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International Journal of Criminology and Sociological Theory, Vol. 6, No. 1, January 2013, 1036 10!

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The Determinants of the Shadow Economy: The Case of Greece _____________________________________________________


George Manolas* Kostas Rontos** George Sfakianakis*** oannis !a"o#ras****

$%stract
Thi# $a$er aim# at a##e##ing the relati%e im$ortance of %ariou# factor# a# &ey determinant# of the #i'e of the #hado( economy in a #am$le of )*C+ countrie#. ,#ing $anel data for a grou$ of 1- countrie# for the 2003 . 200/ $eriod, (e find that the 0uality of go%ernance, the regulatory frame(or& in the $roduct, la1or and credit mar&et# and the ta2 1urden 1oth in the #en#e of the direct co#t on entre$reneurial acti%ity and the co#t of com$liance to the ta2 admini#tration frame(or&, are the mo#t im$ortant factor# affecting the $art of the economic acti%ity that ta&e# $lace out#ide the official #ector, that i# the #hado( or underground economy. The#e re#ult# are u#ed to e%aluate the $otential gain# 3reece could o1tain, in the ca#e it could con%erge to the 1e#t $ractice or e%en to the a%erage le%el# of the determining factor# of the re#t of the )*C+ countrie#.

&'

ntrod#ction

The #hado( or hidden or underground economy ha# 1ecome a #u14ect of con#idera1le academic intere#t only #ince the 1eginning of the 1-"0#. 5o(e%er, the literature on the mea#urement of the $henomenon 6for e2am$le, 7lade# 839, :rey and ;ommerehne 8109, 8119, 3ile# 8139, Thoma# 8319, Schneider 8239 and Schneider, 7uehn and <ontenegro 82/9= a# (ell a# on it# determinant# 6for in#tance +e Soto 8"9, +reher and Schneider 8-9 and Singh, Jain Chandra and <ohommad 82-9= i# already %ery e2ten#i%e. >lthough the 3ree& authoritie# #tarted to gra#$ the $ro1lem of the e2i#tence of a large #hado( economy in 3reece after 1--2, (hen the need of fi#cal con#olidation #tarted to 1e im$erati%e 6Va%oura# and ?ara%iti# 8339=, thi# i##ue returned in the e$icenter of the academic and $olitical intere#t during the current

5ellenic <ini#try of :inance. The %ie(# e2$re##ed in thi# $a$er are #trictly $er#onal and do not nece##arily reflect tho#e of the 5ellenic <ini#try of :inance, e mailAgeomanBmnec.gr. @@ +e$artment of Sociology, ,ni%er#ity of the >egean, e mailA?.Conto#B#oc.aegean.gr @@@ 5ellenic <ini#try of :inance and Technological *ducational In#titute of Chal&i#. The %ie(# e2$re##ed in thi# $a$er are #trictly $er#onal and do not nece##arily reflect tho#e of the 5ellenic <ini#try of :inance, e mailA g#fa&Bmnec.gr @@@@ +e$artment of ;u1lic >dmini#tration, ;anteion ,ni%er#ity and 3o%ernance and Su#taina1le +e%elo$ment Centre 63)S+*C=, e mailA %a%oura#B$anteion.gr

