shadow economy white paper-58-8752

8/10/2019 Shadow Economy White Paper-58-8752

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The Shadow Economyin EuropeUsing payment systems to combat the shadow economy

SPONSORED BY

Friedrich Schneider, Ph.D.


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VISA EuropeVisa Europe is the European payment system, owned and operated by its4,600 European member banks and nancial institutions. Part of the globalVisa network, Visa Europe is a privately owned, incorporated company, withan exclusive, irrevocable and perpetual licence in Europe. Today, there are more than 360 million Visa debit, credit and commercial

cards circulating in Europe. Since the end of June 2008, more than 1.3 trillionof purchases and cash withdrawals were made with Visa cards, and more than 11 percent of consumer spending in Europe occurred at point of salewith a Visa card. As a dedicated European payment system, Visa Europe can respondquickly to the market needs of European banks, cardholders and retailersand to meet the European Commissions objective to create an internal marketfor payments. Visa cardholders get convenience, security and global accep- tance. Visa/PLUS is among the worlds largest global ATM networks, offeringcash access to local currency in more than 170 countries. For more informa-

tion about Visa Europe, please visit www.visaeurope.com.Visa Europe, as sponsor, accepts no responsibility or liability for any information or content provided in this paper or associated presentation or work.

Friedrich Schneider, Ph.D.Dr. Schneider is one of the leading experts on the shadow economy.

He has published multiple articles and books on the shadow economy. Heis a professor of economics and the chair of the Department of Economicsat Johannes Kepler University of Linz in Austria.

A.T. KearneyA.T. Kearney is a global strategic management consulting rm known forhelping clients gain lasting results through a unique combination of strate-

gic insight and collaborative working style. The rm was established in 1926 to provide management advice concerning issues on the CEOs agenda.Today, we serve the largest global clients in all major industries and havespecic expertise in cards and payments. A.T. Kearneys ofces are locatedin major business centres in 35 countries, including 24 ofces in Europe.


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A.T. Kearney | THE SHADOW ECONOMY IN EUROPE 1

A t an estimated 2 trillion, the shadow economy in Europe issignicantranging from 10 percent of gross domestic product(GDP) in the United Kingdom to almost 40 percent in some Central

and Eastern European countries. Governments have formulated clearobjectives to reduce this other marketplace, but with a range of causesand drivers, nding a solution is a complex task. A new study explores the structure and impact of the shadow economy and evaluates the roleelectronic payments can play to reduce it.

The shadow economythat blurry area ofcommerce that includes legal activity hiddendeliberately from public authoritiesis a part ofeveryday life almost everywhere. A painter offershis work at half price by doing it outside the of-cial economy and avoiding taxes. A bar owneraccepts 5 for a glass of wine, then doesnt reportthe sale to the authorities. A construction com-pany does not report to the government in orderto avoid meeting legal standards, such as mini-mum wage or safety regulations. Although the exact size of the shadow econ-omy is difcult to ascertain, in Europe it is believedto be about 1.8 trillion.1 In Germany and France,this economy is about one-eighth the size of thecountries ofcial GDP. In less developed EasternEuropean nations such as Bulgaria, Latvia andEstonia, it comes close to 40 percent of GDP. As the global economy suffers througha recession, more people may be inclined to workoutside the normal, legal framework. Therefore, it

is important to understand the shadow economy,and its effectsboth positive and negativesothat countries may take the right steps towardcapturing lost revenues, protecting workers andproviding for their citizens. It is within this context that A.T. Kearney andFriedrich Schneider, Ph.D., professor of econom-ics and chair of the Department of Economics atthe Johannes Kepler University of Linz, Austria,conducted a study to explore the structure of theshadow economy in Europe and identify mea-sures to reduce it. Dr. Schneider divided theshadow economy into 17 industry sectors in veEuropean countries (see sidebar: About the Studyon page 2). A.T. Kearney analyzed the data, evalu-ated the range of solutions used in countriesaround the world, and explored which industrysubsectors could benet most from the use ofelectronic payment systems to reduce the sizeand impact of the shadow economy. This paper highlights the ndings.

1 Friedrich Schneider. Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries.Economics: The Open-Access, Open- Assessment E-Journal,Vol. 1, 2007-9. The calculation encompasses the 27 countries of the European Union (except for Cyprus, Luxembourg and Malta, for which there is no available shadow economy data) plus Croatia, Norway, Switzerland and Turkey.


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THE SHADOW ECONOMY IN EUROPE | A.T. Kearney 2

The Size of the ShadowThe shadow economy is the realm of legal busi-ness activities that are performed outside the pur-view of authorities. It does not include illegalactivities and crimes, such as drug dealing, smug-

gling, money laundering, tax evasion or embezzle-ment, nor does it include household enterprisesthat, by law, do not need to be registered with thegovernment. Figure 1 shows the extent of theshadow economy in the European Union by size

Measuring the shadow economy isa complex science, and explaining allof the approaches would ll a sciencebook. Thus, the following providesa brief overview of the methods usedin this study to measure the shadoweconomies of ve countries.

Direct. Publicly available infor-mation about the shadow econ-omy, such as information fromanonymous surveys, was analysed.Researchers have found survey par-ticipants to be surprisingly honest,and they provide important detailsabout the shadow economy. Indirect. Macroeconomic indica-tors of the real economy were usedto discern the shadow economysimpact. Such approaches, which mustrely on macroeconomic gures that

are often not dependable or sufferfrom systematic failures, include dis-crepancies between national expendi-tures and income statistics, differ-ences between the ofcial and actuallabour force, statistics on transactionsand currency demand, and a compar-ison of electricity consumption withthe output of the real economy.

