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Shadow economy shades real picture

Too often, doing business or getting things done quickly in Slovakia leads to practices that, though illegal, are commonly accepted as a means of survival. Tax evasion, doling out bribes at adminstrative centres, giving 'gifts' to doctors or public officials, paying employees under the table - all these practices contribute to a phenomenon known as 'the shadow economy.'
Loosely defined, the shadow economy is all economic activity in the country that is not reported to the Tax Office. Economists have put the value of this activity at roughly 10-15% of Slovakia's GDP, or around 90 billion Slovak crowns ($2.1 billion) in 1999.

Too often, doing business or getting things done quickly in Slovakia leads to practices that, though illegal, are commonly accepted as a means of survival. Tax evasion, doling out bribes at adminstrative centres, giving 'gifts' to doctors or public officials, paying employees under the table - all these practices contribute to a phenomenon known as 'the shadow economy.'

Loosely defined, the shadow economy is all economic activity in the country that is not reported to the Tax Office. Economists have put the value of this activity at roughly 10-15% of Slovakia's GDP, or around 90 billion Slovak crowns ($2.1 billion) in 1999.

According to recent surveys, both Slovak citizens and entrepreneurs now believe that obeying the law, paying the correct amount of taxes, and waiting patiently for business licenses or certificates doesn't pay. Indeed, according to a 1999 study by the Centre for Economic Development (CPHR), Slovakia's intricate and burdensome tax system virtually invites corruption among civil servants and begs for illicit behaviour among taxpayers.

Proof that people are quietly opting out of the official economy is also to be found in the gap between official economic data - which paints a rather bleak picture of the country - and the 'real' figures, which are far less ominous.

According to official data, Slovakia experienced a decline in real wages last year for the first time since 1993. But economists, pointing to an increase in consumer spending over the same time, say that the wage figures do not make sense. Similarly, the Labour Office reported over 20% unemployment in January this year, while employers claimed to be having difficulty filling vacancies. The numbers don't add up, many agree, and the culprit is the shadow economy - the under-the-table jobs and unreported income that are not being included in official data.

Setting record straight

It is clearly in the government's interest to bring the shadow economy to heel. According to a report written by Emilia Sičaková, president of the Transparency International Slovakia corruption watchdog, state budget revenues are being hurt by tax evasion and customs cheating, while expenditures are higher because of the needless benefits that are paid out to people who are registered as unemployed but who actually work.

But eliminating illegal practices is proving tough in practice. In transitional economies like Slovakia's, companies that play by the rules and don't bribe officials, distort data or cover up real output are placed at a competitive disadvantage to companies that do. The latter companies may have lower operating costs because, for example, they either don't pay market wages or they evade taxes, and thus are able to offer goods for lower prices than their law-abiding competitors.

But according to Ján Tóth, senior economist for the Dutch investment bank ING Barings, the cost to society of the shadow economy in the long run may make it worth fighting a pitched battle with corruption, whatever the opposition. "I think the biggest problem is that there are direct pressures from the shadow economy to put off reforms and pressures not to make dramatic improvements to the legal system or the economy," he said.

Real wages?

Solid figures supporting the shadow economy's existence can be found in the conflicting data between how much people are spending and how much they are earning. As reported by the Ministry of Labour, real wages - one basis of consumer purchasing power - decreased by 3.1% in 1999 compared to 1998, while employment fell by 3% as well. But the reliability of these data are challenged by a 0.5% increase in real household consumption last year, as well as an 11.7% increase in private savings and a 5.3% increase in retail sales.

"Without the existence of a large shadow economy, it is impossible to explain such parodoxical developments," said Deputy Labour Minister Edit Bauer. She estimated the shadow economy to be from 10 to 15% of GDP, and said that the resulting lost revenues to the state totaled in the billions of crowns.

A typical example of how relatively low official wages can support an increasing cost of living is to be found in the story of Martin D., a 27 year-old who works for a large central Slovak engineering firm. Martin makes 11,000 crowns a month ($310) and can barely support his two-child family after he pays his monthly rent, energy and electrical bills and telephone charges.

But Martin does a little business on the side by providing Austrian or German firms with 'contacts' within his company - contacts they use to gain lucrative orders for their firms. The foreign companies show their gratitude to Martin by paying him up to 1,000 marks or 6,000 shillings ($500) every few months - cash that is, of course, not reported to the Tax Office. "I wouldn't do this if the firm paid a normal wage," he said.

Black work

Unemployment data are also widely suspected of concealing unreported labour. The data come from two sources - from the Labour Bureau, which obtains its figures from the number of people registered at the unemployment office, and the Statistical Office, which collects its data via anonymous surveys. According to Tóth, the difference between data collected by the two agencies - over 60,000 people - reflected the number of people who were actually working and at the same time claiming unemployment benefits.

Other estimates are even higher - of the 470,000 registered unemployed in 1998, 120,000 were thought to be hired unofficially, according to estimates in Sičaková's report. Paul Lewis, bureau chief of the Economist Intelligence Unit in Vienna, said that his agency had in 1997 put the number of registered unemployed actually working at 30%. "This is a trend we tend to see across central and eastern Europe, that 25% of unemployed people turn out to be working black," he said.

ING Barings' Tóth said the difference between the real and official numbers in Slovakia translated into a cost to the government of around 5.7 billion crowns ($135 million) annually in both unnecessary benefits and unpaid income tax on the illegal work.

Štefan B. is a case in point. Last year, Štefan worked five days a week getting up at five in the morning to assemble wood pallettes for 6,000 crowns a month ($142). Now he collects 3,000 crowns a month in unemployment from the state and works two days a week as a baby-sitter for another 4,000 crowns a month under the table. "I'm not a dunce," he said. "You do the math. It doesn't make sense to work regularly."

As cases like that of Štefan multiply, so does the general feeling that black workers or firms which hire them risk nothing. In a 1998 CPHR survey asking whether "doing business in the unregistered economy in Slovakia exposed a company or person to high risk," over 93% said no.

Money for something

Surveys of public opinion show that bribery, too, has become a normal part of life in the country (see charts). Whether paying off a policeman to avoid a ticket, bribing a public official to speed up the process of obtaining a permit, or paying customs to free up the flow of goods at the border, everyone in Slovakia seems to have greased a palm at one time or another.

In 1998, only 20 people were convicted of crimes related to bribery, but according to a 1999 survey by the European Bank for Reconstruction and Development (EBRD), 34.6% of Slovak companies admitted to giving bribes on a regular basis. However, not all analysts believe that bribery is an important part of the shadow economy.

"Bribery is a serious moral problem, but ironically, from a 'cold' macro-economic view, this is simply the redistribution of existing values or incomes and has little bearing on GDP," said Marian Vitkovič of the Slovak Academy of Sciences. Despite his belittlement of bribery, Vitkovic said he believed the shadow economy to be larger than did other economists, putting it at no less than 16 to 18% of GDP.

Vitkovič's estimate was based on his own analysis and research looking at companies undervaluing their exports, wage payments outside of official accounting, barter practices, illegal activities (drug trafficking, smuggling) and the unreported income of Slovaks working abroad. If it is close to the mark, the the Slovak government, which has recntly unveiled a nine-point anti-corruption programme, may have its work cut out.

Tóth said that the Slovak environment many incentives for the proliferation of bribes and corruption, such as bureaucracy, barriers to entry for entreprenuers, a sluggish legal system, import tarrifs, and non-transparent business and legislative frameworks. Public opinion support his theories, as 83.8% of respondents in a 1998 CPHR survey believed the country had insufficient control mechanisms on business activities.

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