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de1t cri#i# $eriod, (hen the 0ue#t for higher fi#cal re%enue# made the need for com1ating the e2i#ting large #hado( economy and the a##ociated ta2 e%a#ion im$erati%e. The relati%e em$irical re#earch focu#ing on the 3ree& #hado( economy, e#$ecially on the mea#urement of the $henomenon i# al#o e2ten#i%e. Indicati%ely, (e could refer to the (or&# of ;a%lo$oulo# 8219, Negre$onti +eli%ani 8209, Va%oura#, ?ara%iti# and T#ouchlou 83!9, ?anelo$oulo#, ?ou##oula&o# and Ca$ano# 81"9, >ga$ito# and <a%ragani# 819, Schneider and *n#te 8269, <anola# and Va%oura# 81-9, Tat#o# et. al. 8309 and Schneider 82D9. The #hado( economy com$ri#e# all out$ut that goe# unre$orted and therefore i# EhiddenF from income ta2. > $art of it $ertain# to legal acti%itie#, #uch a# tran#action# 1et(een firm# and retailer# that are $aid Eoff the counterF, an agreement that ena1le# 1oth $artie# to a%oid $aying ta2e#. The re#t i# the $roduct of illegal acti%itie#, #uch a# $ro#titution, drug traffic&ing and #o on. >ccording to Schneider, 7uehn, and <ontenegro 82/9, the Eunderground economy include# all mar&et 1a#ed legal $roduction of good# and #er%ice that are deli1erately concealed from $u1lic authoritie# to a%oid the $ayment of income, %alue added or other ta2e#, to a%oid $ayment of #ocial #ecurity contri1ution#, ha%ing to meet certain legal la1or mar&et #tandard#, #uch a# minimum (age#, ma2imum (or&ing hour#, and #afety #tandard#, and com$lying (ith certain admini#trati%e $rocedure#F. The $re#ent $a$er aim# at analy'ing em$irically the determinant# of the underground economy u#ing $anel data for 1- )*C+ countrie# for the 2003 200/ $eriod. The em$irical re#ult# are u#ed for the e#timation of the $otential reduction of the #i'e of the 3ree& #hado( economy re#ulting from an im$ro%ement of it# determining factor#. The #tructure of the $a$er i# a# follo(#A in #ection 2 data for the #i'e of the underground economy in 3reece are $re#ented, (hile in #ection 3 the factor# that theoretically determine the #i'e of the underground economy are analy'ed. In #ection ! em$irical e#timate# of the relation#hi$ 1et(een the hidden economy and it# determinant# are $re#ented, u#ing $anel data techni0ue#, (herea# #ection D #um# u$ the re#ult# of the #tudy and conclude#.

(' The Si)e of the Shadow Economy in Greece The #i'e of the #hado( economy i# large in many countrie# all o%er the (orld. In Ta1le 1 e#timate# for the #i'e of the #hado( economy in #elected )*C+ countrie# are $re#ented. Thi# Ta1le i# 1a#ed on e#timate# of Schneider 82!9. In the area of )*C+, the #outhern countrie# 63reece, Italy, S$ain and ;ortugal=, $lu# 7elgium are e#timated to ha%e the highe#t rate of EhiddenF economic acti%itie#, ranging 1et(een the 2! 30G of their recorded or official 3+;. The grou$ of countrie# characteri'ed 1y a #mall #i'e of #hado( economy include# countrie# (ith a relati%ely #mall $u1lic #ector 6Ja$an, ,S> and S(it'erland= and countrie# (ith high ta2 EmoralityF 6,S> and S(it'erland=.

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Ta%le &' The si)e of the #ndergro#nd economy in selected *ECD co#ntries +, of GD-.
Co#ntry >u#tria 7elgium +enmar& :rance 3ermany 3reece Ireland Italy Netherland# ;ortugal S$ain S(eden ,.?. S(it'erland Canada Ja$an ,S> &/0/1/2 6.1-.3 10./ -.0 11./ 22.6 11.0 22./ 11.1D.16.1 1D./ -.6 6." 12./ /./ 6." &///1(222 -./ 22.2 1/.0 1D.2 16.0 2/." 1D.2".1 13.1 22." 22." 1-.2 12." /.6 16.0 11.2 /." (2&2 /." 1".1!.! 11." 1!." 2D.2 13.2 22.2 10.3 1-." 1-./ 1D.6 11.1 /.3 12." -." "./

SourceA Schneider 82!9.

># far a# 3reece i# concerned, all the e2i#ting e#timate# for the #i'e of it# hidden economy, inde$endently of the method of e#timation and the $eriod of reference, #ho( that the unrecorded economic acti%itie# con#titute a high $ercentage of the official 3+;. Thi# $ercentage, due to the current economic cri#i#, increa#ed initially 6u$ from 2!.3G of the recorded 3+; in 200/ to 2D.2G in 2010=, and then it i# e#timated to 1e decrea#ing 6do(n to 2!.3G in 2011 and 2!G in 2012=, 1a#ed on Schneider 82D9. 3' The Determinants of the Shadow Economy The factor# that theoretically influence the #i'e of the #hado( economy in a gi%en country are numerou#. They could 1e di#tingui#hed to t(o 1a#ic categorie#A $urely economic factor#, and other factor#, #uch a# #ocial, $#ychological, admini#trati%e, and #o on. The relati%e im$ortance of each factor i# different at the le%el of each indi%idual country. In the re#t of thi# cha$ter, the mo#t im$ortant determinant# of the #hado( economy are analy'edA 1 i. The tax burden. It i# related to the 1urden cau#ed 1y the im$o#ition of ta2e# and #ocial #ecurity contri1ution#. It i# generally acce$ted that the increa#e of ta2e# and #ocial #ecurity contri1ution# i# one of the main factor#, and $erha$# the mo#t im$ortant one affecting the ri#e of the #hado( economy 6for e2am$le, Schneider and *n#te 82"9=. It i# #traightfor(ard
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See al#o Va%oura# and <anola# 83D9, ch. 10. 103/