Model or latent estimation. A statistical technique called MIMIC(multiple indicators, multiple causes)

was used to create a structural modelfor the shadow economy and exam-

ine the relationships between thiseconomy and several input factors,such as the share of direct taxation orthe social security burden. The modelconsists of observed and unobservedvariables and species causal relation-ships among the unobserved variables.

Breakdown by industry segmentsThe study broke down the shadoweconomy by industry segments tocompare it to the ofcial economy.This was difcult because the Euro-pean economy has different industryclassications than the questionnaires.

As a result, in some cases the research-ers were forced to exercise their own

judgement in dividing up industries,and some activities, such as entertain-ment and some household services,

could not be placed into ofcialcategories. As there is no ofcial breakdownof the GDP per industry segment, weused gross value added (GVA), whichis the value of the goods or servicesminus the cost of inputs used to pro-duce them. The difference betweenGVA and GDP is mainly in the treat-ment of taxes and subsidies on prod-ucts or services.

The following three-step approach was used to evaluate areas most likelyto be helped by electronic payments:

Country analysis. Selected vefocus countries with relevant shadoweconomies (Germany, Italy, Spain,Poland and Turkey) and then dividedeach shadow economy into 17 sectors,based on our research and question-naires. The comparison of undeclared

work against underreporting is basedon our own estimates. Sector analysis. Selected thethree sectors with the highest shareof sales underreporting, based on ourestimates, and split them into 30subsectors, based on ofcial catego-ries. As detailed questionnaires werenot available for each subcategory,information on industry subsectorsand researcher judgement were usedto derive an educated estimate.

Addressable areas. Identied

the most promising subsectors forelectronic payments by analyzing thesuggested amount of shadow econ-omy concentration (based on thesector analysis), the size of the sub-sectors and the potential impactof payment systems (derived by thenumber of low-value payments, cur-rent penetration of electronic pay-ments, convenience of electronic pay-ments, prot margins and the shareof undeclared work).

About the Study


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and percentage of GDP. Germany, Italy andFrance account for about half of Europes shadoweconomy. In Eastern Europe, with less-developedcountries, the shadow economy is much largerin comparison to the ofcial economy than it is in Western Europe. For example, Turkey, with anofcial GDP of 439 billion, has a shadow econ-omy of about 143 billion. The research breaks down the structure,scope and effects of the shadow economy in vecountries, chosen because of their different cul-tures and varied stages of development: Germany,Italy, Spain, Poland and Turkey. The research goesbeyond existing studies by conducting a scientic

analysis of the shadow economy in a wide groupof industries. The analysis looks at various solu-tions proposed and implemented by differentcountries, and explores the role that electronicpayments can play in reducing the shadow econ-omy. Lastly, each industry is divided into sub-categories and examined to determine which areas would be most promising for the introductionof electronic payments. The shadow economy can be divided intotwo parts. The study estimates that about two-thirds is undeclared workwhere workers andbusinesses do not declare their wages to thegovernment to avoid taxes or documentation.

Figure 1The shadow economy in relation to total GDP

GDP and shadow economy in billions of euros Shadow economy as percentage of official GDP

Note: EU-27 (no shadow economy data on Cyprus, Luxembourg, Malta), plus Norway, Switzerland and EU candidate countries, for 2005 Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis

Shadow economy

Official GDP

3 4 6

2 , 2

4 5

2 2 8

1 , 7

2 6

1 8 6

5 9

3 0 2

5 7

5 0 9

2 9 5

4 8

4 1

3 3

2 5

2 5

2 3

2 3

2 4 5

3 4 9

1 , 4 2 8

1 9 4

9 0 9

5 2

1 9 9

3 2

1 5 5

1 4 3

4 3 9

7 0

2 8

2 2

1 8

1 1

8 8 7 6 5 4 1 1

1 3

2 1 3

9 2 8

2 2

3 1

1 0 0

8 9

8 0

2 4 4

1 6 2

1 5 7

2 9 9

2 0 8

2 4 3

1 , 8

0 5

15%

Western Europe SouthernEurope

Eastern Europe

G e r m a n y

F r a n c e

U . K .

B e l g

i u m

N e t h e r l a n

d s

S w e

d e n

N o r w a y

D e n m

a r k

S w

i t z e r

l a n

d

F i n l a n

d

I r e l a n

d

A u s t r i a

I t a

l y

S p a

i n

G r e e c e

P o r t u g a

l

T u r k e y

P o l a n

d

R o m a n

i a

H u n g a r y

C z e c h

R e p

.

C r o a t i a

B u l g a r i a

S l o v e n

i a

S l o v a

k R e p

.

L i t h u a n

i a

L a t v

i a

E s t o n

i a

13%

10%

20%

11%

16%17%

16%

9%

16%

14%

9%

24%

26%

21%20%

33%

29%

35%

24%

18%

34%

37%

18%

30%

38%39%

Shadow economy as percentage compared to the GDP


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The other one-third comes from underreporting.Most underreporting occurs in cash-based busi-nesses, such as small shops, bars and taxicabs, thatonly report part of their income in order to avoidsome of the tax burden. The exact division between undeclared workand underreporting is just an estimate, as the datadoes not exist to come to a scientic conclusion.Undeclared work is very common throughoutEurope. For instance, in Bulgaria, a recent studyfound that 48 percent of the workforce receives

a portion of their wages in cash, unofcially,to avoid taxation. This costs the country billionsof euros a year. The second part,underreporting ,is common in cash-based businesses with littledocumentation, such as a bar owner taking moneyfor a drink and not documenting it.

What Lurks in the Shadows When considering the factors that drive theshadow economy, it is important to understandexactly who benets from such transactions.

