Measuring the Non-observed Economy in a Transition Economy: The Case of Bosnia–Herzegovina

Abstract

In this paper the Organization for Economic Cooperation Development (OECD) approach (adjusted) is applied to estimate the size of the non-observed economy (NOE) in Bosnia and Herzegovina for the year 2001. The method proposed attempts to identify the structure of the NOE according to the reasons behind the unrecorded value added (statistical, illegal and economic). The NOE was estimated for each of the Bosnian entities separately according to sector of activity. A definition of the shadow economy is proposed based on SNA93. A comparison with alternative estimates of shadow economies in Central and Eastern European countries is provided.

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Notes

  1. 1.

    Eilat and Zinnes (2002) reveal many weaknesses of the electricity consumption method: ‘First, not all shadow activities use energy electricity in particular. Second, technical progress that changes the efficiency of use of energy may change the electricity/total economic activity (TEA) ratio over time and across countries. So can many other factors such as changes in industrialization, efficiency changes in the industry and changes in energy prices. These problems become particularly manifest during transition when the share of industry typically contracts profoundly and the share of nonenergy-intensive agriculture expands. Moreover liberalization of the energy market could cause big changes in electricity prices and use. Finally, the massive modernization efforts associated with transition will undoubtedly increase the energy efficiency of output’ (p. 1238).

  2. 2.

    See World Bank (2005, p. 3) for institutional and methodological issues of the Bosnian statistical system.

  3. 3.

    The 1993 SNA states explicitly that illegal activities should be included in the system of NAs, noting that ‘despite the obvious practical difficulties in obtaining data on illegal production, it is included within the production boundary of the System’ (1993 SNA: 6.30), and that: ‘All illegal actions that fit the characteristics of transactions – notably the characteristic that there is mutual agreement between the parties – are treated the same way as legal actions’ (1993 SNA: 3.54). The 1993 SNA suggests that illegal actions for which there is no mutual agreement can be construed as an extreme form of externality for which, in general, no values are imputed in the NAs. So it is the absence of consent rather than illegality that is actually the criterion for exclusion from the production boundary (OECD, 2002, p. 38).

  4. 4.

    See the Appendix for details on the data sources.

  5. 5.

    Excluding the NACE (Classification of Economic Activities in the European Community) categories L-Public administration, defence, compulsory social security, M-Education and N-Health and social welfare.

  6. 6.

    Usually, it is observed that the productivity level in the informal market is lower than that prevailing in the formal market. The lower value of output per informal worker can be explained by two factors: (1a) the informal market usually has access to less-advanced equipment than the formal market, which implies a lower productivity per worker employed in the informal labour market; (2a) the informal labour market employs those who cannot find a job in the formal sector. They have fewer skills and lower abilities, implying lower productivity. At the same time, there are factors that can increase the VA produced by the informal activities: (1b) in terms of the cost of labour, since it is expected that productivity will be lower in the informal sector, the irregular employees normally receive a lower wage; (2b) products and services offered by informal activities are produced without having to pay taxes and contributions; therefore, they could be sold with a higher markup. These two factors that (on the one hand) lower the value of the output and (on the other) decrease the cost of labour and the tax burden in the production process could generate very similar amounts of value added between the formal and informal worker. To take into account mainly the first two components, the value added produced by an informal worker is lower by 10% than that of the regular worker.

  7. 7.

    When estimates for 2001 are unavailable, we show in Figure 3 the average value calculated in the period from 2000 to 2003.

  8. 8.

    For example in Poland, the contribution of NOE to GDP using the output method was 15.7% whereas it was 7.8% with the expenditure method; in Latvia the respective figures were 13.6% (production method) and 8.28% (expenditure method), and in Norway 2.4% (production method) and 1.0% (expenditure method) (UN, 2006, p. 8).

  9. 9.

    Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Poland, Romania, Serbia/Montenegro, Slovakia, Slovenia.

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Acknowledgements

This study was made possible through support provided by the US Agency for International Development's mission to Bosnia and Herzegovina under the terms of Award No. 168-A-00-02-00113-00. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the US Agency for International Development.

We are grateful to Friedrich Schneider, Almir Jazvin and Emil Okanovic for insightful advice and also to Simon Jansen for reviewing the paper. Special thanks to the Financial Service Volunteers Corps and Central Banks of Bosnia Herzegovina. The usual disclaimer applies.

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Appendix: DATA SOURCES

Appendix: DATA SOURCES

Table A1

Table 4 Table a1

STATISTICAL SOURCES

Agency for Statistics of BiH 2003: NAs, GDP for BiH 1996–2001. Statistical Bulletin 2003–1, Sarajevo, January 2003.

Agency for Statistics of BiH 2003: NAs, GDP for BiH 1997–2002. Statistical Bulletin 2003–6, Sarajevo, December 2003.

Central Bank of BiH 2004. Bulletin no. 2, June 2004.

Department for International Development (UK) 2004: labour and social policy in BiH: the development of policies and measures for social mitigation. Living in BiH, July 2004.

Federal Office of Statistics 2002: GDP and Gross Fixed Capital formation in Federation of BiH for 2001. Statistical Bulletin no. 51, November, ISSN 1512-5106, Sarajevo.

Federal Office of Statistics 2003: GDP and Gross Fixed Capital formation in Federation of BiH for 2002. Statistical Bulletin no. 62, November, ISSN 1512-5106, Sarajevo.

Federal Office of Statistics 2002: Statistical data on Economic and other Trends. July, 2002 no. 7. ISSN 1512-5017, Sarajevo.

Federal Office of Statistics 2003: Statistical data on Economic and other Trends. July, 2003 no. 7. ISSN 1512-5017, Sarajevo.

Federal Office of Statistics 2004: Statistical data on Economic and other Trends. July, 2004 no. 7. ISSN 1512-5017, Sarajevo.

Transparency International BiH 2004: Corruption Perception study BiH.

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Dell'Anno, R., Piirisild, M. Measuring the Non-observed Economy in a Transition Economy: The Case of Bosnia–Herzegovina. Comp Econ Stud 49, 609–631 (2007). https://doi.org/10.1057/palgrave.ces.8100211

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Keywords

  • Bosnia and Herzegovina
  • non-observed economy
  • shadow economy
  • unofficial economy

JEL Classifications

  • P240
  • C820