that high direct and indirect ta2e# in the official economy are directly related to the enlargement of the #hado( economy. > large $art of ta2 e%a#ion $ertain# to EhidingF income earned from a #econd em$loyment, or from #elf em$loyment, or an agreement 1et(een the t(o re#$ecti%e $art# to a%oid the $ayment of V>T, tran#fer ta2e#, etc. >t the #ame time, a #ignificant $art of #ocial #ecurity contri1ution# e%a#ion #tem# from the declaration of lo(er (age# and thu# the $ayment of lo(er contri1ution# for the #ocial #ecurity, 1oth from the $art of em$loyee# and em$loyer#. In the neo cla##ical model#, the marginal ta2 rate i# con#idered a# the 1a#ic factor for the increa#e of the #hado( economy. The higher the marginal ta2 rate, the #tronger the effect Eof #u1#titution 1et(een la1or and lei#ureF and the larger the di#tortion in the deci#ion of a $er#on to di#tri1ute time 1et(een la1or and lei#ure. If a $er#on could get an income from the hidden economy, then the #u1#titution effect (ould 1e higher than the income effect and, thu#, the indi%idual (ill (or& le## in the official economy 6Schneider 8229=. *m$irical #tudie# on %ariou# *uro$ean countrie# confirm the im$ortant effect# of the ta2 1urden on the #i'e of the #hado( economy. Ce1ula 8!9 e#timated that an increa#e of the marginal ta2 rate of the $er#onal income ta2 rate in ,S> 1y 1 $ercentage $oint, re#ult#, ceteri# $ari1u#, to an increa#e of the hidden economy 1y 1.! $ercentage $oint#. Similarly, Chianini, <ar'ano and Schneider 8D9, u#ing data for the Italian economy, found that an increa#e 1y 1 $ercentage $oint of ta2 e%a#ion increa#e# the ta2 rate 1y 0.3G, (hile the re%er#e increa#e# the ta2 e%a#ion in the long run 1y 0.!/ $ercentage $oint#. ii. The existence of a large number of regulations in the economyA Cegulation# target at the control of mar&et# 1y im$o#ing rule# and re#triction#. They ta&e the form of la(# or other regulation# and they mainly $ertain to the la1or mar&et, the em$loyment of foreigner#, re#triction# on free trade, etc. ># a re#ult, they limit the choice# of indi%idual# in the frame(or& of the official economy 6Schneider and *n#te 8269=. The#e regulation# lead to an increa#e in the co#t of la1or in the official economy, $ro%iding incenti%e# for em$loyment in the #hado( economy rather than in the official economy. John#on, ?aufmann and Shleifer 81!9, a# (ell a# John#on, ?aufmann and Hoido Io1atJn 81D9 found that an increa#e 1y one unit of the indicator of regulation 6(hich ta&e# %alue# from 1 to D, (ith D to #ho( that a country ha# #tringent regulation#=, ceteri# $ari1u#, re#ult# to an increa#e of the hidden economy 1y /.1 $ercentage $oint#. Similarly, e#timate# of :riedman, John#on, ?aufmann and Hoido Io1atJn 8129, u#ing data from "6 de%elo$ed and de%elo$ing countrie#, #ho( that an increa#e of the indicator of regulation# 1y one unit, re#ult# to an increa#e of the #hado( economy 1y 10 $ercentage $oint#. <ore #$ecifically, in#titutional re#triction# in the la1or mar&et u#ually increa#e the co#t of la1or, thu# increa#ing the incenti%e of enter$ri#e# to a1#or1 (or&er# from the #econdary or $arallel la1or mar&et 6illegal economic immigrant#, indi%idual# (ho recei%e unem$loyment 1enefit# etc= rather than from the legal la1or mar&et. :or e2am$le, the reduction of hour# (or&ed in :rance and 3ermany, increa#ed the a%aila1le time for lei#ure and could lead to an increa#e of em$loyment in the #hado( economy 65unt 8169=. Similarly, $art time em$loyment and early retirement could ha%e #imilar re#ult# 6+e 3i4#el 869=. The more general conclu#ion from thi# category of em$irical #tudie# i# that the increa#e of the num1er or the inten#ity of regulation# in an economy 6and not the im$ro%ement of their effecti%ene##= increa#e# rather than decrea#e# the acti%ity in the underground economy. iii. The role of the StateA The State influence# the #i'e of the #hado( economy mainly %ia it# a1ility of deterring and re$re##ing ta2 e%a#ion and from the degree of acce$tance of it# $o(er. <ore #$ecifically, the a1ility of a State to reduce the tendency for ta2 e%a#ion de$end# on the organi'ational effecti%ene## of ta2 #er%ice#, the #tructure of the e2i#ting ta2 #y#tem and the degree of accounting organi'ation of enter$ri#e#. The ri#& of 1eing caught and $uni#hed i# one of the main deterring factor# for ta2 e%ader#. >t the #ame time, the ta2 morality of indi%idual# i# connected not only to the e2i#ting le%el of #ocial de%elo$ment 1ut al#o to the

