In Lithuania one in two would consider shadow activity in financial hardship

LFMI // 19 October 2018

The shadow economy in Lithuania remains pervasive despite economic growth, and as many as one in two people would consider informal consumption and undeclared work if their financial circumstances worsened, shows a research report on the shadow economy released by the Lithuanian Free Market Institute and based on population surveys in Lithuania, Latvia, Estonia, Poland, the Czech Republic and Sweden.

During the last 12 months, as many as six out of ten respondents had made a purchase of goods or services knowing or suspecting that the sales revenues were not officially declared, and as many as 35% had bought from illegal sources. Three out of ten said to have friends or relatives working in the shadow labour market.

“Our data confirm that the most common unofficial goods and services have two fundamental features: those are either goods or services that comprise a large share of people’s total consumption, e.g. food or clothing, or highly taxed goods, such as tobacco, alcohol, or fuel,” – says project research leader Vytautas Žukauskas. A total of 31% of the surveyed population admitted to having unofficially purchased foodstuffs, 28% – clothes, 25% – beauty services, 23%– auto repair services, 17% – cigarettes, 18% – construction and renovation services, and 17% – medicines and food supplements from unofficial sources in the past 12 months. Around one-third of respondents said that their friends or relatives bought illicit cigarettes and alcohol and one in four indicated that their friends or relatives purchased illicit fuel.

The most important factors of the shadow economy are related to taxation. Public perceptions of the reasons behind illicit purchases are similar in all surveyed countries. The high cost of legitimate goods and the price difference between legitimate and illegitimate goods is seen as the main reason for illicit purchases. This was indicated by 89% of respondents in Lithuania, 83% in Estonia, 75% in Latvia, 71% in the Czech Republic, 70% in Poland, and 66% in Sweden.

High labour taxation is also considered to the main driver of undeclared work. It was reported by 64% of respondents in the Baltic States, Poland and the Czech Republic, and 42% of the surveyed in Sweden. These findings are also in line with those of other international studies.

LFMI experts note though that when it comes to the reasons of the shadow economy, the level of income and the affordability of goods and services play a key role, and these are in turn influenced by productivity and economic conditions in a country. When the economy and income levels grow, legitimate goods and services become more affordable and therefore more preferable by market participants.

“It is important to understand that many people would consider going into the informal economy if their income decreased or they lost jobs. In Lithuania this proportion of the population is the biggest among all surveyed countries. It should serve as a reminder to decision makers that economic policies, e.g. taxes and regulations, should not only be designed in light of economic growth. It is crucial to consider people’s choices and preferences in case of economic decline,” – says Vytautas Žukauskas.

According to LFMI, if economic incentives to go informal persist, i.e. if people can see big differences between official and unofficial wages or legitimate and illegitimate goods while the income level remains low, neither severe penalties nor a high likelihood of detection will not eliminate the shadow economy.

“The fight against illicit consumption, trade or work is at its most effective not when they are completely eradicated, but when they are transferred from the informal to the formal sector by reducing the tax and regulatory burden for legitimate economic activity. It is crucial to help people legalize their business or work rather than terminating it”, – concludes Žilvinas Šilėnas, LFMI president.

Read the full research report Shadow Economy: Understanding Drivers, Reducing Incentives

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