OECD: Growing shadow economy in 36 countries due to pandemic – The image for Greece

The coronavirus pandemic had a strengthening effect on the shadow economy as a percentage of GDP in all 36 member states of the Organization for Economic Co-operation and Development (OECD), including Greece. As a result, the share of services offered in the “shadow” of the official economy, increased in 2020 significantly, compared to a year ago. In fact, especially in the 28 EU countries (including the United Kingdom), the increase between 2019 and 2020 is estimated to be the highest in the last 20 years.

Speaking to APE-MPE, these assessments were made by economist Freidrich Schneider, an honorary professor (retired) at the Research Institute of Banking and Economics at Johannes Kepler University in Austria and considered a leading figure.

Evidence of his assessment, he cites the results of research conducted during the pandemic using the MIMIC method, the findings of which were included in a paper entitled “Development of the Shadow Economy of 36 OECD Countries over 2003-2021”.

The rise in 2020, which came to halt the downward trend of the shadow economy in almost all 36 countries, from 2003 onwards, seems to have stalled again in 2021 (provisional data), during which it is estimated that moderate decline of the informal economy.

Why did the shadow economy grow in a period of “frozen” activity?

As Mr. Snyder explains in the APE-MPE, in 2020, rising unemployment and the recession manifested by a sharp decline in GDP in almost all countries due to Covid-19, led more people to the shadow economy to replace their lost income. As a result, in the 36 OECD countries the “shadow” economy is estimated to have approached 17% of GDP in 2020 (16.48% last year, compared to 14.98% in 2019). In 2021, due to the gradual economic recovery that occurred, it is estimated that it fell to 16.07% (forecast).

In the 28 EU Member States (including the United Kingdom, which left the united Europe on 31 January 2020), the shadow economy is estimated to have grown in the first pandemic year to 17.87%, up from 16.28% in 2019, before declining slightly last year, to 17.42% (unweighted average of 28), according to the professor’s forecasts, which are based – as he explains – on the official data of the countries for growth and unemployment. The figures for some countries in 2020, he adds, relate to projections.

In which countries did the “shadow” weigh the most?

The highest growth of the shadow economy for 2020 is recorded, according to the professor, in Croatia (29% of official GDP compared to 26.4% in 2019). It is followed by Bulgaria, which maintains the highest shadow economy among the Community states (32.93% of official GDP in 2020 compared to 30.12% in 2019). In contrast, the most anemic growth occurred in Finland (from 10.59% in 2019 to 11.36% of GDP in 2020) and in Denmark (from 8.92% to 8.92%). In the midst of a pandemic, Austria maintained the lowest shadow economy in a united Europe (at 7.23% of GDP in 2020 compared to 6.10% in 2019).

In Greece, the shadow economy is estimated to have increased last year to 20.9% of GDP, compared to 19.23% in 2019, with the estimate for 2021 being that it fell again, to 20.3%, according to Mr. Snyder.

For 2021, the professor expects, as mentioned above, a small reduction in the informal economy in a united Europe: “This reduction is expected to come as a result of large public investment in infrastructure and subsidies to businesses and individuals, which I hope will lead to a larger GDP growth accompanied by a modest decline in unemployment economic recovery.

He emphasizes that in any case, to enter the official economy activities that are currently taking place in the “shadow” would be a blessing for every country. To this end, he supports the establishment and implementation of targeted policy incentives, in order to entice those who are currently active in the informal economy to come out of the “shadow”.

The image in Greece and the forecast for 2021

Increased as a percentage of GDP, but reduced in absolute terms, was in 2020 the shadow economy in Greece, as Vassilis Vlachos, assistant professor at the Department of Economics of the International University of Greece (DIPAE) points out in APE-MPE. In 2021, however, based on the estimated growth rate of 8% for this year, it estimates that the shadow economy in absolute size (not as a percentage of GDP) increased by 1.6 billion euros.

More specifically, citing data from the Observatory of Measurement of Informal Economy of the University of Macedonia (PAMAK), headed by Professor Aristidis Bitzenis, Mr. Vlachos points out that in 2020 the shadow economy in Greece increased as a percentage of GDP compared to 2019.

“The growth of the shadow economy as a percentage of GDP, during the lockdown of 2020, indicates the explosion of the undeclared activity of the share of society, which lived at that time with greater uncertainty, ie the business world,” he notes.

However, in absolute terms, the shadow economy declined: “Macroeconomic estimates show that the shadow economy in Greece followed an upward trend until 2009 (56.9 billion euros in current prices). of the Greek economic crisis) is following a declining course and in 2020 it reached 34.6 billion euros “.

Plastic money, service costs and tax compliance

The causes and effects of the downturn, he argues, are related to the increased use of plastic money and the significant reduction in spending on services, due to financial hardship.

More specifically, according to the professor, “citizens and businesses comply with taxes when they feel that their daily lives are improving through the supply of public goods and services. International indicators show that Greece has not taken significant steps in this area. In addition, in the short term, The size of the shadow economy depends mainly on the level of disposable income.

In the last decade, the disposable income of Greeks has significantly decreased, leading the percentage of the population experiencing material deprivation (can not meet basic needs) from 23% in 2009 to 32.6% in 2020. Serious material deprivation, which is associated negatively with the expenses for undeclared activities (eg services), it also shows an upward trend and in 2020 it reached 16.5%.

“Although there were no positive effects on tax compliance, it was the large increase in” plastic money “transactions and the significant reduction in service costs that led to the shrinking of the shadow economy,” he said.

“Lack of tax compliance in Greece is not considered immoral”

Asked whether the tax conscience of Greeks has been strengthened, Mr Vlachos said: “The Observatory’s work on participating in the shadow economy during the financial crisis of the last decade shows that the lack of tax compliance in Greece is not considered immoral. “The most important reasons are the lack of tax repayment and the magnitude of corruption in the public sector,” he said.

How does he think the pandemic will affect the informal economy in Greece in the medium to long term and why? “With the optimistic forecast that the pandemic is in its last days, the shadow economy is expected to grow, at least in absolute terms. Assuming that Greece’s GDP grows by 8% in 2021, the shadow economy is estimated to grow by “1.6 billion euros”, he claims.

How can the shadow economy be reduced?

The main reasons for the aid, he says, are rising undeclared employment and spending on services. “Reducing the shadow economy in the medium term requires reducing income inequalities and boosting productivity. Improving the competitiveness of the Greek economy to create sustainable jobs and investing in the human capital of the Greek economy for , more competitive productive structure, will reduce income inequalities, but many workers will not have the necessary skills to meet the new requirements. “GDP growth should not be accompanied by an increase in the shadow economy,” he concludes.

Source: AMPE