Shadow Economy Index for the Baltic Countries

In 2016, Latvia saw a slight contraction of the shadow economy, thus continuing the long-term trend since 2013. In contrast, there has been a modest increase in the size of shadow economies in Lithuania and Estonia. Following this trend for several consecutive years, the gap between the sizes of shadow economies in the three Baltic countries has diminished considerably – a conclusion drawn by the authors of the annual Shadow Economy Index for the Baltic countries.

Components of the shadow economies in the Baltic countries in 2016.

Calculated as a percentage of the gross domestic product (GDP), the proportion of shadow economy in Latvia in 2016 was 20.3%, in Lithuania – 16.5%, but in Estonia – 15.4%. In the course of the year the size of the shadow economy in Latvia decreased by 1.0% of GDP, however, the shadow economy in Latvia is still considerably higher than in the two neighbouring Baltic countries.

“Contraction of the shadow economy in Latvia has been driven mainly by decreases in underreporting of business income and underreporting of the number of employees. Nevertheless, underreporting of business income is the component determining most of the difference in the size of the shadow economy in Latvia and the other two Baltic countries. But the level of underreporting of envelope wages has been similar in all three Baltic countries,” stresses the author of the survey, Associate Professor at SSE Riga Dr. Arnis Sauka.

Figure: Components of the shadow economies in the Baltic countries in 2016.

The largest share of the shadow economy in Latvia is due to underreporting of business income or income tax avoidance. Underreporting of business income in Latvia is considerably higher than in the neighbouring countries (in Latvia – 18.5%, compared to 11,7% in Lithuania and 8.3% in Estonia). However, compared to a year before, the share of unreported business income in Latvia in 2016 contracted by 1.4%, whereas Lithuania and Estonia experienced an increase by 1.2% and 0.8% respectively.

The second largest share of the shadow economy in Latvia is still made up by “envelope” wages. The level of underreporting of envelope wages in 2016 was similar in all the Baltic countries, namely, within the range of 15.4% to 18.1%. The proportion of envelope wages in the totality of all the wages in Latvia and Lithuania in 2016 remained on the level of 2015, whereas in Estonia it decreased slightly. Both underreporting of business income and envelope wages are considerable problems of the shadow economy in Latvia making up 42.1% and 40.2% of the total Latvian shadow economy respectively. But in Lithuania and Estonia the major problem of the shadow economy is envelope wages, making up 53.6% and 42.4% of the total shadow economy respectively. Moreover, the study results indicate that unregistered enterprises account for approximately 5%-8% of all the enterprises in the Baltic countries.

Irrespective of the positive trend in 2016 as compared to a year before, Lithuania still stands out among the Baltic countries as having the highest level of bribery. Namely, in 2016, bribery in Lithuania decreased both in general entrepreneurship (from 12.7% to 9.8% of revenue), as well as in government bribery (from 11.5% to 8.1% of the value of a government contract value). Bribery is also more tolerated by Lithuanian company managers than by the Estonian and Latvian ones.  The level of bribery contracted also in Latvia: general business bribery from 7.6% in 2015 to 6.5% in 2016, but government bribery from 4.5% to 3.9%. Government bribery in Estonia in 2016 increased reaching 4.8%.

Figure: Size of the shadow economy (% of GDP) by sector (average 2014-2016).

Analysed by sector, the highest proportion of shadow economy in Latvia is traditionally in the construction sector. The share of shadow activity in the construction sector in Lithuania and Estonia is considerably smaller.

 

Figure: Size of the shadow economy (% of GDP) by region in Latvia (average 2014-2016).

The highest levels of shadow economy in Latvia are observed in the Kurzeme region and Riga, as well as its vicinity.

As emphasised by Dr. Arnis Sauka, “Results prove that entrepreneurs in all three Baltic countries are of the opinion that the risk to be caught for underreporting of business income, wages, and the number of employees is relatively high. Nevertheless, at least a quarter of the interviewed company managers in all three Baltic countries do not perceive the consequences of being caught as significant.” In line with the study data, smaller and younger firms engage in proportionally more shadow economy than larger and older firms. However, the differences across company size categories are not explicit; some large companies also contribute to the shadow economy considerably.

