Shadow economy: Disaster or source of survival for population?

Author : Yuriy Hryhorenko

Source : 112 Ukraine

Each Ukrainian government is struggling with the shadow economy, but there are no significant results. Its level still balances on the rate of 35-50% and every third Ukrainian works unofficially
20:56, 13 March 2018

Read original article at

112 Agency

The shadow economy means not only the outright crime, but also various economic "schemes" (smuggling, minimization of taxation, converting centers - all that is not fixed by official statistics). The formal and shadow economies exist in parallel. "Black" salaries are spent in official stores, thus returning to legal turnover, and then again can go into the "shadow".

For assessments of the shadow economy, several methods are used. They differ in methodology and results, but they have one thing in common - Ukraine's indicators are very high. Thus, the Ministry of Economic Development and Trade (MEDT) in January-September 2017 noted a decrease in the level of the shadow economy by 3 points, to 33% of GDP in comparison with the same period in 2016. For this period, the indicator of the level of the shadow economy, calculated using methods of unprofitable enterprises and "population costs - retail turnover," decreased by 3 percentage points and amounted to 22% and 48% respectively, and monetary and electric (comparing the increase in electricity consumption with GDP growth), the methods showed a decrease of 2 percentage points, to 23% and 30%, respectively.

The difference in methods is expressed in ambiguous results. According to the Ministry of Economic Development and Trade, in January-September 2017, the highest level of the shadow segment was recorded in the financial sector - 49% and in the extractive industry - 44%, and the lowest - in the form of "agriculture, forestry and fisheries" - 6%. At the same time, in the study of the Pension Fund, the highest shadow employment in 2017 was in agriculture (42.7%). It is unlikely that there can be low shadowing in the agroindustrial complex, because almost half of the workers there do not have formal registration of labor relations and do not pay any taxes.

"It is extremely difficult to calculate the shadow economy, and any methods here have a significant error (one of the key ones is to correlate GDP and energy consumption, compare household spending with their income level, compare export statistics from Ukraine's key trade partners with official import statistics from them, which does not coincide, and so on), " says Andriy Popov, partner of Kreston GCG.

According to the study of the International Association of Chartered Certified Accountants (ACCA), Ukraine in 2016 ranked third (45.1%) in the list of countries with the largest shadow economy. On the lower positions are only Nigeria (48.4%) and Azerbaijan (67%). It should be noted that, according to the Ministry of Economic Development and Trade, the size of the shadow economy in Ukraine in 2016 was 33%.

"I think that the share of shadow GDP in Ukraine is about 50%, which is largely due to the use of a simplified system of taxation. About 1.5 million entrepreneurs work in the "simplified" system, in part they create a shadow economy, since they rarely pay taxes honestly and therefore, according to official statistics, the salary of Ukrainians is low, but the number of new cars bought is amazing," said Oleksandr Okhrimenko, the president of the Ukrainian Analytical Center.

According to the IMF, in the period from 1991 to 2015, the average size of the shadow economy in Ukraine was 44.8% of GDP. From year to year, it varied - from 1991 (39%) it grew to 1998 (57%), and then decreased to 2008 (36.7%), so that by 2015 it will grow to 42.9%. In 2015, the Ministry of Economic Development and Trade estimated the share of the shadow economy in 40%.

Anyway, all existing estimates show a very high level compared to other countries. For comparison, according to the IMF estimates, in the developed countries (USA, Netherlands, Japan, Switzerland, Singapore), the level of shadow economy is in the range of 7-15%. Regarding Russia, the IMF calls the indicator in 33.7%, while Russian Statistics Service - 15-16%.

According to Alexei Amfiteatrov, director of the rating agency IBI-Rating, the real level of the shadow economy in Ukraine roughly corresponds to the estimates of the Ministry of Economic Development and Trade. Due to the specifics of the existence of retail trade in our country, the mentality of the population and many other factors, some of the operations will be carried out in cash.

"Its reduction was facilitated by a reduction in the social burden on enterprises due to a decrease in single social tax (up to 18%), as well as tougher requirements for business on a simplified system. In addition, the restriction of the volume of purchases in cash also contributed to the dynamics of the level of the shadow economy. The need to reduce the fiscal burden intensified, because of the increase in the requirements for a minimum wage. Even despite the possible sanctions for shadow employees and salaries such cases in the country are not unique, "adds Alexey Amfiteatrov.

Related: National Bank to introduce new coins to replace banknotes

According to Andriy Popov, the social contract in Ukrainian realities looks somewhat unusual for the European country. Throughout the years of independence, the state has turned a blind eye to the shadow economy, enabling citizens, without much hiding, to use various schemes of shadow earnings - from illegal rental of housing to use of "internal offshore" in the form of a single tax. In return, society was sympathetic to corruption at all levels of government.

Shadow: good or evil?

