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The Unofficial Economy in Croatia : Causes, Size and Consequences


  • Ivo Bicanic

    (University of Zagreb)

  • Katarina Ott

    (Institute of Public Finance)


In all economies, there is a part which is not included in the official economy, in other words, economic activities not included in the official statistics. The size of the unofficial economy in the Republic of Croatia was probably at least 25% of GDP in 1995. Two periods can be clearly distinguished between 1990 and 1996. During the first period up to 1993, all available data indicate that the size of the unofficial economy increased in relation to GDP. The second period began in 1994 and it is not possible to make a final judgement because despite the fact that a majority of indicators suggest a fall, some particularly important indicators point to an increase in the size of the unofficial economy. The calculated size of the unofficial economy in relation to GDP (25%) is large and will probably remain so in the foreseeable future because the inherited tradition, the transition with intensified sectoral and institutional restructuring, the large state influence in the economy, especially in privatisation along with the tax pressure, the recovery of growth and new enterprise, only support the unofficial economy. Economic policy aimed at suppressing the unofficial economy must: 1) reduce taxes and customs duties (to the extent permitted by the state budget); 2) selectively reduce regulation; 3) reduce the role of the public sector and the presence of the state in the economy while liberalising the economy; 4) better estimate the size of the unofficial economy within the overall economy and in individual sectors.

Suggested Citation

  • Ivo Bicanic & Katarina Ott, 1997. "The Unofficial Economy in Croatia : Causes, Size and Consequences," Occasional paper series 03, Institute of Public Finance.
  • Handle: RePEc:ipf:occasi:3

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    References listed on IDEAS

    1. Ericson, Richard E., 1984. "The "second economy" and resource allocation under central planning," Journal of Comparative Economics, Elsevier, vol. 8(1), pages 1-24, March.
    2. Graafland, J J, 1990. "Tax Policies and Interaction between Hidden and Official Economy," Public Finance = Finances publiques, , vol. 45(1), pages 75-89.
    3. Feige, Edgar L., 1990. "Defining and estimating underground and informal economies: The new institutional economics approach," World Development, Elsevier, vol. 18(7), pages 989-1002, July.
    4. Smith, Stephen, 1989. "European perspectives on the shadow economy," European Economic Review, Elsevier, vol. 33(2-3), pages 589-596, March.
    5. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-178, Winter.
    6. repec:mes:challe:v:22:y:1979:i:5:p:5-13 is not listed on IDEAS
    7. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
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    Cited by:

    1. Katarina Ott, 2002. "The Underground Economy in Croatia," Occasional paper series 12, Institute of Public Finance.
    2. Aleksandar Stulhofer & Ivan Rimac, 2002. "Opportunism, Institutions and Moral Costs: the Socio-Cultural Dimension of the Underground Economy in Croatia 1995-1999," Occasional paper series 14, Institute of Public Finance.

    More about this item


    informal sector;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements


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