There are four main factors thatinuence the size and scope of theshadow economy in any givenlocation. Savings. By working outsidethe active economy, participants canavoid taxes and social security pay-ments, circumvent tax and labourregulations and sidestep paperwork.The gure illustrates the strong corre-lation between a countrys tax rateand the size of its shadow economy.Saving money draws people into thisother economy, especially duringan economic downturn. Lack of a guilty conscience.The shadow economy is perceived asa normal part of society. This attitudeis prevalent in places where the per-ceived quality of state institutions andbenets is low, and in some EasternEuropean countries where there islittle condence in the state. Also, thebenets of the shadow economy areimmediate, while state benets areusually indirect, collective or deferred.

Ease of participation. Paying with cash makes it easier to not

declare work. As cash paymentscannot be traced, they are used forboth undeclared work and under-reporting. And with more free timethese days, Europeans can do addi-

tional undeclared work on the side.Low risk of detection. Partici-

pating in the shadow economy is notlegal, but the less chance of gettingcaught, and the lower the penalties,the more people will consider the risk

worthwhile.

What Drives the Shadow Economy?

Figure: The higher tax and social secuirty burden in a country, the larger the shadow economy

Note: Size of the shadow economy, calculated with the MIMIC and currency demand method. Total tax and social security burden of single average wage income earner (including social security payments from the employer) + value added tax.Sources: OECD, Paris, 2003; Schneider, 2003; and Enste (2003) with own calculations; Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis

Share of shadow economy

Tax and social security burden

30%Greece

SpainPortugal Belgium

SwedenDenmark

FranceNetherlands

Austria

Norway FinlandGermanyIreland Canada

U.K.Japan

AustraliaNew Zealand

SwitzerlandUnitedStates

Italy25%

20%

15%

10%

5%

0%25% 35% 45% 55% 65% 75% 85%30% 40% 50% 60% 70% 80%

Correlation: ~ 0.56


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In some cases, the benets are shared betweenthe payee and payer (see sidebar: What Drives the Shadow Economy?). A typical example is thetradesman who offers a 50 percent discount toa customerthe customer saves money on the work, the tradesman saves money on the taxes.Undeclared work is difcult to quantify, as it is inthe best interests of both sides to remain hidden.In other instances, the benets are realised by onlyone side, usually the one receiving payment. Thebar owner who does not declare a beer sale maystill charge full price for the beer. Part of the difculty in reducing the shadoweconomy stems from its ambiguous role in society.There are certainly negative effects. For example,governments lose revenues from income tax andsocial security contributions, and their safety rulesand other regulations cannot be enforced out-side the ofcial economy. Additionally, this othereconomy promotes behaviours that have a negativeimpact on society: inequality of competition, where shadow services are signicantly cheaperthan those from the ofcial economy, and a free-rider attitude, where citizens take ofcial benets without paying for them. Some of these negatives are offset by other,more positive factors, at least in terms of unre-ported work. For example, much of the moneyends up beneting the economy as a whole.The study estimates that about two-thirds ofshadow-economy income is spent in the ofcialeconomy, which boosts national economic growthand amasses value-added tax, which makes up forat least part of the lost revenues. Additionally,many of the services offered in the shadow econ-

omy would likely vanish if forced to exist in theofcial economy. Indeed, in Germany, more thantwo-thirds of services offered in the shadow econ-omy would go away or would be performed bycustomers themselves, according to a recent study.2

Because of these positive factors, it is difcultto quantify the exact toll the shadow economytakes on a countrys ofcial economy. In any case,the shadow economy is large and cannot beignored by any governmentparticularly in timesof economic crisis. Changing the environmentto make people less inclined to participate in theshadow economy is importantand achievable.

The Search for SolutionsFor this study, we interviewed more than 20 pub-lic authorities in Europe, including ministers ofnance, tax authorities and association leaders todetermine the measures taken to limit the shadoweconomy.3 We built a broad database of mea-sures75 in total, including 51 from Europe.4

The ndings show that most leaders arefocused foremost on curbing undeclared work,and on creating credible laws and penalties. A large number of other measures focused on taxfraud, a crime that we do not consider part ofthe shadow economy but is certainly related.The broad spectrum of enforcement measures fallunder two umbrellasnegative and positive.5

Negative measures. New regulations, controlsand penalties to limit the shadow economy by theforce of law are all considered negative measures.They include identication cards for construction workers, the forced use of electronic payments,onsite visits by public authorities or tax audits by

2

Friedrich Schneider. Shadow Economies Around the World: What Do We Really Know?European Journal of Political Economy , Vol. 21/3, September 2005, pp. 598-642. 3 The interviews were conducted in September 2008 by telephone and in person.4 The database included a record of measures collected by European Foundation for the Improvement of Living and Working Conditions (Eurofound: http://www.eurofound.europa.eu/areas/labourmarket/tackling/search.php) and the European Industrial Relations Observatory, and from studies by the

European Commission, including Undeclared Work in an Enlarged Union in 2004.5 Eurofound, 2008.Tackling Undeclared Work in the European Union. Dublin: European Foundation for the Improvement of Living and Working Conditions.


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inspectors. These measures, by their nature, tendto be unpopular, but their success is dependent onreliable enforcement and solid penalties. The Decreto Bersani, a sweeping law passedin Italy in 2006, which imposed strict penaltieson shadow economy activities, is an example ofa powerful enforcement technique. Under this law,a retailer that fails to issue a sales receipt three timesin a ve-year period can be closed by the govern-ment. Construction sites can be shut downif employment irregularities are found by govern-ment inspectors. The use of cash to pay for profes-sional services of more than 100 is illegal. Theenforcement of receipts at retailers, coupled with other measures, brought in 7.8 billionin additional revenues for the government in 2007.

