Fifty shades of gray

The shadow or informal economy phenomenon has been present in all countries worldwide since its first appearance in the 1970s, regardless of their socioeconomic system, level of development, or political system. While a country's development level is inversely proportional to the size of the informal economy, the widespread misconception that the shadow economy is only associated with underdeveloped countries has been dispelled over the past decades. It exists even in developed countries, although at lower levels (e.g., Switzerland has a 7% informal economy), and has been imported into all countries in transition, including ours.

The complexity of identifying and effectively reducing the share of the shadow economy in a country's GDP arises from the fact that it encompasses various activities and often appears in new forms. At the same time, because significant money circulates in the shadow economy and those employed in the informal sector still generate income, policymakers often look the other way because the shadow economy serves as an excellent social buffer that reduces social tensions in society. In Serbia, it peaked during hyperinflation but has persisted to this day, albeit in different forms and adapting to societal changes.

In recent years, Serbia has achieved noticeable results in combating the shadow economy, regardless of the measurement method used. These trends have been most influenced by macroeconomic stabilization, a more efficient labour market, increased fiscal discipline resulting from fiscalization, the development of non-cash payment services, more effective work of inspection bodies, etc. However, it has by no means been eliminated.

Cash is still present (and favoured) in all transactions involving real estate, land, cars, etc. Anyone who has worked in the private sector has had to cross the boundaries of the shadow economy sooner or later.

Here are some statistics. According to survey-based methods, the percentage of the shadow economy's contribution to the country's GDP has continuously declined from 21.5% in 2012 to 14.9% in 2017, down to 11.7% in 2022, totalling 6.5 billion euros. The monetary method of estimating the shadow economy, which includes the "unregistered" economy, also indicates a decreasing trend in the shadow economy from 22.2% to 20.1% of GDP. This suggests that registered and "unregistered" businesses in the shadow zone generate nearly 11 billion euros in turnover annually, resulting in a budget shortfall of over 3 billion euros, according to rough estimates.

The highest percentage of the shadow economy is in construction and agriculture, with every fourth company involved in the informal economy. Hiring workers off the books and paying part of the salary in cash continue to be critical elements of illegal business practices.

This only underscores the need to continue the fight against the shadow economy. Activities such as strengthening the capacities of inspection bodies and misdemeanour courts, improving the efficiency of the Tax Administration, further reducing the tax burden on salaries, addressing the issue of parafiscal charges, reducing the number of undeclared workers by 20%, and stimulating non-cash payments are among the key measures.

The fight against the shadow economy should not be limited solely to legal solutions and state repression, as evidenced by the experiences of developed countries in recent decades. For this occasion, I would like to highlight a few measures.

Stimulating non-cash payments and their economic impact on the state budget: Serbia lags behind developed EU countries regarding the number of payment cards per capita and the value of non-cash transactions by two-thirds. Therefore, if Serbia were to increase its non-cash economy to the average level of Central and Eastern European countries, it could reduce the size of the shadow economy by 3.4% of GDP and increase tax revenues by approximately 700 million euros annually.

Estimates from relevant experts in fiscal economics indicate that a 10% increase in electronic payments reduces the shadow economy by 5%.

Promoting tax (civil) morale and tax culture: It is unrealistic to expect high-quality public services (such as a quality school and education system, good roads, an efficient railway, and public infrastructure) while remaining passive in the fight against the shadow economy. This means businesses and citizens must recognize their role in combating the shadow economy, and conditions must be created for them to do so.

According to surveys, only a third of entrepreneurs are willing to report unfair competition because they believe that uncovering "unregistered" companies is the state's job, or they don't think reporting would have an effect.

At the same time, a significant portion of them base their business logic on the slogan, "I would love my country twice as much if I paid half as much in taxes."

When citizens don't take a receipt at the cash register, they allow the merchant to refrain from paying VAT on the goods purchased, which means that the revenue earned is not accounted for in the books.

Workers who work off the books, without any employment contract, rarely decide to report their employer to the relevant inspection authority out of fear of losing their job and, consequently, their livelihood.

Furthermore, further improving the investment climate reducing fiscal pressures regarding taxes and contributions, would stimulate companies to move from the shadow economy to the formal economy. This would lead to increased budget revenues, more significant public investments, and increased formal employment, and all of these factors combined would result in high economic growth rates and material well-being for the nation.