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$erce$tion they ha%e for the State, although the t(o factor# are not unrelated. If they 1elie%e that the State i# an ineffecti%e organi'ation that doe# not aim at $romoting $ro#$erity, they could more ea#ily turn to the hidden economy. )n the other hand, countrie# (ith high corru$tion, e#$ecially in the $u1lic #ector, al#o tend to ha%e an e2ten#i%e hidden economy, #ince $u1lic #ector corru$tion increa#e# the o$$ortunitie# $ro%ided to turn to the #hado( economy. :inally, #ometime#, the State, for %ariou# rea#on#, rela2e# the control#, thu# #trengthening the acti%ity in the #hado( economy. :or e2am$le, in 3reece, the underground economy i# not irrele%ant to electoral or $olitical cycle# 6Va%oura# and <anola# 83D9=. *2ce$t for >nd%ig et. al. 829 and +reher and Schneider 8/9, (ho ha%e #ho(n that a relation#hi$ e2i#t# 1et(een corru$tion and the hidden economy, the role of go%ernance in relation to the underground economy i# al#o e2amined mainly in the #tudie# of Torger and Schneider 8329 and Singh, Jain Chandra and <ohommad 82-9. In the fir#t #tudy, the author# alternati%ely u#ed more than 2D %aria1le# (hich are related to the go%ernance and the 0uality of in#titution# and found the e2i#tence of it# #trong correlation (ith the hidden economy (hile, in addition, the increa#e in ta2 morality decrea#e# the #i'e of the underground economy. The em$irical analy#i# of Singh, Jain Chandra and <ohommad 82-9 #ugge#t# that in#titution# are a more im$ortant determinant of the #i'e of the #hado( economy com$ared to ta2 rate#. 4' Em5irical $nalysis 4.1. Independent variables In thi# #ection (e $roceed to e#timate the determinant# of the #hado( economyA u#ing the e#timate# of Schneider 82!9 for the #i'e of the #hado( economy in 21 )*C+ countrie#, (e e%aluate the rele%ant im$ortance of %ariou# factor# referred to in the literature. <ore #$ecifically, (e model the #i'e of the #hado( economy a# a function ofA a= The %ariou# a#$ect# of go%ernance in a country, including the control of corru$tion and the degree of go%ernment effecti%ene##. Ke (ould e2$ect that countrie# characteri'ed 1y 1etter go%ernance (ould 1e more efficient in lea%ing le## lee(ay L enforcing #anction# for acti%itie# in the informal #ector. 1= The regulatory frame(or& in the $roduct, la1or and credit mar&et#. Ceteri# $ari1u#, more rigid L infle2i1le regulation (ould tend to $ro%ide incenti%e# to 1rea& the rule#. Thi#, ho(e%er, i# not nece##arily the ca#e for the credit mar&et. c= Ta2 1urden, 1oth in the #en#e of the direct co#t on entre$reneurial acti%ity and the co#t of com$liance to the ta2 admini#tration frame(or&. Ke e2$ect that the higher the ta2 1urden i# the more it $ro%ide# incenti%e# to #(itch to the #hado( economy.