More common measures include monetarypenalties and the loss of benets for shadow econ-omy participants. For example, in Sweden, unem-ployed people who are caught doing undeclared work lose their state benets. Positive measures (indirect and direct). Some of the most powerful measures to curtailthe shadow economy are considered indirectmainly, revamping the tax and social securitysystems to make them simpler and, in some cases,cheaper. In Germany, for example, the govern-ment introduced mini-jobs reform, simplifyingthe red tape and taxes to encourage lower-wage workers, such as household servants, to join theofcial economy. Spain reduced the tax rate andsocial security contributions to discourage tax

Figure 2The more electronic payments in a country, the smaller the shadow economy

Note: EU-27 (no data available for Cyprus, Luxembourg, Malta) plus Turkey Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis

Share of shadow economy

Average number of electronic transactions per inhabitant per year

45%

40%

35%

30%

BulgariaRomania

Turkey

GreecePoland

HungarySlovenia

Estonia

SpainPortugal Belgium

Sweden DenmarkFrance

U.K. Netherlands

Austria

FinlandGermanyIreland

Lithuania

Latvia

Italy

CzechRepublic

SlovakRepublic

25%

20%

15%

10%

5%

0%0 50 100 150 200 250 300

Correlation: ~ 0.7


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evaders. Some countries use direct incentivesto encourage participation in the ofcial econ-omy, such as Belgiums system of vouchers offeredto workers in household jobs, or the reductionof value-added-tax rates for card users.

In some countries, improving the lines ofcommunication between citizens and govern-ments can help. In Denmark, for example, agovernment-sponsored marketing campaign aimedto illustrate the costs of the shadow economy tocitizens. It asked, What if everyone worked un-declared? and showed the harm caused by lost taxpayments, which seemed to reach the youngerpopulation. Such campaigns may have less effectin countries where the shadow economy is anentrenched part of doing business.

Of the leaders interviewed, most under-stood that enforcement was contingent not onlyon measuring the shadow economy but also onmeasuring the success of initiatives to curtail sucheconomies. Yet measurement can be elusive.Tangible results could be discerned in just 10percent of government actionseither becausethe government action was too recent, or becauseit was one of many variables in play. Our research also reveals that underreportinghas not been broadly addressed in Europe. In fact,in evaluating 66 measures countries in Europeused to curtail the shadow economy, just 15 per-cent focused on sales underreporting, and fewerstill considered the increased use of electronicpayments.

Figure 3Shadow economy concentration, by industry

Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis

Turkey Spain Italy Germany Poland

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%Agriculture,hunting and

fishing

Manu-facturing

Construc- tion

Wholesaleand retail

trade, etc.

Hotels andrestaurants

Transport,storage

and com-munication

Real estate,renting and

businessactivities

Healthand

socialwork

Community,social andpersonalservices

Mining,electricity,financialservices,

etc.

6 European Commission, Directorate-General for Employment and Social Affairs, 2004. Undeclared Work in an Enlarged Union.


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A World of Electronic PaymentsCash is perhaps the most important enabler of theshadow economy because of ease of use and dif-culty in tracing it. For example, bar owners or taxidrivers who deal primarily in cash can easily hidepart of their earnings from the government. Thus,the use of electronic payment systems makes it moredifcult to participate in the shadow economy,as it produces documentation of the transactions. In fact, as shown in gure 2 on page 6, thereappears to be a strong correlation between theprevalence of electronic payments in a countryand its shadow economy. Countries with highlevels of electronic payment usage, such as theUnited Kingdom and the Netherlands, havesmaller shadow economies than those with mini-mal levels of electronic payments, such as Bulgariaand Romania. In reviewing the measures used by countriesacross the world to curb shadow transactions, thestudy found that electronic payments have proven

to be an effective technique for producing tangi-ble results. For example, the Mexican governmentestablished a fund to subsidise the cost of elec-tronic payment terminals at small shops. Colombiaand Argentina instituted a sales-tax discount forretail purchases made using electronic paymentcards. Several countries, including Russia, theUnited Kingdom and Singapore, have begunsending government payments electronically.

Meanwhile, other than in Italy where theDecreto Bersani law forced widespread electronicpayments, most other European countries havenot yet employed similar solutions.

The Most Vulnerable IndustriesThe study suggests that the same industrieseither tend to stay out of the shadow economyor are particularly prone to being part of it(see gure 3 on page 7). In the ve countries exam-ined closely in the study, four industriesreal estate, electricity, health care and nancial

Figure 4The shadow economy of the five focus countries, divided by sector

Note: Shadow economy which cannot be attributed to a certain sector: entertainment, massage, prostitution, household services and other. Material costs account for ~30 percent of segment, they include new and second-hand goods and materials and may partly be reported both in the official and unofficial GDP.Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis

Realestate,renting,

businessactivities

Manu-facturing

Whole-sale and

retail,cars andmotor-cycles

Transport,storage

andcommun-

ication

Construc- tion

Healthand

socialwork

Othersocial andpersonalservices

Hotelsand

restaur-ants

Agri-culture,hunting

andfishing

Privatehouse-

holds withemployedpersons

Sectorswithoutshadow

economy

Otherpersonalservices

Split ofGDP

Shadow economy 2005 ( billion)

GDP 2005 ( billion)

1,1001,022

592

370311 309

198 170 12731

932

84

159128

58105

35 1936 19 4 2

418

25-35 25-35 110-120 40-50 15-25 5-10 0-5 20-30 5-10 0-2


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serviceshave the most limited shadow econo-mies. Thats because they are either highly regu-lated and overseen by governments, or rely onregular contracts with customers.

