THE SIZE AND DETERMINANTS OF THE SIZE AND DETERMINANTS OF THE UNOFFICIAL ECONOMY IN THE UNOFFICIAL ECONOMY IN

CROATIA CROATIA

Prepared by Davor MikulićZagrebZagreb, , Semptember Semptember 20120155

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Scope of the paperScope of the paper

• Overview of unofficial economy estimates in Croatia and new member states (NMS)– Exhaustiveness of national accounts results

– MIMIC approach estimates

• Identification of UE determinants

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Non-exhaustivenessNon-exhaustiveness typestypes (national (national accouts approach)accouts approach)::

N1 – Deliberately non-registered (underground )

N2 – Illegal producers

N3 – Not required to register

N4 – Legal persons not surveyed

N5 – Registered entrepreneurs not surveyed

N6 – Producers deliberately misreporting

N7 – Other statistical deficiencies

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MIMIC approach (Schneider)MIMIC approach (Schneider)

Structural model: determine the relationship between an unobservable variable (unofficial economy) and a set of indicators related to UE

Indicators: GDP, money in circulation, participation rate

Causes: size of government, share of direct taxation, fiscal freedom, business freedom, unemployment rate, government effectiveness

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Estimates of unofficial economy in Croatia

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Is Eurostat approach conservative?

Eurostat MIMIC bil. HRK 23 93

Unofficial economy UE, as % of categoryGDP 330 7,0 28,2GVA 278 8,3 33,5GVA before UE 255 9,1 36,5Imputed NA items (dwelling rents, FISIM…) 30GVA before imputed NA items 225 10,3 41,4GVA, government units 50GVA - GOV - IMPUTED 175 13,2 53,2GVA, FIN INST 16GVA, LARGE ENT (50+) 95GVA, SMALL UNITS (<50) 64 36,3 146,0Monetary household income (HBS) 120 19,3 77,5

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Reference period

Adjustment for NOE in national accounts

Buehn, Schneider (2012)

Ratio Buehn, Schneider (2012) NOE

NMS 12.0 28.2 2.4Bulgaria 2001 10.2 36.6 3.6Czech Republic 2000 7.7 19.1 2.5Estonia 2002 9.6 32.0 3.3Hungary 2000 11.9 25.1 2.1Latvia 2000 14.4 29.8 2.1Lithuania 2002 18.9 32.8 1.7Poland 2002 7.8 27.7 3.6Romania 2002 17.7 33.5 1.9Slovenia 2002 6.9 26.6 3.9Slovakia 2002 14.6 18.6 1.3OECD-EU 6,2 18,6 6,4Austria 2001 7,9 9,7 1,2Belgium 2002 3,0 22,0 7,3Ireland 1998 4,0 16,1 4,0Italy 2003 14,8 27,0 1,8Netherlands 1995 1,0 13,3 13,3Spain 2000 11,2 22,7 2,0Sweden 2000 1,3 19,2 14,8Croatia 2000 10,1 33,4 3,3

Comparison of UE estimates

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Unoffical economy and GDPpc

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Unoffical economy and corruption

Econometric tests of determinants of UE in new Econometric tests of determinants of UE in new member statesmember states

• Depedent variable: UE NOE (model 1) and UE MIMIC (model 2)

• Period: 2000-2011

• Panel data – fixed effects

• yi,t =α +βXi,t + ei,t (1)yi,t =α +βXi,t + ei,t (1)

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Determinants of the unofficial economy in Determinants of the unofficial economy in economic literatureeconomic literature

• Burdens on the official economy;

• Public sector services;

• Tax morality and government controls;

• Labour market conditions;

• Structural factors.

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Variable Dependant variable: UE estimates based on MIMIC

approach

Dependant variable: UE estimates based on Eurostat

approach

Estimated parameters Estimated parametersConstant 41.036*** (43.01) 5.34*** (2.94)Government spending 0.02071 *** (2.92) 0.196 *** (3.98)Index of economic freedom

-0.1137*** (-5.67) 0.153*** (4.49)

GDP per capita -0.00041 *** (-13.57) -0.00029 *** (-5.41)Freedom from corruption -0.031 ** (-2.21) -0.075 *** (-3.12)

Adjusted R2 0.9896 0,933

Redundant cross section fixed effects LR testF statistics (p-value)

386.28*** (0.000) 92.24*** (0,000)

Number of observation 132 132

Causes of unofficial economy in new EU member states and Croatia

CONCLUDING REMARKSCONCLUDING REMARKS

Significant differences in UE in NMSSignificant differences in UE in NMS

Exhaustiveness of national accounts results in lower Exhaustiveness of national accounts results in lower estimate of unofficial economy in comparison to MIMICestimate of unofficial economy in comparison to MIMIC

Lower variability in MIMIC estimates for individual Lower variability in MIMIC estimates for individual countries countries

Government expenses, as broadest indicator of costs Government expenses, as broadest indicator of costs government posed to the official economic units, turned government posed to the official economic units, turned to be more significant than revenuesto be more significant than revenues

Improvement in overal institutional framework reduces Improvement in overal institutional framework reduces the share of unofficial economy the share of unofficial economy

Official and the unofficial economy in Official and the unofficial economy in NMSNMS are are substitutes not complementssubstitutes not complements

Impact of economic freedom is unclearImpact of economic freedom is unclear

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Thank you!Thank you!

☺☺

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