All Ukrainian governments in one way or another struggled with the shadowing of the economy. There were unsuccessful attempts to declare an amnesty of capital, introduce mandatory for everyone income declaration, struggle with black salaries and shadow employment, but there were no significant results. Authorities saw the source of development of the official economy in the shadow, so they did not fight systematically. The State Employment Service recognizes that every third Ukrainian works illegally, that is, about 4-5 million people.

"The negative effect of the shadow economy is obvious: these are unpaid taxes that could go to finance state programs, health care, education, pensions, allowances, etc. The shadow economy is a favorable environment for all sorts of offenses, and not only in the financial sphere, but and in the sphere of drug trafficking, arms and other illegal activities, "said Andriy Popov.

On the other hand, the struggle between the authorities and the shadow economy was largely formal - at the state enterprises, in the companies of bureaucrats and pro-government businessmen we see the same black salaries, the use of converting centers, kickbacks, work through other companies, overstatement of prices and so on. There it is not profitable to notice the shadow economy and corruption, but it is there.

At the same time, experts are not inclined to assess the impact of the shadow economy in Ukraine, especially negatively, because it creates a certain margin of safety for business and the population in economic difficulties (this phenomenon is constant in Ukrainian conditions).

According to Andriy Popov, during the most difficult periods of modern Ukrainian history, from the "dashing 90s" to the crisis of 2014, it was the shadow economy that became the "safety cushion" that prevented the economy from sliding into a complete collapse. As a rule, after such a drop in official GDP (minus 30% per year) and with such inflation as in Ukraine in 2014-2015, (25% and 43% respectively), states and their capitals look somewhat different than modern Kyiv. The money, postponed for a bad day, was the shadow economy (often literally in the form of undeclared dollars).

"For Ukraine, the shadow economy is largely salvation, and if it were not, then there would be no possibility of experiencing crises. The crisis of 2014-2015 showed that Ukrainians were saved by the shadow economy. Many of them, having lost their jobs in legal business, found work in the shadow economy, "adds Okhrimenko.

According to Alexei Amfiteatrov, the shadow economy is not total evil, but it is not good either, it is an objective reality. "In conditions of limited resources, business and public have to choose what to spend money for. For many people, leaving for "shadow" is a matter of survival, although for the economy as a whole the phenomenon is rather negative, as the state is underfunding a number of programs, or is forced to cover the budget deficit at the expense of loans, but do not forget that a high level of economy in the shade is a potential for its growth - but only with the effective implementation of fiscal and economic policies, "the expert stresses.

What to do?

The solution to the problem of the shadow economy is not universal and guaranteed success: the policy of fines and repression in the economy leads to an outflow of money into the "shadow", and total liberalization (reduction of tax rates, refusal of state influence on business) will not create a "miracle", that is, the return of shadow money to legal circulation.

According to Okhrimenko, to reduce the shadow economy, the authorities need to stop implementing reforms, because all of its actions lead to the growth of the shadow economy. The shadow economy may decrease if there is stability and more or less normal growth in the country. From 2000 to 2008, the share of the shadow economy in Ukraine decreased, but then no sharp movements or significant reforms were made by the authorities.

As noted by Andriy Popov, the measures of fighting shadow are traditional - carrot and stick. The need for a stick is justified by the fact that business by its nature voluntarily will not abandon the increased rate of profit. A wide range of measures in this direction have already been taken.
Carrot means the creation of a situation when the costs from the shadow business become higher than the costs of doing business "in white", and the advantages and security of the "white" business are more significant than the advantages and security of the "gray" one. Plus, you need to reduce the tax burden on business, simplify all kinds of state procedures, maximize their transparency and automation and further deregulation," the expert adds.

The withdrawal of funds from the "shadow" is a complex solution based on creating an attractive investment climate, attracting investments and introducing innovations, limiting the government's influence on business and social responsibility of the business itself, that is, the willingness to pay taxes in full.

"I think that the key to solving the economic problem in the shadow lies in the interaction between business and the state and finding the optimal balance for all stakeholders. The fiscal burden should not kill the business, but the enterprises / employees themselves must understand where their taxes are going. It is important that bona fide payers receive the necessary social guarantees. And the state really strictly fulfilled its obligations. In addition, the introduction of new technologies and simplification of administration also affects the desire of the business to work legally,"  says Alexei Amfiteatrov.

The shadow economy is not only a different business scheme for minimizing taxation, but also a reality more understandable to a simple Ukrainian - various bribes and "gratitudes", getting black wages, working without obtaining a license, renting an apartment without notifying the tax office and many other things that seem quite ordinary and understandable, but that do not become less illegal. This is the everyday shadow economy, from which it is very hard to refuse for individual Ukrainian. And such an approach is much more difficult to break than to adopt and implement even the most correct laws.

Related: About 58% of Ukrainians never tried to protect their rights, - ombudswoman

Related: Canada, Sweden allocate USD 2 mln to restore Donbas infrastructure

Система Orphus

If you find an error, highlight the desired text and press Ctrl + Enter, to tell about it

see more
latest news
editor's choice