In contrast, construction has the most prev-alent shadow economy of any sector, making upat least 30 percent of all work in each of theve countries, followed by manufacturing, retail,hotels and restaurants(see gure 4).

A few factors drive the shadow economyin these businesses. One is a traditionally highlevel of underreporting, particularly in construc-tion, where there is often a cultural habit for thepractice, especially when dealing with subcontrac-tors. Another is the large number of small, cash-based transactionsa cheap taxi ride, one nightat a hotel, a quick meal at a sandwich shop.In each case, small businesses can rather easilyevade taxes by trading largely in cash.

For a more detailed analysis, three industries were selected: wholesale and retail, automotiveand motorcycle sales and maintenance; transpor-tation, storage and communications; and hotelsand restaurants. These represent an estimated 20to 25 percent of the shadow economy, and they were selected because underreporting both inbusiness-to-business and business-to-consumersalescomprised a large share(see gure 5). Additionally, these industries are wide-ranging. For example, the transportation, storageand communications industry includes mail,telecom and air travel (all highly regulated witha miniscule shadow economy) and taxi services(unregulated and largely cash based). The Benets of Electronic PaymentsThe analysis zoomed in on all three industries,determining which sectors could benet most

Figure 5Estimation of the share of underreporting in the shadow economy, divided by sector

1Sector selected because of higher addressability due to higher underreporting concentration Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; Eurostat; A.T. Kearney analysis

25-35 25-35 110-120 40-50 15-25 5-10 0-5 20-30 5-10 0-2


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from electronic payments. Two factors were com-pared: the size of the shadow economy in thatindustry, and the potential for introducing elec-tronic payment systems. For the latter we tookinto account the current prevalence of paymentsystems and the convenience of using them,among other factors. Based on these criteria, the research identi-ed sectors where electronic payments wouldbe of the most help (see gure 6). These sectors(in all ve countries) included cars and carparts, non-specialised retail stores, restaurants andbars, catering, and transportation (such as taxisand buses). We found a few others specic to anindividual country: in Poland, pharmaceuticalretail; in Turkey, fuel sales; and in Italy andSpain, budget hotels. By targeting these sectors,governments could address 50 percent of the

shadow economy in the three main industries. There are ample reasons for implementingelectronic payment technology, even in smallbusinesses. Electronic payment technology isalready strong throughout much of society, withcredit cards, debit cards and direct deposits repre-senting widespread and accepted forms of pay-ment. Portable card readers offer instant onlinetransactions. Computer-chip technology allowsfast completion of card payments. Online andmobile banking offer access to up-to-date infor-mation about transactions, account balances andpayment receipts as well as speedy payments.

Areas for ActionTo increase the use of electronic payments,two action areas emerged: banking inclusion andcash displacement. For customers without bank

Figure 6Sectors where electronic payments can pay off

Source: A.T. Kearney

Targeted subsectors (bubble size = gross value added in the subsector)

H i g h

L o w

A d d r e s s a

b i l i t y

b y p a y m e n t s y s t e m s

HighLowShadow economy concentration

Post and telecommunications

Fuel sales

Water transport

Car and motorcycle repairs(including personal goods)

Car andcar part sales

Canteens andcatering

Out-of-store retail

Restaurantsand bars

Taxis, buses andcommercial transport

Budgetaccomodation

Non-specialisedretail stores

Supporting transportactivities

Wholesale tradeand commission

trade

Pharmaceuticaland cosmetic

retail

Railways

Pipelines transport

Air transport

Specialisedretail stores

Hotels


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accounts or credit cards, cash is the only formof payment. Thus, providing new options inde-pendent of bank accounts, such as prepaid cards,is a good short-term action to reduce the useof cash. The second area, cash displacement, ismore complex and therefore will require coordi-nated action by all stakeholders. Governments canlead the way by driving more payments, such asbenets, onto cards. Credit and debit cards need tobecome more widespread in different sectors, par-ticularly in sectors such as bars and taxis, wherecards are not traditionally used. Small payments, of 10 or less, mostly dominated by cash today, havebeen slow to move to electronic payments. Theadvent of faster, contactless payments will playa role in accelerating the use of low-value cards.

Indeed, in the long run, electronic payments willexpand for use in person-to-person transactions. Figure 7 illustrates measures that encourageelectronic payments and reduce the use of cash inmature and developing economies. South Korea,for example, is now expanding its electronic pay-ments programme by offering incentives and bysending all government payments electronically.Between 1998 and 2002, use of electronic pay-ments helped South Korea increase its tax reve-nues from $46 billion to $76 billion. This spurredother electronic payment programmes, includingprogrammes to manage R&D spending, providefuel and tax discounts to disabled citizens, dis-tribute fringe benets to government workers,and disseminate subsidies to truck drivers.

Figure 7Proposed government measures to encourage electronic payments

Source: A.T. Kearney

Developedcountries

Developingcountries

Countries employing the measureMeasure

Provide value-added-tax reductions forcard payments

Fund and support new electronic payment terminals

Limit cash payments in certain segments

Offer incentives for using cards

Support low-value payment (LVP) andcontactless technology a war on cash

Push for prepaid cards to enhance bankinginclusion

Send government payments electronicallyor by cards

Colombia, Argentina,South Korea

Mexico, Italy (for tabacchi),South Korea

Italy (planning stage)

South Korea, Mexico, Italy

Netherlands (LVP initiative), Italy (cash)

Potential still to be realised

Russia (purchasing cards),Italy (social prepaid cards)

Possibly

Yes

Yes

No

Possibly

Yes

Yes

No

No

Yes

Yes

Yes

No

Yes

Relevant for


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Additionally, as the programme became moreefcient, costs fell by 90 percent, translatingto savings of $23 million.