4.2. Data and sources )ur #am$le include# 1! out of 1D of the EoldF *, <em1er State# 6e2cluding Iu2em1ourg= and #elected mem1er# of the )*C+, namely the ,.S., Ja$an, >u#tralia, Canada, Nor(ay, S(it'erland and Ne( Healand. ># mentioned a1o%e, the data for the de$endent %aria1le 6the #i'e of the #hado( economy= (ere ta&en from Schneider 82!9, (hile for inde$endent %aria1le# #ource# includeA a= The )*C+ data1a#e for the ta2 1urden 6(hich include# #ocial #ecurity contri1ution#=, along (ith *m$loyment ;rotection Iegi#lation and ;roduct <ar&et Cegulation %aria1le#. 10!0

1= The annual re$ort Economic Freedom of the World of the :ra#er In#titute for the credit mar&et regulation %aria1le and alternati%e indice# for the regulatory frame(or& in the $roduct and la1our mar&et#. Thi# re$ort al#o $ro%ide# an o%erall inde2 of regulation in the economy. c= The Korld 7an& 6?aufmann, ?raay and <a#tru''i 81/9 $ro%iding data for the #i2 go%ernance indicator# (hich are (idely u#ed for international com$ari#on#, namelyA %oice and accounta1ility, $olitical #ta1ility and a1#ence of %iolenceLterrori#m, go%ernment effecti%ene##, regulatory 0uality, rule of la( and control of corru$tion.

4.3. Empirical analysis In thi# #ection (e $re#ent our em$irical e#timate# for the determinant# of the #hado( economy in the #elected grou$ of countrie#. The model #$ecification# e%entually cho#en (ith the a$$ro$riate #tati#tical L econometric criteria are $re#ented in Ta1le# 2 and 3. Ke #hould note ho(e%er that, 1efore concluding, %ariou# alternati%e# (ere tried, a# $erA 6i= the com1ination of %aria1le#, 6ii= data #ource#, 6iii= econometric method#. Cegarding the latter, e%entually the e0uation (a# e#timated u#ing ;anel *3IS, (ith country (eight# and diagonal correction of #tandard error# for hetero#ceda#ticity and autocorrelation 6u#ing the methodology of Khite=. S$ecification# (ith 1oth fi2ed and random effect# (ere tried, 1ut their $erformance (a# relati%ely inferior 1a#ed on the u#ual #tati#tical L econometric criteria. >l#o, a$art from allo(ing for a different re#idual %ariance for each cro## #ection 6ca$tured 1y the country (eight#=, there i# no indication that the data #tructure i# characteri'ed 1y $eriod #$ecific hetero#&eda#ticity, contem$oraneou# co%ariance#, and 1et(een $eriod co%ariance# 6gi%en, in any ca#e, the relati%ely #mall time dimen#ion=. In Ta1le 2 e#timate# for the determinant# of the #hado( economy are $re#ented, (ith inde$endent %aria1le# including $roduct mar&et regulation 6#ourceA )*C+=, la1or and ca$ital mar&et regulation 6#ourceA :ra#er In#titute=, the ta2 1urden and the t(o that (e con#ider a# the mo#t im$ortant 6ta&ing al#o into account the rele%ant theoretical and em$irical re#earch= go%ernance indicator# 6namely, control of corru$tion and go%ernment effecti%ene##=. The o%erall fitne## of the model i# %ery good, (ith inde$endent %aria1le# e2$laining a #ignificant $art of the %ariance of the de$endent %aria1le 6a# #ho(n 1y the corrected C2 and the te#t on it# #tati#tical #ignificance u#ing the : #tati#tic=. >ll e#timator# are #tati#tically #ignificant at the 1G #tati#tical #ignificance le%el, (ith the e2ce$tion of the credit mar&et deregulation %aria1le (hich i# #ignificant at the 10G #tati#tical #ignificance le%el. >l#o, all e#timator# ha%e the e2$ected #ignA for e2am$le, increa#ing the control of corru$tion and go%ernment effecti%ene## (ould tend to ha%e an ad%er#e effect on the #i'e of the #hado( economy, and the #ame hold# for the deregulation of 1oth the la1or and $roduct mar&et#. )n the other hand, increa#ing the ta2 1urden (ould tend to #timulate the #hado( economy. Cegarding the deregulation of the credit mar&et, an additional note i# in orderA contrary to the effect of deregulation of the other mar&et#, increa#ed regulation of thi# mar&et #eem# to 1e condoning to the do(n#i'ing of the #hado( economy. Thi# i# not, ho(e%er, a counterintuiti%e re#ult, if (e ta&e into account that financing the acti%itie# of the #hado( economy 1ecome# more difficult (hen regulation and #u$er%i#ion are tighter2. The #ame hold# for the a1ility to u#e in the formal #ector income earned through informal #ector acti%itie# 6for e2am$le, it i# difficult to $roceed (ith de$o#iting large amount# (hich could 1e con#idered a# Emoney launderingF=.

