Tackling The Hidden Economy:
Employing Best Eu Policy Practices For Growth And Jobs
This project is funded by the European Union
Macedonia features in many discussions as a country with high hidden economy. The European Commission has repeatedly voiced its concerns in its regular country reports about the size and proliferation of hidden economy practices. Undeclared work in Macedonia is of particular concern to the authorities, provided the very high and stubborn levels of official unemployment and low employment levels. However, most studies and research on the matter involve a high level of ambiguity, as they refer to specific narrow outcomes of the hidden economy, usually towards a specific point in time, with dynamics being difficult to trace.
On 13 October 2015 the Center for the Study of Democracy (CSD) and the Center for Research and Policy Making (CRPM), Macedonia held a policy forum to present the results of the Hidden Economy Index, an innovative monitoring instrument, which allows the tracking of the dynamics of the hidden economy and its main components in Macedonia and provides international comparison. Thе index, as well as the report Monitoring the Hidden Economy in Macedonia: Trends and Policy Options make possible for the Macedonian government and its European partners to follow the impact and assess the effectiveness of their policies. Estimates suggest that the hidden economy size in Macedonia ranges from 24% to 47% of its GDP according to different measurement methods. The current report indicates that the percentage of hidden salaries remains the most acute concern, with the employment income of some 40% of Macedonian employees being at least partially undeclared. Moreover, 7% of all Macedonian employees work without a contract, and are not being paid any social security contributions whatsoever. The interviewed business representatives confirmed wide scale violations of the Labour Code. Over half of those respondents claimed that signing contracts with ‘hidden clauses’ (not accounting for the full remuneration paid out) were commonplace in their sector. Moreover, large-scale tax evasion seems to continue to pose a serious problem for the Macedonian economy and social system as the government tries to adjust them in order to be compatible with the principles of the market economy without imposing too extensive erosion of the social fabric and the existing social benefits. Tax avoidance is especially widespread among the poorest members of the society, which makes the underprivileged especially vulnerable as they may find themselves being criminally prosecuted for unpaid taxes or charged with paying large penalties. VAT returns are provided back to companies with significant time lags and present additional burden for companies which are part of the formal economy. The issuance of cash register receipts also remains an problem, as only less than a half of the respondents claimed that they always received receipts when buying groceries. The situation is similar with the purchase of services.
Dr. Marija Risteska, Director of the Center for Research and Policy Making, Macedonia opened the event by underlining the importance of capacity building within the CSOs for analyzing the hidden economy and participating in the policy process. She noted that the proposed Hidden Economy Task Force will serve as the needed single body, which will collect the views of all stakeholders, generate policy recommendations and propose measures for tackling the problem.
Mr. Ruslan Stefanov, Director of the Economic Program at the Center for the Study of Democracy encouraged the active debate on the issue and the open public engagement of the institutions. He stressed that the political parties can achieve much more progress in tackling the hidden economy through collaboration and commitment. He noted that Macedonia could benefit from the experience of other European countries, such as Slovenia, and thanked the European Delegation for its support.
Mr. Jaromír Levíćek, Head of Operations 1: Economic Affairs, Institution Building, Pre-accession Reporting at the Delegation of the European Union congratulated the project partners for their efforts in analyzing the issue and placing it in the current policy debate. He stated that the size of the hidden economic activities in the country, and in particular their negative impact on the most vulnerable groups of the population, are a key concern for the European Commission. According to him, the report indicates long-term structural problems, which require patience, persistence, and determination to tackle. He pointed out that a positive step in that direction is the proposed by CRPM and CSD establishment of a Hidden Economy Task Force, where governmental institutions, social partners and business-sector representatives can reach consensus on hidden economy issues.
Mr. Emil Shurkov, Analyst at the Center for Research and Policy Making presented the main findings of the Macedonian and Bulgarian partners on the trends and manifestations of the hidden economy. According to him, the three key challenges that the country faces are the high unemployment rate, the long-term unemployment and the youth unemployment, as factors stimulating the informal economy. He noted that the tax discipline depends both on the trust in the government and the size of the salaries – below the psychological threshold of monthly remuneration of MKD 20 000 (EUR 322) about a third the Macedonian population is inclined to evade taxes. In terms of education, only 44% of the surveyed employees who have primary education have an employment contract, as opposed to 81% of those with higher educational degree. The survey also indicates that 1/3 of the companies are “manipulating VAT” and use “accounting tricks” aimed at paying lower taxes in the sectors in which they operate. Mr. Shurkov recommended decrease of the transaction costs for the remittances, development of new projects and business support centers for the diaspora, increase of the efficiency of the programmes supporting vulnerable groups and their employment at both state and regional level, faster returns of VAT, investment in electronic tax administration, and abolishment of the municipal corporate tax (firmarina).
Mr. Goran Veleski, Advisor at the Ministry of Labour and Social Policy, Macedonia underlined that the basis for countering the hidden economy has been set in the form of business promotion measures, incentives for the young entrepreneurs, flexible labour legislation, grants and credits with low interest rates. However more time is needed for these measures to be further developed and take effect. On a question from one of the participants on how are citizen of Macedonia supposed to escape poverty with the present low minimum wages (165 eur) Mr. Velevski noted that it is a gradual process which cannot be artificially inflated. The cost to businesses and to the Macedonian economy as a whole would be catastrophic if one decides to ignore the economic realities and the competitive nature among countries’ economies. Countries compete against eachother with economic, but also labor measures, in order to provide the best possible business environment for attracting foreign and domestic investors which are generally weary of the investment conditions they encounter and this is a fact that is regularly ignored by the public. Mr. Veleski concluded by underlining that the social effect of any policy should always be considered before implementation.
Ms. Natasa Vidmar, Sector for Employment and Migration, Ministry of Labour, Family, Social Affairs and Equal Opportunities, Slovenia shared the experience of her country in tackling the phenomena. She described the provisions envisioned in the Prevention of Undeclared Work and Employment Act, including the penalties and exceptions from the rules. In Slovenia the market, labour, traffic and tax inspectorates have the authority establish the existence of informal activities, which could eventually lead to their cease, confiscation of assets and/or fines. The customs, as well as the Commission for Detecting Undeclared Work also play key part in the process.
Ms. Katarina Kakalikova, Vice President, Public Policy in Central and Eastern Europe, MasterCard highlighted the fact that 85% of all transactions around the world are in cash, which costs 1.5% of the GDP. Because of that, MasterCard is currently researching the electronic payment as a method for decrease of the hidden economy and increase of the financial inclusion. She underlined that the global trend of intensified use of electronic payments is not related only to the technological advance, but also to the realized importance of transparency by the national governments. She advised the policies to focus on incentives, not only on regulations, since the motivated customer is more likely to use electronic means of payment.
Professor Colin Williams, Professor of Public Policy at the Sheffield University Management School presented to the audience the best EU policy approaches to tackling the hidden economy. He stressed that besides the widely known disadvantages, the policies should also consider the advantages of the hidden economy. For example, two thirds of the businesses start up as unregistered and formalize over time. If regulations are too strict, the entrepreneurial activity could be impeded. Other advantages include: testing the trade viability of the business venture, providing source of income for the poor, flexibility on where and how the people can work, decreased barriers to entry in formal employment, producing more affordable goods, stopping the governments in pursuing burdensome regulations. Professor Williams noted that at the moment facilitating formalization is advocated in Europe as the most appropriate policy. This could only be achieved by fostering commitment and trust in the institutions, which is more efficient and cheaper than inspections and detection.