In Albania, electronic payments are changinga country where cash has long been the basis fora large shadow economy. The countrys centralbank and ministries of economy and nance joined forces to increase the use of electronic pay-ments, including paying state payrolls directly tobank accounts, and debiting utility paymentsdirectly from bank accounts. Today, the countryhas more banking networks, ATMs and point-of-sale payment systems.7 In 2006, the year of the programmes implementation, the amount ofcash in circulation dropped 7 percent while the Albanian GDP grew 5 percent.

Lining Up for ActionGovernments are not powerless in recoupingrevenues lost to shadow economies. Public man-dates to increase the use of electronic paymentsare proven ways to reduce the size and scope ofa shadow economy. Banks and payment systemcompanies can do their part by exploring com-mercially viable uses for electronic payments,identifying opportunities for using prepaid cardsinstead of cash, encouraging small merchantsand public ofcials to use payment systems, andcontinuing to improve the systems technology.Electronic payments can help countries increaserevenues and reduce cash, the shadow economyskey enabler. Reducing the shadow economy isan achievable task.

7 Fatos Ibrahimi, deputy governor of the Bank of Albania, The Reduction of Cash in the Context of Reducing the Informal Economy (speech at the EuropeanFinance Convention, Tirana, Albania, Oct. 2006).


15/20


Appendix 1The shadow economy in Europe

GDP(millions ofeuros, 2005)CountryAbbreviation

Share ofshadoweconomy

Shadoweconomy

(millions ofeuros, 2005)

Austria

BelgiumBulgaria

Cyprus

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg (Grand-Duch)

Malta

Netherlands

Poland

PortugalRomania

Slovakia

Slovenia

Spain

Sweden

United Kingdom

Subtotal (EU-27)