>n e2am$le in thi# re#$ect (ould 1e loan# to #elf em$loyed $rofe##ional#, if 1an&# are o1liged 1y the regulator to ta&e into account only declared income. The #ame (ould a$$ly to mortgage#, if cro## chec&ed again#t the declared L o14ecti%e %alue# of real e#tate u#ed for contract# 6(hich i#, in fact, the ta2a1le income of the con#tructor . #eller and i# #y#tematically lo(er than actual mar&et %alue#=. 10!1

In Ta1le 3 (e u#e the #ame #$ecification 1ut, in order to ca$ture the effect of go%ernance, (e u#e an a%erage of the #i2 Korld 7an& go%ernance indicator# mentioned a1o%e. >gain, the e0uation (a# e#timated u#ing ;anel *3IS, (ith country (eight# and Khite correction for #tandard error#. The o%erall fitne## of the model i# %ery good, (ith all e#timator# ha%ing the e2$ected #ign# and 1eing #tati#tically #ignificant at the 1G #tati#tical #ignificance le%el.

Ta%le (' Determinants of the si)e of the shadow economy with indi"id#al go"ernance indicators +e$endent %aria1leA Shado( economy 6G of 3+;= <ethodA ;anel *3IS 6Cro## #ection (eight#= Sam$leA 2003 200/ Cro## #ection unit#A 1Total num1er of o1#er%ation#A 11! Varia1le Coefficient Standard t #tati#tic ; %alue error Con#tant 1!.0/2 3.!D!.0"1 0.00 Control of 0.-00 0.2-3 3.0"/ 0.00 corru$tion 3o%ernment !.0"! 0.D"! ".10D 0.00 effecti%ene## +eregulation of 1.!00.1"3 /.161 0.00 the la1our mar&et +eregulation of 0.!"0 0.2-0 1.622 0.10 the credit mar&et ;roduct mar&et 3.D02 0."1" !.//6 0.00 regulation Ta2 1urden 0.2361 0.0!1 D."!3 0.00 Keighted #tati#tic# C #0uared 0./3 <ean de$endent 1-.60 %ar. >d4u#ted C 0./2 S.+. de$endent %ar. /.D! #0uared S.*. of regre##ion 2./! Sum #0uared re#id. /6D.3! : #tati#tic /6.0/ ;ro16: #tati#tic= 0.00

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Ta%le 3' Determinants of the si)e of the shadow economy #sing an a"erage of go"ernance indicators +e$endent %aria1leA Shado( economy 6G of 3+;= <ethodA ;anel *3IS 6Cro## #ection (eight#= Sam$leA 2003 200/ Cro## #ection unit#A 1Total num1er of o1#er%ation#A 11! Varia1le Coefficient Standard t #tati#tic ; %alue error Con#tant 1!.066 2.D2" D.D66 0.00 >%erage of ".D60.6// 10.--D 0.00 go%ernance indicator# +eregulation of the la1our mar&et +eregulation of the credit mar&et ;roduct mar&et regulation Ta2 1urden C #0uared >d4u#ted C #0uared S.*. of regre##ion : #tati#tic ;ro16: #tati#tic= 1.!6! 0.-!2 3.D!2 0.1!6 0.2/D 0.!-! 10.0!6 3.303 ".1"0 0.00 0.00 0.00 0.00 22.63 13."6 -26.--

0.20/ 0.03! 6.0-1 Keighted #tati#tic# 0./D <ean de$endent %ar. 0./! S.+. de$endent %ar. 2.-3 11-.26 0.00 Sum #0uared re#id.

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4.4. Estimates of the relevant impact of individual factors on the potential reduction of the shadow economy in Greece 7a#ed on our re#ult# on the determining factor# of the #hado( economy, (e can $roceed to e#timate the $otential im$act of each one of them in trying to reduce the latterM# #i'e. <ore #$ecifically, (e ha%e ela1orated t(o #cenariaA a= each one of the determining factor# for 3reece ta&e# the %alue of the a%erage of the re#t of the countrie#, and 1= the #ame %aria1le# ta&e the %alue# of the 1e#t $erforming country. The re#ult# are $re#ented in Ta1le !. T(o 1a#ic conclu#ion# are in orderA 1= 3reece (ould 1enefit more 1y trying to reach the a%erage of the other countrie# (ith re#$ect to regulation of the $roduct mar&et, the la1or mar&et and go%ernment efficiency. 2= 3reece ha# a lot of ground to co%er in trying to con%erge to thi# a%erage, in#ofar a# the control of corru$tion, im$ro%ing go%ernment effecti%ene## and the deregulation of the la1or mar&et are concerned. <o#t nota1ly, the $erformance of 3reece i# im$re##i%ely lo( regarding the control of corru$tion, a# the re#t of countrie# are $erforming 6on a%erage= almo#t 1! time# 1etter than 3reece.

