The Evolution of the Informal Economy and Tax Evasion in Croatia

This paper presents the results of research on the size and evolution of the informal economy and tax evasion in Croatia. It compares the results of two large-scale surveys of the informal economy and tax evasion, one conducted in 1996, covering the first half of the 1990s, and another conducted in 2001, covering the 1996-2000 period. Before conducting the second survey we expected the size of the informal economy and the extent of tax evasion in Croatia to be declining in response to positive economic and political changes in Croatia and the region in the second half of the 1990s. Most of our measurement methods confirm this null hypothesis. In particular, the system of national accounts method indicates that the size of the informal economy in 2000 was equivalent to about 7% of GDP, compared with an estimated 37% in 1993. However, the monetary evaluation method and the electricity consumption method suggest that the size of the informal economy increased somewhat in the second half of the 1990s. Such discrepancies are also common in empirical work in other countries and we investigate some possible reasons for the contrasting results in the case of Croatia. The paper first presents the key results of our surveys on the size of the informal economy and the extent of tax evasion; then discusses other evidence supporting our main finding on the decline in the size of the informal economy, including the results of research on the socio-cultural dimensions of the informal economy in Croatia, and finally gives some conclusions and provides some policy recommendations.