Croatia

NorwaySwitzerland

Turkey

Total

244,453

301,96621,882

13,659

100,190

207,756

11,210

157,335

1,726,068

2,244,600

198,609

88,863

161,498

1,428,375

13,012

20,673

30,032

4,764

508,964

244,420

149,12379,587

38,480

28,252

908,450

294,674

1,804,58611,036,931

31,260

242,935299,127

386,93712,048,929

at

bebg

cy

cz

dk

ee

fi

fr

de

gr

hu

ie

it

lv

lt

lu

mt

nl

pl

ptro

sk

si

es

se

uk

hr

noch

tr

9.3%

19.6%36.5%

N/A

18.3%

16.1%

38.2%

15.8%

13.2%

15.3%

26.3%

24.3%

14.1%

23.2%

39.4%

30.2%

N/A

N/A

11.1%

27.3%

20.4%35.4%

18.2%

27.3%

20.5%

16.3%

10.3%16.3%

34.1%

16.8%8.5%

33.2%16.6%

22,734

59,1857,987

N/A

18,335

33,449

4,282

24,859

227,841

343,424

52,234

21,594

22,771

331,383

5,127

6,243

N/A

N/A

56,495

66,727

30,42128,174

7,003

7,713

186,232

48,032

185,8721,798,117

10,660

40,81325,426

128,4632,003,479

Sources: Dr. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis


16/20


A p p e n

d i x 2

S h

a d o w

e c o n

o m

y p e r i n

d u s t r y s e c t o r i n

t h e f i v e f o

c u s c o u n

t r i e s

G D P

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

S h

a r e

o f

s h a d o w

e c o n

o m

y

S h

a d o w

e c o n

o m

y

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

A g r i c

u l t u r e

,h u n

t i n g a n

d f o r e

s t r y

F i s h i n

g

Mi n i n

g a n

d q u a r r y i n

g

M a n

u f a

c t u r i n

g

E l e

c t r i c i t y , g

a s a n

d w

a t e r

s u p p l y

C o n

s t r u c t i o n

H o t e l s

a n

d r e

s t a u r a n

t s

T r a n

s p o r t , s t o r a

g e a n

d c o mm

u n i c

a t i o n

F i n a n

c i a l i n

t e r m

e d i a

t i o n

R e a l e

s t a t e ,r e n

t i n g a n

d b u s i n e s s a c t i v i t i e s

P u b l i c

a d mi n i s t r a

t i o n

a n

d d e f e n

c e ; c o m p u l s o r y

s o c i a l s e

c u r i t y

E d u c a t i o n

H e a l t h

a n

d s o c i a l w

o r k

O t h e r

c o mm

u n i t y , s o

c i a l a n

d p e r s o n

a l s e r v i c

e a c t i v i t i e s

P r i v a

t e h

o u s e h

o l d

s wi t h

e m

p l o

y e d p e r s o n

s

E x t r a - t e r r i t o r i a l o r g

a n i s a

t i o n

s a n

d b o d i e s

T o t a l

E n

t e r t a i n m

e n

t ,m a s s a g e , p r o

s t i t u t i o n ,h

o u s e h

o l d

s e r v i c

e s , a n

d o t h e r

T o t a l

s h a d o w e

c o n

o m

y

2 7 ,1 3 4

1 ,7 6 6

2 , 6 4 9

1 4 6 , 8 7 0

1 7 , 9 1 2

1 0 5 , 0 2 7

9 7 , 3 0 4

6 7 ,7 5 6

6 2 , 5 1 1

4 1 , 9 7 7

1 4 7 ,7 1 2

5 4 ,1 4 2

4 3 ,4 3 5

5 0 ,1 9 0

3 4 ,1 5 1

7 , 9 1 3 -

9 0 8 ,4 4 9

S e c t i o n A

S e c t i o n B

S e c t i o n C

S e c t i o n D

S e c t i o n E

S e c t i o n F

S e c t i o n G

S e c t i o n H

S e c t i o n I

S e c t i o n J

S e c t i o n K

S e c t i o n L

S e c t i o n M

S e c t i o n N

S e c t i o n O

S e c t i o n P

S e c t i o n Q

1 2 %1 0 % 0 %

1 8 % 0 % 3 2 %

2 0 %2 1 %

1 6 %1 0 % 0 % 0 %

1 2 %1 0 %

1 4 % 6 %

2 1 . 3 %

3 ,2 5 6 1 7 7

-2 6 ,4 3 7

- 3 3 , 6 0 9

1 9 ,4 6 1

1 4 ,2 2 9

1 0 , 0 0 2 -

1 4 ,7 7 1 - - 6 , 0 2 3

3 ,4 1 5

1 ,1 0 8 -

1 3 2 ,4 8 8

6 1 , 0 1 4

1 9 3 , 5 0 2

G D P

( mi l l i o n

s o f

e u r o s ,2 0 0 5 )

S h

a r e o f

s h a d o w

e c o n o m

y

G E R MA N Y

S P A I N

S h a

d o w

e c o n o m

y

( mi l l i o n s

o f

e u r o s ,2 0 0 5 )

1 9 ,4 6 2

2 5 5

4 ,4 2 0

5 0 4 , 0 2 7

5 3 ,1 0 2

8 8 ,4 4 8

2 3 2 ,1 2 5

3 6 , 3 1 0

1 2 8 , 0 8 1

1 1 2 ,2 0 8

5 5 3 , 9 6 1

1 3 4 , 6 2 7

1 0 1 ,4 0 8

1 6 2 , 0 4 2

1 0 6 , 6 3 6

7 ,4 8 8

-

2 ,2 4 4 , 6 0 0

1 2 % 5 % 0 %1 0 % 0 %

3 8 %1 9 %

1 7 %1 1 % 5 % 0 % 0 %

1 0 % 8 %1 2 % 5 %

1 5 .4 %

2 , 3 3 5 1 3 -

5 0 ,4 0 3 -

3 3 , 6 1 0

4 4 ,1 0 4

6 ,1 7 3

1 4 , 0 8 9 -

2 7 , 6 9 8 - -

1 6 ,2 0 4

8 , 5 3 1 8 9 9

-

2 0 4 , 0 5 9

1 4 1 , 6 1 0

3 4 5 , 6 6 9

S o u r c e

s : D r .F r i e

d r i c h

S c h n

e i d

e r ,

J o h

a n n

e s K

e p l e r

U n i v e r s i t y

o f L i n z ,A

u s t r i a ; A .T .K

e a r n

e y a n

a l y s i s

Wh o l e s a l e a n d r e t a i l t r a d e ; r e p a i r o f m o t o r v e h i c l e s ;