Ta%le 4' Estimates of the rele"ant im5act of indi"id#al factors on the red#ction of the shadow economy in Greece Variable Impact on the shadow economy sample a erage Impact on ! erage " the performanc shadow e of #reece economy best performin g country 2.0" 6.!D 6.!/ 1."/ D.2/ 0./D 1(('/( 13./6 2.D6 1.DD 1.!3 0.!1.16 $est performin g country " %erforma nce of #reece 20.!2 3.60 2.02 1.63 0.3! 0./-

Control of corr#5tion Go"ernment efficiency Dereg#lation of the la%or market Dereg#lation of the credit market -rod#ct market reg#lation Ta6 %#rden Total %enefit

1.3" 3./3.!/ 1.20 !.0" 1.2/@ 1&('7&

@ In 200-, 1efore the im$lementation of the <o,, 3reece had a lo(er ta2 1urden com$ared to the #am$le a%erage. .

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8' Concl#ding Remarks and -olicy Recommendations The #hado( economy ha# many $olitical, #ocial and economic im$lication#. The e2i#tence of a #ignificant hidden com$onent to total actual economic acti%ity not only affect# the relia1ility of the official data and the %ariou# #ocioeconomic indicator# 1a#ed on the#e data, 1ut al#o affect# almo#t all the main o14ecti%e# of economic $olicy. ># far a# the fi#cal $olicy i# concerned, the large #hado( economy reduce# dramatically $u1lic re%enue# 6mainly direct and indirect ta2e#= and increa#e# $u1lic e2$enditure# 6mainly #ocial tran#fer#3 and intere#t $ayment#= increa#ing a# a re#ult the $u1lic deficit and de1t. In a country li&e 3reece that i# facing de1t #u#taina1ility $ro1lem# and (here fi#cal ad4u#tment i# generally recogni'ed a# it# $rimary o14ecti%e, the a1o%e i##ue ma&e# the need to ado$t $olicy mea#ure# to(ard# reducing the off mar&et acti%itie# in the economy im$erati%e. Im$ro%ing the effecti%ene## of the ta2 #y#tem i# an im$ortant factor contri1uting to the re#triction of the #hado( economy in a country. The re$re##ion, 1ut e%en more im$ortantly the $re%ention of ta2 offence#, i# the 1a#ic factor in the effort to reduce the #i'e of the hidden economy. Cegarding $re%ention, thi# could 1e $ur#ued through $olicie# #uch a# the rationali'ation of the ta2 1urden, #o that a Ehori'ontalF and E%erticalF ta2 4u#tice e2i#t# and the ta2 1urden corre#$ond# to the real #ituation in the economy. )ther rele%ant $olicie# include the im$ro%ement of the tran#$arency of the ta2 #y#tem and the #y#tematic control and cro## chec&ing of data $ro%ided 1y ta2 $ayer#. ># far a# the re$re##ion i# concerned, it i# %ery im$ortant that $enaltie# are im$o#ed in an effecti%e (ay that ma&e# them relia1le and a$$lica1le, $romoting the conce$t of ta2 4u#tice. Through the#e $olicie#, ta2 morality (ill al#o im$ro%e, thu# contri1uting to the re#triction of the hidden economy in the long run. In the field of $re%ention, a# (ell a# in the field of re$re##ion of the #hado( economy, the role of ITC# i# %ery im$ortant. It i# a fact the effecti%ene## of the #tateM# controlling mechani#m doe# not #olely de$end only on ne( technologie#, 1ut al#o on the organi'ation of the #er%ice# in charge, a# (ell a# on the e2i#tence of a 0ualified and $roducti%e #taff. The increa#e of $roducti%ity of the entire $u1lic #ector i# nece##ary, 1y im$ro%ing the method# of organi'ation and admini#tration, com1ined (ith the im$ro%ement of the 0uality of u#e of the e2i#ting re#ource#. Thi# (ill re#ult to containing $u1lic e2$enditure, (hich in turn (ill reduce the ta2 1urden and (ill 1oo#t the de%elo$ment of the official $ri%ate #ector, thu# re#tricting the #i'e of the #hado( economy. :inally, due to the clo#e relation#hi$ 1et(een corru$tion and the hidden economy, the effecti%e re#triction of $u1lic #ector corru$tion in 3reece i# e2$ected to ha%e a #ignificant im$act on the reduction of the #hado( economy. Thu#, $olicie# aiming at the reduction of the #hado( economy in 3reece #hould $rimarily focu# on the fight again#t corru$tion and on the im$ro%ement of the 0uality of go%ernance, mainly 1y reducing the unnece##ary #tate inter%ention#, 1y a1oli#hing the clienteli#tic relation# of $olitician# (ith the electorate and 1y com1ating the $er#i#tent in#titutional (ea&ne##e# that $ro%ide fertile ground for rent #ee&ing 1eha%ior on 1ehalf of $olitician# and $u1lic em$loyee#. In thi# conte2t, the 3ree& de1t cri#i# could 1e regarded a# a EchanceF for an hi#toric tran#formation of the economy that ho(e%er re0uire# the tran#formation of the 3ree& #ociety a# (ell, #ince the effecti%e reduction of the #hado( economy in the long run i# mainly a #ocial i##ue, namely an i##ue of #ocial de%elo$ment.

