December 7, 2015 Print

When governments make it difficult for people to trade and build businesses, entire sections of an economy can disappear into the shadows. Atlas Network partner the Lithuanian Free Market Institute (LFMI) recently released a new study about the shadow economies in Lithuania, Latvia, Estonia, Belarus, Sweden, and Poland. The study, titled “Shadow Economies in the Baltic Sea Region 2015,” generated more than 70 media hits in a single day after being unveiled at a major international policy conference on the subject.

“The shadow economy can generally be defined as economic activities (goods produced and services rendered) conducted in non-compliance with applicable laws for the purpose of avoiding taxes/or and regulations,” the study explains. “If the goal is to effectively tackle the issue of the shadow economy, it is crucial to view the shadow economy not only as a criminal offence, but also to recognize that the shadow economy is primarily about economic activities that create value. This implies that the fight against the shadow economy is the most effective not when shadow economy activities are completely eradicated, but when they are transferred from the undeclared domain to the formal sector. ... The incentive to participate in the shadow economy always stems from economic restrictions on legal economic activities, be it taxes or regulations. Therefore, the primary way to curb the shadow economy is by creating a favourable legal environment for legal activities.”

The project included data from representative population surveys in six countries — including Lithuania, Latvia, Estonia, Poland, Sweden and Belarus — that gauged public perceptions of the shadow economy and actual engagement in shadow economic activities. The target audience included 18- to 75-year-old residents, with a total sample size of 6,035 in all six countries.

“The surveys have revealed the extent of undeclared labour,” LFMI reports in a press release. “Three in ten people in Lithuania admit to having friends or relatives who have worked in the shadow labour market in the past year. In most cases these people have job contracts but receive part of their wage as an ‘envelop wage.’ In Latvia and Poland the share of the population who have friends or relatives in the shadow labour market is even higher, 36 and 33 percent respectively. In Estonia this proportion is 26 percent, and in Sweden it stands at a mere 8 percent. Shadow employment is the most widespread in construction.”

LFMI has explored the economics and policy implications of shadow economies since 1997, and has built a solid expertise on the topic. In large part thanks to the policy analysis and advocacy efforts of LFMI, Lithuania requires that any proposed legislation must assess and indicate its impact on the spread of the shadow economy.