Estimating the Size of Underground Economy in Romania
AbstractBased 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 InfoPaper provided by Institute for Economic Forecasting in its series Working Papers of Institute for Economic Forecasting with number 070601.
Length: 26 pages
Date of creation: Jun 2007
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informal economy; secondary income; informal income; decent income;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D10 - Microeconomics - - Household Behavior - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- P36 - Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-07 (All new papers)
- NEP-EEC-2007-07-07 (European Economics)
- NEP-TRA-2007-07-07 (Transition Economics)
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- 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, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 1(2), pages 177-190.
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- 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.
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