Shadow Economy Index for the Baltic Countries

Compared with the previous year, the size of the shadow economy in Latvia slightly shrank in 2015, while Lithuania and Estonia experienced a small increase in the size of the shadow economy – that is a conclusion drawn by the authors of the annual study of the Stockholm School of Economics in Riga (SSE Riga) on the shadow economy in the Baltic countries.

Calculated as a percentage of the gross domestic product (GDP), the proportion of shadow economy in Latvia in 2015 was 21.3%, in Lithuania – 15%, but in Estonia – 14.9%. In the course of the year the size of the shadow economy in Latvia has decreased by 2.2% of GDP; however, the shadow economy in Latvia is still considerably higher than in the two neighbouring Baltic countries.

“Although contraction of the shadow economy in Latvia is basically due to a decline in the proportion of unreported business income and “envelope” wages, these indicators are still to be considered as very high in Latvia,” admits the author of the study, Associate Professor at SSE Riga Dr. Arnis Sauka. The highest level of shadow economy is registered in Riga and its vicinity, followed by the region of Kurzeme.

The largest share of the shadow economy in Latvia is due to underreporting of business income or tax avoidance reaching almost 45% of the Latvian shadow economy. Underreporting of business income in Latvia is considerably higher than in the neighbouring countries (in Latvia – 19.9% compared to 10.5% in Lithuania and 7.5% in Estonia). Moreover, the study results indicate that unregistered enterprises account for approximately 5%-7% of all the enterprises in Latvia.

The second largest share of the shadow economy in Latvia is still made up by “envelope” wages. The proportion of “envelope” wages in 2015 is roughly on the same level, namely, within the range of 15.2% to 17.9%. It should be noted, though, that the proportion of “envelope” wages in the totality of all the wages in Latvia has been falling already since 2010 and this trend continued also in 2015. Unofficial “envelope” wages is the most substantial problem of shadow economy in Estonia, as it constitutes up to 60% of its total shadow economy.

Among the Baltic countries, the highest level of bribery is in Lithuania which in 2015 witnessed an increase in both general business bribery (from 10.2% to 12.7% of revenue), as well as government bribery (from 10.9% to 11.5% of a government contract value).

Analysed by sector, the highest proportion of shadow economy in Latvia is traditionally in the construction sector, where about 40% of the sector activity takes place in the “grey zone”. The share of shadow activity in the construction sector in Lithuania and Estonia is about half that of the Latvian construction sector.

According to the study results, small companies tend to operate in the grey zone more than large companies, however, the differences among the company size categories are not large, and also some large companies contribute considerably to the shadow economy.  

Similar to the previous years, also in 2015 the highest dissatisfaction with the government’s tax policy among the three Baltic countries was observed in Latvia, although companies are still relatively satisfied with the performance of the State Revenue Service. Naturally, companies that are not satisfied with the tax policy of the government tend to engage in the shadow economy more often than their satisfied counterparts.

The study results prove that smaller and younger firms engage in proportionally more shadow activity than larger, older firms – the authors of the study explain it with the fact that tax evasion is used by firms to gain certain competitive edge.

To reduce the size of the shadow economy the authors suggest making tax policy more stable, making taxes more “fair” from the perspective of businesses, and increasing the transparency with which taxes are spent. Increasing the probability of detection is also expected to reduce shadow activity. It is concluded in the study that the ethnic composition also has an impact on the level of shadow economy, most probably as a result of minorities feeling less engaged in society and country-level decision making. Thus, the authors suggest that addressing social cohesion and integration of minorities may also lead to a reduction in the shadow economy.


The SSE Riga Shadow Economy Index for the Baltic countries is estimated annually based on surveys of entrepreneurs in the Baltic countries. Since 2009, when the first study was carried out, all three Baltic countries have experienced contraction in the relative size of their shadow economies, with the most dramatic decline being experienced by Latvia (from 36.6% of GDP in 2009). The authors of the study are Dr. Arnis Sauka, Director of the Centre for Sustainable Business at SSE Riga, and Dr. Tālis Putniņš, Professor at SSE Riga. The study is supported by SEB.

The SSE Riga Shadow Economy Index for the Baltic countries was presented during the annual Shadow Economy Conference on May 12, 2016,  which aims to identify possible solutions for reducing the shadow economy in Latvia. The conference was organized in cooperation the Latvian Chamber of Commerce and Industry (LCCI), the Ministry of Finance of Latvia (FM), and organization Business Against Shadow Economy (BASE).

Please see presentations from the Shadow Economy Conference by Dr A.Sauka, I.Petersone and J.Stinka (in Latvian) >>>

1/ Prezentācija „Ēnu ekonomikas indekss Baltijas valstīs 2009.-2015.” 
Dr. Arnis Sauka, SSE Riga Ilgtspējīga biznesa centra direktors
2/ Prezentācija "Valsts ieņēmumu dienesta īstenotie pasākumi ēnu ekonomikas mazināšanā un nodokļu plaisas aprēķins."
Ināra Pētersone, Valsts ieņēmumu dienesta (VID) ģenerāldirektore
3/ Prezentācija "Kā pareizi mazināt ēnu ekonomiku Latvijā? Valsts iestāžu darba plāns ēnu ekonomikas ierobežošanai 2016.-2020."
Juris Stinka, biedrības „Business against shadow economy” (BASE) valdes loceklis

Photos from the Shadow Economy Conference >>>

Ēnu ekonomikas indekss Baltijas valstīs 2009-2015 (latviešu valodā)

2.08 MB, pdf

Shadow Economy Index for the Baltic Countries 2009-2015 (in English)

2.38 MB, pdf

Informācija medijiem (latviešu valodā 12.05.2016.)

0.07 MB, docx

Dr. A.Saukas prezentācija (latviešu valodā 12.05.2016.)

1.43 MB, pdf

Dr A.Sauka presentation (in English 12.05.2016.)

1.69 MB, pdf

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The aim of the SSE Riga “Shadow Economy Index for the Baltic Countries” is to measure the size of the shadow economies in Latvia, Lithuania and Estonia, as well as to explore the main factors that influence participation in the shadow economy.  SSE Riga Shadow Economy Index is commissioned by the Centre for Sustainable Business at SSE Riga (powered by SEB).

 

The Index is measured annually since 2009.


 

Authors


Dr. Arnis Sauka is Associate Professor at the Stockholm School of Economics in Riga. Prior to joining the doctoral program at the University of Siegen (Germany), he was a visiting PhD candidate at Jönköping International Business School (Sweden) and University College London (U.K.). His main research interests are related to tax evasion, entrepreneurship policies, business strategies, competitiveness and social contribution of entrepreneurs.



Dr. Tālis Putniņš is Professor at the Stockholm School of Economics in Riga, Research Associate at the Baltic International Centre for Economic Policy Studies (Latvia), and Chancellor's Postdoctoral Research Fellow at UTS Business School (Australia). His research interests include financial economics, market microstructure, market manipulation, tax evasion, and partial detection modelling. Tālis has a Ph.D. from the University of Sydney.