Integrating the unofficial economy into the dynamics of post-socialist economies : a framework of analysis and evidence

Over a third of economic activity in theformer Soviet countries was estimated to occur in the unofficial economy by the mid-1990s; in Central and Eastern Europe, the average is close to one-quarter. Intraregional variations are great: in some countries 10 to 15 percent of economic activity is unofficial, and in some more than half of it. The growth of unofficial activity in most post-socialist countries, and its mitigating effect on the decline in official output during the early stages of the transition, have been marked. In this paper, the authors challenge the conventional view of how post-socialist economies function by incorporating the unofficial economy into an analysis of the full economy. Then they advance a simple framework for understanding the evolution of the unofficial economy, and the links between both economies, highlighting the main characteristics of"officialdom,"contrasting conventional notions of"informal"or"shadow"economies, and focusing on what determines the decision to cross over from one segment to another. The initial empirical results seem to support hypothetical explanations of what determines the dynamics of the unofficial economy. The authors emphasize the speedy liberalization of markets, macro stability, and a stable and moderate tax regime. Although widespread, most"unofficialdom"in the region is found to be relatively shallow--subject to reversal by appropriate economic policies. The framework and evidence presented here have implications for measurement, forecasting, and policymaking--calling for even faster liberalization and privatization than already advocated. And the lessons in social protection and taxation policy differ from conventional advice.