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associate professor Kosmarova Nadiya
Crimean economic institute of Vadim Hetman Kiev national economic
university
Methods of estimating the size of non-observed economy
in Europe
Good quality national accounts are vital for economic policy making and
research. An important aspect of their quality is the extent to which they
cover all economic activities. Exhaustive coverage is difficult to achieve
because of the wide range of economic activities, some of which are
deliberately concealed from observation by those responsible for them.
A lot of attention is paid to the possibility of missing economic
activities, and reports often suggest that the GDP figures published by
national statistical offices exclude large parts of the economy.
However, during the course of research,
different scientists have used by the wide range of
different terms in common use - non-observed economy,
hidden economy, shadow economy, parallel economy, subterranean economy,
informal economy, cash economy, black market. This lack of precision regarding
the measurement target is created a number of problems.
First, used methods of
measurement frequently fail to define exactly what is to be measured and thus,
possibly, missed. The second problem is the dependence of many estimation
methods upon simplistic assumptions that cannot be justified.
In this paper will be given a short
overview of the methods used for measuring the non-observed economy (NOE). Only
one will be used to assess the size of the non-observed economy in Europe.
The so-called “monetary
models” assume that changes in the patterns of currency demand can be
attributed entirely to, and reflect accurately, changes in missing economic
activities. Another popular model is based on changes in consumption of
electricity. Such methods make inadequate use of the wealth of pertinent
economic data available and there is no obvious way in which their findings can
be combined with others to provide more reliable measures. One of the reasons
that these macro-models get so much attention is that national statistical offices
do not explain their own methods sufficiently, and thus users suppose that
other methods are needed and useful.
There is a method of estimating the size of the
NOE based on the Eurostat (2002) framework, called the Eurostat method. It is
actually a set of methods for estimating the size of each type of NOE according
to Eurostat. This method is probably one of the most detailed methods of
estimating NOE. Most detailed also means most complicated, so this method is
rarely used for estimating NOE for more than a couple of years at a time.
The multiple indicator multiple cause (MIMIC)
model belongs to the linear independent structural relationship (LISREL) family
of models and utilizes structural equation modeling (SEM) to get information
about the subject of research.
The MIMIC approach has the common errors and
anomalies that might occur. Such as,
sensitivity to the change of units of measurement: different results can be obtained
by measuring the variables in different units; differencing variables to insure
stationary being unnecessary, inefficient, creating problems and/or resulting
in a predictor that has no long-run relationship with the endogenous variables
it is supposed to predict; the sign of the unit coefficient during
normalization is sometimes chosen simply out of convenience or so that the
signs of the other coefficients would make sense, inverting the sign of the
unit coefficient inverts the time path of the result, if the latent variable is
interpreted as a series of changes.
Nevertheless, the MIMIC method is the most
useful in EU. According to Friedrich Schneider research, the shadow economy is the realm of legal business activities performed outside
the purview of authorities. It doesn’t include illegal activities and crimes,
such as drug dealing, smuggling, money laundering or embezzlement, or household
enterprises that, by law, don’t need to be registered with the government.
Although the exact size of the shadow economy is difficult to ascertain,
estimates put it at about ˆ2.2 trillion in Europe in 2011. This is 5 percent higher
than the ˆ2.1 trillion in 2007, and a full rebound from the shadow
economy’s pre-crisis size. In Germany and France, this economy is about
one-eighth the size of the countries’ official GDP, but in less-developed
Eastern European nations, such as Bulgaria, Croatia, Lithuania and Estonia,
it’s 30 percent or more.
Four main factors influence the size and scope of the shadow economy in
any given location:
Savings. By working outside the active economy, participants can avoid
taxes and possibly social security payments, circumvent tax and labor
regulations, and sidestep paperwork. A strong causal relationship exists
between a country’s tax rate and the size of its shadow economy. “Saving money”
by not paying the full taxes and, thus, boosting the available personal income
draws people into this other economy, especially during an economic downturn.
Lack of a “guilty conscience.” The shadow economy often is considered to
be a normal part of society. This attitude is prevalent in places where the
perceived quality of state institutions and benefits is low, and in some
Eastern European countries where there is little confidence in the state. The
benefits of the shadow economy also are immediate, while state benefits are
usually indirect, collective or deferred.
Ease of participation. Paying with cash makes it easier not to declare
work. Since cash payments cannot be traced, they are used for both undeclared
work and underreporting. Many Europeans do additional undeclared work on the
side and receive payments in cash.
Low risk of detection. Participating in the shadow economy is illegal,
but the less chance there is of getting caught, and the lower the penalties,
the more people will consider the risk worthwhile.
In any case, the shadow economy is large and can’t be ignored by any
government, particularly in times of economic crisis. As a result, many
European countries are debating the shadow economy and measures to curb it.
Here is two solutions to curb the shadow economy - revamping the tax and
social security systems to make them simpler and, in some cases, cheaper. The
second is cash displacement. Countries where citizens frequently use electronic
payments have smaller shadow economies than those that use cash.
Since the first research into the non-observed
economy and attempts to measure it, the researchers have tackled the subject
from different angles, using different approaches, and still no optimal
approach on which all would agree has been found.
One thing MIMIC can do without any outside help is
estimate relationships between the latent variable and its causes and
indicators. While most of the relationships outputted by the model have been
expected, an interesting negative relationship between the direct taxes and NOE
and social security contributions and NOE has been estimated. This relationship
seems to be present in the economies of the transitional countries.
MIMIC should however be viewed as complementary
to other methods of estimating the NOE, rather than a method itself. For
instance, elaborate methods that produce detailed estimates of the NOE usually
cover very short periods of time, often just a year or two. MIMIC can be used
successfully to complement those methods and to extend their findings over a
longer period of time.
Literature
1. Friedrich Schneider, Andreas Buehn, Claudio E. Montenegro. Shadow Economies
all over the World: New Estimates for 162 Countries 1999 to 2007// http://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/SHADOWECONOMIES_June8_2010_FinalVersion.pdf
2. Friedman E. Dodging the Grabbing Hand: The Determinants of Unofficial
Activity in 69 Countries / Friedman E.., Kaufmann D., Zoido-Labton P. //
Journal of Public Economics. – 2000. – Vol. 76. – No 3. –
P. 459-493.//
http://www.gfintegrity.org/
3. Non-observed economy in National Accounts, survey of country practices. –
New York: United Nations, 2008. //http://www.economy.org/-
Estimating the
size of