Also in 2016 entrepreneurs in all three Baltic countries were relatively satisfied with the performance of the State Revenue Service (SRS) and relatively unsatisfied with the government’s tax policy and support to entrepreneurs. Satisfaction with the SRS in Latvia in 2016 has decreased as compared to the period 2012-2015 when the satisfaction of entrepreneurs was almost invariably high. Similarly, satisfaction of Latvian company managers with the government’s tax policy has diminished considerably, and it is relatively lower than in other Baltic countries. Altogether, Latvian companies are less satisfied than their Estonian and Lithuanian counterparts, and it basically explains the higher level of the shadow economy in Latvia.

The study results prove that the so called tax morale is high in all three Baltic countries. It means that entrepreneurs are not of the opinion that tax evasion “in case there is a chance”, would always be justifiable behaviour. “We use various indicators (both direct and indirect) in order to measure the attitude of company managers towards community belonging, as well as their attitude towards tax avoidance. Everything leads to the conclusion that company managers in Latvia are patriots of their country and would often rather lead a more peaceful life without avoiding taxes. Thus, not so much campaigns about the usefulness of paying taxes, but rather targeted measures to improve the business environment are the tools that the policy makers should work on more,” emphasises Dr. Arnis Sauka. The study results indicate that the work on the reduction of shadow economy should be continued not only in Latvia, but also in Lithuania and Estonia, where several negative trends regarding factors that affect shadow economy have been registered. In Latvia, company managers are of the opinion that it would be crucial to work on the improvement of the tax system and to minimise uncertainty about regulatory policies.

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 survey 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 survey are Dr. Arnis Sauka, Director of the Centre for Sustainable Business at SSE Riga, and Dr. Tālis Putniņš, Professor at SSE.

The results of the study “Shadow Economy Index for the Baltic countries” were presented at a conference “Shadow Economy in Latvia” on 10 May, dedicated to the subject of shadow economy contraction in Latvia and organised by the Centre for Sustainable Development at SSE Riga in cooperation with the Latvian Chamber of Commerce and Industry and the Ministry of Finance of the Republic of Latvia for seven consecutive years already.


The SSE Riga Shadow Economy Index for the Baltic countries 2009-2016 was presented during the annual Shadow Economy Conference, which took place at SSE Riga on May 10th, 2017.
The working language of the conference was Latvian. Please watch videos below.

1. daļa
Konferences atklāšana
SSE Riga Rektors Anders Paalzow
Ministru prezidents Māris Kučinskis
LTRK prezidents Aigars Rostovskis

Pētījuma „Ēnu ekonomikas indekss Baltijas valstīs 2009 - 2016” prezentācija
Pētījuma autors, SSE Riga Ilgtspējīga centra direktors Dr. Arnis Sauka

Valsts ieņēmumu dienesta īstenotie pasākumi ēnu ekonomikas mazināšanā un nodokļu plaisas aprēķins 
Valsts ieņēmumu dienesta ģenerāldirektore Ilze Cīrule


2. daļa
Paveiktais un vēl darāmais ēnu ekonomikas mazināšanai Latvijā.
Valsts iestāžu darba plānā ēnu ekonomikas ierobežošanai 2016. - 2020. gadam.

LTRK Ēnu ekonomika no uzņēmēju skatupunkta, LTRK padomes locekle Elīna Rītiņa

Finanšu ministrijas reakcija (nodokļu reformas aspekts), Finanšu ministrijas valsts sekretāra vietnieks Ilmārs Šņucins

Paneļdiskusija  moderē LTRK valdes priekšsēdētājs Jānis Endziņš.
Piedalās: Finanšu ministrijas valsts sekretāra vietnieks Ilmārs Šņucins, Ekonomikas ministrijas valsts sekretārs Juris Stinka, VID ģenerāldirektore Ilze Cīrule, Rīgas Tehniskās universtitātes pētnieks Māris Jurušs, Latvijas Kokrūpniecības federācijas izpilddirektors Kristaps Klauss, Korupcijas novēršanas un apkarošanas biroja priekšnieka p.i. Ilze Jurča.


Photos >

SSE Riga Shadow Economy Index 2009-2016

2.40 MB, pdf

SSE Riga Ēnu ekonomikas indekss 2009-2016

2.04 MB, pdf

Prezentācija - Arnis Sauka

1.60 MB, pdf

Prezentācija - Ilze Cīrule

1.75 MB, pdf

Prezentācija - Elīna Rītiņa

0.52 MB, pdf

Prezentācija - Ilmārs Šņucins

1.92 MB, pdf

Preses relīze par Ēnu ekonomikas indeksa rezultātiem 10.05.2017.

0.04 MB, docx

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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.