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Institutions and the Informal Economy: Tax Morale of Small Businesses in Armenia and Georgia

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Informality, Labour Mobility and Precariousness

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Abstract

Georgia is said to be one of the countries with the largest informal economies in the world. This is despite the fact that the country is one of the top reformers among the countries of the former Soviet Union in terms of democratization and marketization. Its neighbour Armenia, on the other hand, has been slow with reforms and today remains a more authoritarian country with a less competitive private sector. This chapter seeks to find out whether the difference in the size of the informal economy between the two countries can be attributed to discrepancies between formal and informal institutions. Both quantitative and qualitative secondary data are used to determine the levels of tax morale of small businesses as an expression of diverging formal and informal institutions. The empirical evidence shows larger discrepancies between formal and informal institutions for Armenian than for Georgian entrepreneurs and thus rules out the institutional incongruence hypothesis as a possible explanation for the differences in the size of the informal sectors.

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Notes

  1. 1.

    See for instance the Bertelsmann Transformation Index, Global Competitiveness Index, Corruption Perception Index, Index of Economic Freedom, Global Innovation Index, or the International Property Rights Index.

  2. 2.

    See Boanada-Fuchs and Boanada Fuchs 2018 for a detailed “taxonomic understanding of informality”. The authors analyse existing literature and find seven “thematic dimensions of informality”, namely an economic, legal, technical, organizational, political, social, and a cultural dimension. See also the Global Encyclopedia of Informality, edited by Alena Ledeneva, for a collection of informal practices around the world.

  3. 3.

    For detailed overviews of the “New Institutionalisms” in the Social Sciences, see for example Koelble et al. (1995), Hall and Taylor (1996), Brinton and Nee (1998), Peters (2005), Nee (2005), Lowndes and Roberts (2013).

  4. 4.

    Legitimacy is defined here as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman 1995, p. 574).

  5. 5.

    See Helmke and Levitsky (2004) for a typology of informal institutions and their interactions with formal institutions. Other works systematizing these relationships include Lauth (2000), Grzymala-Busse (2010), and Voigt (2019).

  6. 6.

    A distinction is made here between the “informal” and the “illegal” economy.

  7. 7.

    For a detailed review on the topic see Horodnic (2018) and Horodnic and Williams (2019).

  8. 8.

    Since the latest available year for which there is an estimate of the size of the informal economy in Schneiders and Medinas paper is 2015, I will use data from the same time period for the analysis.

  9. 9.

    For a detailed literature review on tax morale and its influencing factors see Horodnic (2018).

  10. 10.

    For a thorough review, again, see Horodnic (2018).

  11. 11.

    The following institutions were asked about: free elections, freedom of speech, peace and stability, law and order, gender equality, fair justice system, independent press, and political opposition.

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Paquin, J. (2022). Institutions and the Informal Economy: Tax Morale of Small Businesses in Armenia and Georgia. In: Polese, A. (eds) Informality, Labour Mobility and Precariousness. International Political Economy Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-82499-0_6

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