p e r s o n a l a n d h o u s e h o l d g o o d s


17/20


A p p e n

d i x 2

S h

a d o w

e c o n

o m

y p e r i n

d u s t r y s e c t o r i n

t h e f i v e f o

c u s c o u n

t r i e s

G D P

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

S h

a r e

o f

s h a d o w

e c o n

o m

y

S h

a d o w

e c o n

o m

y

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

A g r i c

u l t u r e

,h u n

t i n g a n

d f o r e

s t r y

F i s h i n

g

Mi n i n

g a n

d q u a r r y i n

g

M a n

u f a

c t u r i n

g

E l e

c t r i c i t y , g

a s a n

d w

a t e r

s u p p l y

C o n

s t r u c t i o n

H o t e l s

a n

d r e

s t a u r a n

t s

T r a n

s p o r t , s t o r a

g e a n

d c o mm

u n i c

a t i o n

F i n a n

c i a l i n

t e r m

e d i a

t i o n

R e a l e

s t a t e ,r e n

t i n g a n

d b u s i n e s s a c t i v i t i e s

P u b l i c

a d mi n i s t r a

t i o n

a n

d d e f e n

c e ; c o m p u l s o r y

s o c i a l s e

c u r i t y

E d u c a t i o n

H e a l t h

a n

d s o c i a l w

o r k

O t h e r

c o mm

u n i t y , s o

c i a l a n

d p e r s o n

a l s e r v i c

e a c t i v i t i e s

P r i v a

t e h

o u s e h

o l d

s wi t h

e m

p l o

y e d p e r s o n

s

E x t r a - t e r r i t o r i a l o r g

a n i s a

t i o n

s a n

d b o d i e s

T o t a l

E n

t e r t a i n m

e n



o u s e h

o l d

s e r v i c

e s , a n

d o t h e r

T o t a l

s h a d o w e

c o n

o m

y

1 1 , 0 1 8 5 2

6 ,1 9 6

4 5 ,2 4 7

8 , 8 8 8

1 4 ,7 2 9

4 6 , 3 1 3

3 , 0 1 6

1 7 , 6 9 0

1 0 , 6 4 5

3 3 , 5 9 3

1 5 , 0 4 4

1 2 ,4 9 7

8 , 9 1 5

9 ,1 5 2

1 ,4 2 5

2 4 4 ,4 2 0

S e c t i o n A

S e c t i o n B

S e c t i o n C

S e c t i o n D

S e c t i o n E

S e c t i o n F

S e c t i o n G

S e c t i o n H

S e c t i o n I

S e c t i o n J

S e c t i o n K

S e c t i o n L

S e c t i o n M

S e c t i o n N

S e c t i o n O

S e c t i o n P

S e c t i o n Q

1 5 % 0 % 0 %2 4 % 0 %

4 0 %2 5 %

1 4 %1 0 % 0 % 0 % 0 % 0 %

1 0 %1 5 % 8 %

2 8 .7 %

1 , 6 5 3 - -

1 0 , 8 5 9 - 5 , 8 9 2

1 1 , 5 7 8 4 2 2

1 ,7 6 9 - - - - - 9 1 5

2 1 4 -

3 3 , 3 0 2

3 6 , 8 4 6

7 0 ,1 4 8

G D P

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

S h

a r e

o f

s h a d o w

e c o n

o m

y

I T A L Y

P O L A N D

S h

a d o w

e c o n

o m

y

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

2 9 , 6 5 7

1 , 6 9 1

5 ,7 3 3

2 6 0 ,1 4 7

2 8 ,4 8 7

8 5 ,7 0 7

1 6 9 , 3 5 9

5 4 ,1 1 3

1 0 9 , 6 0 3

6 7 , 5 3 2

3 1 6 ,2 3 3

9 3 , 8 7 5

6 9 , 6 1 4

8 1 , 8 5 3

4 1 ,4 1 1

1 3 , 3 6 1

-

1 ,4 2 8 , 3 7 6

1 5 % 9 % 0 %2 0 % 0 %

3 0 %2 3 %

2 4 %1 7 %

1 0 % 0 % 0 %1 5 %

1 1 %1 4 % 6 %

2 4 .4 %

4 ,4 4 9 1 5 2

- 5 2 , 0 2 9

-2 5 ,7 1 2

3 8 , 9 5 3

1 2 , 9 8 7

1 8 , 6 3 2 -

3 1 , 6 2 3 - -

1 2 ,2 7 8

4 , 5 5 5

1 , 8 7 0 -

2 0 3 ,2 4 0

1 4 5 ,2 8 2

3 4 8 , 5 2 2

S o u r c e

s : D r .F r i e

d r i c h

S c h n

e i d

e r ,

J o h

a n n

e s K

e p l e r

U n i v e r s i t y

o f L i n z ,A


e a r n

e y a n

a l y s i s




18/20


A p p e n

d i x 2

S h a d o w e c o n o m y p e r i n d u s t r y s e c t o r i n t h e f i v e f o c u s c o u n t r i e s

A g r i c u l t u r e ,h u n t i n g a n d f o r e s t r y

F i s h i n g

Mi n i n g a n d q u a r r y i n g

M a n u f a c t u r i n g

E l e c t r i c i t y , g a s a n d w a t e r s u p p l y

C o n s t r u c t i o n

H o t e l s a n d r e s t a u r a n t s

T r a n s p o r t , s t o r a g e a n d c o mm u n i c a t i o n

F i n a n c i a l i n t e r m e d i a t i o n

R e a l e s t a t e ,r e n t i n g a n d b u s i n e s s a c t i v i t i e s

P u b l i c a d mi n i s t r a t i o n a n d d e f e n c e ; c o m p u l s o r y s o c i a l s e c u r i t y

E d u c a t i o n

H e a l t h a n d s o c i a l w o r k

O t h e r c o mm u n i t y , s o c i a l a n d p e r s o n a l s e r v i c e a c t i v i t i e s

P r i v a t e h o u s e h o l d s wi t h e m p l o y e d

p e r s o n s

E x t r a - t e r r i t o r i a l o r g a n i s a t i o n s a n d b o d i e s

T o t a l

E n

t e r t a i n m

e n



o u s e h

o l d

s e r v i c

e s , a n

d o t h e r

T o t a l

s h a d o w e

c o n

o m

y

S e c t i o n A

S e c t i o n B

S e c t i o n C

S e c t i o n D

S e c t i o n E

S e c t i o n F

S e c t i o n G

S e c t i o n H

S e c t i o n I

S e c t i o n J

S e c t i o n K

S e c t i o n L

S e c t i o n M

S e c t i o n N

S e c t i o n O

S e c t i o n P

S e c t i o n Q

G D P

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

S h

a r e

o f

s h a d o w

e c o n

o m

y

T U R K E Y

S h

a d o w

e c o n

o m

y

( mi l l i o n

s o f

e u r o

s ,2 0 0 5 )

3 4 , 6 9 6

9 9 1

4 ,4 8 4

6 5 , 8 6 3

7 , 0 2 8

1 6 , 8 6 6

4 7 ,1 4 8

8 , 5 4 0

5 2 , 3 6 5

1 0 ,7 5 3

4 8 , 6 3 1

1 5 ,2 9 4

1 0 ,4 4 7

6 , 0 7 8

6 ,2 8 2

5 8 5

3 3 6 , 0 5 1

2 0 %1 0 % 0 %

3 0 % 0 % 3 5 %

3 0 %2 0 %

2 5 %2 0 %

1 5 % 0 %1 0 %

2 0 %2 0 %

2 5 %

3 2 . 5 %

6 , 9 3 9 9 9 -

1 9 ,7 5 9 - 5 , 9 0 3

1 4 ,1 4 4

1 ,7 0 8

1 3 , 0 9 1 - 9 ,7 2 6

2 ,2 9 4 - 6 0 8

1 ,2 5 6 1 1 7

-7 5 , 6 4 4

3 3 , 5 7 1

1 0 9 ,2 1 5

S o u r c e

s : D r .F r i e

d r i c h

S c h n

e i d

e r ,

J o h

a n n

e s K

e p l e r

U n i v e r s i t y

o f L i n z ,A


e a r n

e y a n

a l y s i s




20/20

shadow economy white paper-58-8752

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