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Estimating the Size of Underground Economy in Romania

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  • Albu, Lucian Liviu

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Abstract

Based on two Romanian household surveys, we analyse the structure of households’ income by sources: main job, secondary job, and hidden activities. After conceptual clarification and explanation of the methodology we used, we estimate the size of informal economy, analyse the relationship between variables related to different types of income, and explore the dynamics of the informal economy. We find that the main participants in the informal economy are the poor people: the survival motive is dominant in the Romanian informal economy. We estimate that both in September 1996 and in July 2003 the income from the informal economy amounted to about 1/4 of the total household income (23.6% in 1996 and 22.7% in 2003, respectively). Also, we estimate the share of income from the informal economy in the cases of various categories of population (defined according to the dimension of the official declared income per person in the household). The extension of our analysis to the entire year using the household population structure by deciles suggests that the informal economy has increased, on average, by about 2-2.5% over the period 1995-2002. Indeed, beside the actual level of income, the households’ involvement in informal activities is probably influenced by occupation, region, age, education, number of children and many other factors. However, certain conclusions could be outlined: a) People perceive taxation as the main cause of the underground economy; b) Separating the main motivations of operating in the informal sector in two groups, “subsistence” and “enterprise” respectively, the surveys suggest that the subsistence represented a relevant reason for the households’ decision to operate in the informal economy, including its underground segment; c) Informal activities supplied a “safety valve” within the surviving strategies adopted by the poorest households; d) Participation in informal economy seems to be not simply correlated with poverty: in the informal economy are involved poor people (having probably a low educational level), as well as rich persons, but their motivations are quite different. The former are practically “forced” to operate in the informal economy (the “subsistence” criterion), but the latter are “invited” to participate in it (the “enterprise” criterion). In both cases, at least during the first stages of transition to a free market system in Romania, the environment was propitious due to legislative incoherence, feeble penalty system in the cases of fraudulent activities, and existence of some accompanying elements of proper informal activity, such as corruption, bureaucracy, etc. However, the household’s behaviour related to the participation in informal economy is sometimes fundamentally different between the two extreme groups of population. This is why in this study we focused on a deeper investigation of the behavioural aspects of different groups of population related to the implication in the informal sector.

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Bibliographic Info

Paper provided by Institute for Economic Forecasting in its series Working Papers of Institute for Economic Forecasting with number 070601.

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Length: 26 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:rjr:wpiecf:070601

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Related research

Keywords: informal economy; secondary income; informal income; decent income;

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Cited by:
  1. Alexandru Adriana Anamaria & Dobre Ion & Ghinararu Catalin, 2009. "Estimating The Size Of Romanian Shadow Economy Using The Currency Demand Approach," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 623-631, May.
  2. Koziarivska Larysa & Oliinyk Andrii, 2006. "Effects of the 2004 Personal Income Tax System Reform on the Shadow Sector in Ukraine," EERC Working Paper Series 06-08e, EERC Research Network, Russia and CIS.
  3. Albu, Lucian Liviu & Iorgulescu, Raluca & Stanica, Cristian, 2010. "Estimating Hidden Economy and Hidden Migration: The Case of Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 46-56, July.
  4. Albu, Lucian-Liviu, 2007. "A model to estimate informal economy at regional level: Theoretical and empirical investigation," MPRA Paper 3760, University Library of Munich, Germany.
  5. Lucian Liviu ALBU & Ion GHIZDEANU & Mărioara IORDAN, 2008. "Informal Economic Estimation Models at Macroeconomic Level. Some Theoretical and Methodologial Considerations," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 1(2), pages 177-190.
  6. Albu, Lucian-Liviu & Ghizdeanu, Ion & Iorgulescu, Raluca, 2011. "Analysing drivers of and barriers to the sustainable development: hidden economy and hidden migration," MPRA Paper 32810, University Library of Munich, Germany.
  7. Iuliana Precupetu & M. Precupetu, 2013. "GINI Country Report: Growing Inequalities and their Impacts in Romania," GINI Country Reports romania, AIAS, Amsterdam Institute for Advanced Labour Studies.

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