representing the causes of unofficial economic activity are set at zero in the estimated demand for money equation and the volume of currency in circulation derived is then subtracted from actual currency in circulation.Google Scholar
  12. 12.
    For example the burden on economic activity due to import and export controls, cf. Daniel Kaufmann “Diminishing Returns to Administrative Controls and the Emergence of the Unofficial Economy,”Economic Policy, vol, 19, December 1994, pp. 52–69, and World Bank,Ukraine: The Real Economy and its Sectors: A Quarterly Statistical Abstract Volume II, Issue no. 1, February 1996, Kiev.Google Scholar
  13. 13.
    Due to the limitations of the available statistical data no attempt was made to estimate figures for the previous years.Google Scholar
  14. 14.
    No attempt is made here to examine this influence of the unofficial economy. A first attempt has been made for Greece: Gerasimos T. Soldatos, “The Structural Consequences of the Underground Economy—The Case of Greece”,Jahrbücher für Nationalökonomie und Statistik, vol. 214/3, 1995, pp. 302–323. This study presents evidence that virtually all the components of official GDP on the origin side are influenced by the unofficial economy. The demand side, on the other hand-private consumption was studied-appears to be affected to a lesser degree.Google Scholar
  15. 15.
    Empirically it has been shown that indirect taxes usually have only a weak influence on cash balances. It can be concluded from this that such taxes have little influence on the unofficial economy. On top of this comes the fact that in most cases an increase in the rate of valueadded tax—for example, by, one percentage point-generates greater fiscal receipts than increasing the marginal rate of income tax by one point.Google Scholar
  16. 16.
    The procedure adopted by the USA and Canada could serve as a model here: the tax authorities in these countries enjoy far-reaching rights in verifying the tax returns made by taxpayers.Google Scholar
  17. 17.
    For example, on the basis of an empirical analysis of Pakistan it has been argued that a mutually reinforcing process has been initiated between the budget deficit and the unofficial economy, the breaking of which makes it advisable to reduce the budget deficit without raising taxes. Possible solutions are, it is argued, broadening the tax base and strict spending discipline. Cf. Ghiat Shabsigh, “The Underground Economy: Estimation and Economic Policy Implications—The Case of Pakistan”, International Monetary Fund,Working Paper no. 101, Washington D.C., 1995.Google Scholar
  18. 18.
    It is to be emphasized that this report has not considered whether the unofficial economy affects primarily investment or consumption. It has been argued that unofficial economic activity in eastern Europe focuses on the production of consumer goods and consumption-oriented services, and thus that even given the current significant level of unofficial economic activity no significant impulse for the expansion of productive potential can be expected, because the official statistics have largely accurately reflected the drastic collapse of investment. This supposition, would appear to be, confirmed here, as in the Ukraine the unofficial economy seems to be concentrated on non-tradable goods and this excludes capital goods. On this hypothesis cf. Wolfram Schrettl and Ulrich Weißenburger, “Russia: Success Story or Collapse?”,The Halifax G-7 Summit: Issues on the Table, ed. by Sylvia Ostry and Gilbert R. Winham, Center for Foreign Policy Studies, Halifax 1995, pp. 107 ff.Google Scholar

Copyright information

© Gower Publishing 1997

Authors and Affiliations

  • Ulrich Thießen

There are no affiliations available

Personalised recommendations