<oreo%er, #ocial tran#fer# are mi#allocated a# a re#ult of hidden income 1y many of the 1eneficiarie#. 10!D

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;a%lo$oulo#, ;., The underground economy in #reece* ! :uantitati e e aluation, :*IC, S$ecial Studie#, nQ. 1" 61-/"=, 6in 3ree&=. Schneider, :., The de elopment of the shadow economies and shadow labor force of 74 ;E.& and 77 transition countries, C*Sifo +IC* Ce$ort, 1L2003 62003=. Schneider, :., The si,e of the shadow economies of 4<= countries all o er the world* First results o er the period 4555 to 788>, IH> +i#cu##ion ;a$er No. !31 6200!=. Schneider, :., The influence of the economic cri#i# on the underground economy in 3ermany and the other )*C+ countrie# in 2010, at htt$ALL(((.econ.4&u.atLmem1er#LSchneiderLfile#L$u1lication#LIate#tCe#earch2010LSh ad*c)*C+2010.$df. 62010=. Schneider, :., Si'e and de%elo$ment of the #hado( economy of 31 *uro$ean and D other )*C+ countrie# from 2003 to 2012A Some ne( fact#, at htt$ALL(((.econ.4&u.atLmem1er#LSchneiderLfile#L$u1lication#L2012LShad*c*uro$e31. $df. 62011=. Schneider, :., and *n#te, +.5., Shado( economie#A Si'e, cau#e# and con#e0uence#, )ournal of Economic ?iterature, 3/, "" 11! 62000=. Schneider, :., and. *n#te, +.5., The shadow economy* !n international sur ey, Cam1ridge ,ni%er#ity ;re##, Cam1ridge 6200!=. Schneider, :., 7uehn, >., and <ontenegro, C., Ne( e#timate# for the #hado( economie# all o%er the (orld, International Economic )ournal, 2! 6!=, !!3 61 62010=. Singh, >., Jain Chandra, S., and <ohommad, >., Inclusi e growth' institutions and the underground economy, I<: Kor&ing ;a$er, !" 62012=. Tat#o#, N., Chri#todoulou, +., Traga&i, >., <ani&a, V., and 3anou, I., The underground economy and tax e asion in #reece, :*IC 62001=, 6in 3ree&=. Thoma#, J., Ruantifying the 1lac& economyA <ea#urement (ithout theory, Economic )ournal, 10-, 3/1 3/- 61---=. Torger, 7., and Schneider, :., Shadow economy' tax morale' go ernance and institutional :uality* ! panel analysis, IH>, Kor&ing ;a$er No. 2D63 6200"=. Va%oura#, I., and ?ara%iti#, N., The $ro1lem of the #hado( economy in 3reeceA Si'e, im$act and $olicie# to tac&le it, in The present and the future of the #ree- economy, ?inti#, >., 6ed.=, 3uten1erg, >then#, 12D 13D 61--"=, 6in 3ree&=. Va%oura#, I., ?ara%iti#, N., and T#ouchlou, >., >n indirect method to e#timate the #i'e of the underground economy (ith an a$$lication in the ca#e of 3reece, in the /nderground Economy, Va%oura#, I., 6ed.=, ?riti&i ;u1li#hing, >then#, 36" 3"- 61--0=, 6in 3ree&=. Va%oura#, I., and <anola#, 3., The underground economy in #reece and the world* ! first approximation, ;a$a'i##i# ;u1li#hing, >then# 6200!=, 6in 3ree&=.

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