reducing the hidden economy in bulgaria policies, impact and lessons ruslan stefanov project...

Reducing the Hidden Economy in Bulgaria – Policies, Impact and

LessonsRuslan Stefanov

Project Coordinator

Federal City Council

Washington D.C., April 19th, 2004

The Bulgarian Path

• Hidden economy declined steadily since 1997

• Public-private partnership and international (incl. U.S.) support a key factor for success

• Challenges - need for further attention

The Colors of Hidden Economy

official

hidden

criminal

Source: Friedrich Schneider

35,1

30,427,4

24,321,6 20,9 20,9

16,3

12,6

23,3

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

in %

of p

opul

atio

n

Hidden Economy - Bulgaria’s Position in 98/99

Hidden Economy - Barriers to Business(% of companies defining the respective item as a ‘big’

problem to their business)

39,0

40,6

41,6

43,2

49,2

52,3

0 10 20 30 40 50 60% of companies

AdministrativeCorruption

Lack of Financing

Licensing&PermitRegimes

Crime

Taxes

Unfair Competition

Source: Vitosha Research

Public-Private Action• The Private Sector – 2001/2002 – series of high-profile public and

policy events critical test for success: mechanisms for keeping government on

the right track• Ministry of Labor and Social Policy – 2003 - registration of labor

contacts & social security contributions thresholds 300 000 persons have emerged from undeclared work + more

than $ 150 mln. increase in social security revenues critical test for success: reduction of social security payments,

tax administration improvement • Ministry of Finance – 2003 - customs reform & revenue agency customs revenue increased by 18% and fraud detection by 70% critical test for success: closure of major sources of informality

Stefanov

Most of the actions taken by the Ministry of Labor and Social Policy and the Ministry of Finance were prompted by CSD reports delivered at two international conferences in April and November 2002, which showed that informal economy and its connections to illegal activities hamper the economic development of the country. Here I have briefly scethed the major actions taken by the government and the results the administration claims to have achievedCSD put two critical test for long-term success of such actions. It seems government has failed to achieve them so far.

The Index

Informal Economy Index

Business Perceptions

Hidden Labor

Hidden Turnover

Tax Evasion

• the index has two levels• indices assume values from 0 (low informal economy) to

10 (high informal economy)• measures dynamics + pinpoints problems areas +

attracts public and policy attention

Index Dynamics

0,00

1,00

2,00

3,00

4,00

5,00

Dec'02 March'03 Nov'03

IndexBusiness PerceptionsLaborHidden TurnoverTax Evasion

Source: Coalition 2000

Stefanov

What we see is a revrse in business response to government policies. While strong administrative pressure from the MLSP resulted in a steady fall in all components of informal economy in the beginning of 2003, failure on the side of the government to deliver on promises to lower tax and social security burden and to act aginst major sources of informality (duty free shops) results in a revision of business policy on informality. Though the reversement is still small it might be expected to pick up.

Index Components’ Dynamics

0,000,501,001,502,002,503,003,504,004,505,00

Dec'02 March'03 Nov'03

No Contract EmploymentHidden Clauses Employment Undocumented SalesDeclaring Lower Profit

Source: Coalition 2000

Stefanov

These are components of the Inforlam Labor (spending of hidden revenue) and Hidden Turnover (sources of hidden revenues) Sub-Indices. It would be expected that Informal Employment and Corruption payments go up whever Hidden Turnover Goes up.

The Hidden Economy – Policy Response & Lessons

>50% ~35% ~25%

1996/971999/00

2002/2003

Economic policy Admin. policy ?

THANK YOU

Stefanov

Informal economy is a dynamic phenomenon, which illustrates the degree of compliance of informal social relations to formally imposed rules. Government measures to counter informal economy have to take account of this notion to be sustainable in the long run.

reducing the hidden economy in bulgaria policies, impact and lessons ruslan stefanov project...

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