Explaining the Undeclared Economy in Bulgaria: an Institutional Asymmetry Perspective

Open access

Abstract

This paper proposes a way of explaining the undeclared economy that represents participation in undeclared work as a violation of the social contract between the state and its citizens, and as arising when the informal institutions comprising the norms, values and beliefs of citizens (civic morality) do not align with the codified laws and regulations of a society’s formal institutions (state morality). Drawing upon evidence from 1,018 face-to-face interviews conducted in Bulgaria during 2013, the finding is that the greater is the asymmetry between formal and informal institutions (i.e., citizens’ civic morality and state morality), the greater is the likelihood of participation in the undeclared economy, and vice versa. The outcome is that tackling the undeclared economy requires a focus upon reducing this lack of alignment of formal and informal institutions. How this can be achieved in Bulgaria in particular and South-East Europe and beyond more generally, is then discussed.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Allingham M. G. and Sandmo A. 1972. Income tax evasion: a theoretical analysis. Journal of Public Economics 1(2): 323-338.

  • Andrews D. Caldera Sanchez A. and Johansson A. 2011. Towards a Better Understanding of the Informal Economy. Paris: OECD Economics Department Working Paper no. 873 OECD.

  • Baric M. and Williams C. C. 2013. Tackling the undeclared economy in Croatia. South-Eastern Europe Journal of Economics 1: 7-36.

  • Baumol W.J. and Blinder A. 2008. Macroeconomics: principles and policy. Cincinnati OH: South-Western Publishing.

  • BICA. 2011a. Доклад за основните предизвикателства за диагностика ограничаване и превенция на неформалната икономика [Report on the key challenges to the diagnosis restriction and prevention of the informal economy]. Sofia:

  • BICA BICA. 2011b. Неформалната икономика и работодателите [The informal economy and the employers]. Sofia:

  • BICA BICA. 2012. Комплексен аналитичен доклад за състоянието на неформалната икономика в България и изводи за нейното ограничаване и превенция [Complex analytical report on the state of the informal economy in Bulgaria and conclusions on its reduction and prevention]. Sofia: BICA.

  • Bogdanov L. and Stanchev K. 2010. Сивата икономика в България: състояние към средата-края на 2010 г. [The grey economy in Bulgaria: situation as of 2010]. Sofia: Institute for Market Economics.

  • Castells M. and Portes A. 1989. World underneath: the origins dynamics and effects of the informal economy. In The Informal Economy: studies in advanced and less developing countries edited by A. Portes M. Castells and L. Benton 1-19. Baltimore: John Hopkins University Press.

  • Chang J.J. and Lai C.C. 2004. Collaborative tax evasion and social norms: why deterrence does not work. Oxford Economic Papers 56(2): 344-368.

  • Chavdarova T. 2014. Envelope wages. Paper presented at the States and States of Informality Conference Sofia 5 September.

  • Center for the Study of Democracy. 2009a. Crime without Punishment. Countering Corruption and Organised Crime in Bulgaria. Sofia: CSD.

  • Center for the Study of Democracy. 2009b. Policies to Counter the Effects of the Economic Crisis: Hidden Economy Dynamics 2009. Policy Brief No. 20. Sofia: CSD.

  • Center for the Study of Democracy. 2011. The Hidden Economy in Bulgaria and the Global Economic Crisis. Sofia: CSD.

  • Center for the Study of Democracy. 2012. Bulgarian Serious and Organised Crime Threat Assessment 2010-2011. Sofia: CSD.

  • Center for the Study of Democracy. 2013a. The Hidden Economy in Bulgaria Policy Brief No. 37. Sofia: CSD.

  • Daskalova N. 2013a. Joint effective control on undeclared work Bulgaria. Eurofound [Online]. Available: http:// www.eurofound.europa.eu/areas/labourmarket/tackling/cases/bg017.htm (accessed 21 December 2014).

  • Dau L.A. and Cuervo-Cazurra A. 2014. To formalize or not to formalize: entrepreneurship and pro-market institutions. Journal of Business Venturing 29: 668-686.

  • Daude C. Gutierrez H. and Melguizo A. 2013. What drives tax morale? a focus on emerging economies. Review of Public Economics 207: 9-40

  • De Soto H. 1989. The Other Path: the economic answer to terrorism. London: Harper and Row.

  • De Soto H. 2001. The Mystery of Capital: why capitalism triumphs in the West and fails everywhere else. London: Black Swan.

  • Dekker H. Oranje E. Renooy P. Rosing F. and Williams C.C. 2010. Joining up the fight against undeclared work in Europe. Brussels: Commission of the European Communities Employment Social Affairs and Equal Opportunities DG.

  • Denzau A.T. and North D. 1994. Shared mental models: ideologies and institutions. Kyklos 47: 3-30.

  • Dolenec D. 2013. Democratic Institutions and Authoritarian Rule in Southeast Europe. Colchester: ECPR Press.

  • Dzhekova R. Franic J. Mishkov L. and Williams C.C. 2014. Tackling the Undeclared Economy in FYR Macedonia. A Baseline Assessment. GREY Working Paper No. 3. Sheffield: Sheffield University Management School.

  • Dzhekova R. and Williams C.C. 2014. Tackling the Undeclared Economy in Bulgaria. A Baseline Assessment. GREY Working Paper No. 1. Sheffield: Sheffield University Management School.

  • Elgin C. and Oztunali O. 2012. Shadow Economies around the World: Model Based Estimates. Istanbul: Bogazici University.

  • European Commission. 2007. Special Eurobarometer 284. Undeclared Work in the European Union. Brussels: \

  • European Commission European Commission. 2012. Report from the Commission to the European Parliament and the Council. On Progress in Bulgaria under the Cooperation and Verification Mechanism. COM(2012) 411 final. Brussels: European Commission.

  • Franic J. and Williams C.C. 2014. The Undeclared Economy in Croatia. A Baseline Assessment. GREY Working Paper No. 2. Sheffield: Sheffield University Management School.

  • Frey B.S. and Torgler B. 2007. Tax morale and conditional cooperation. Journal of Comparative Economics 35: 136-159.

  • Gallin D. 2001. Propositions on trade unions and informal employment in time of globalisation. Antipode 19: 531-49.

  • Gasparaeniene L. Kartasova J. and Remeikiene R. 2014. Evaluation of shadow economy emergence and development factors in service sector: Greek case. Academic Journal of Interdisciplinary Studies 3: 139- 145.

  • Geertz C. 1963. Old Societies and New States: the quest for modernity in Asia and Africa. Glencoe IL: Free Press. General Labour Inspectorate. 2013. Activity Report 2012.

  • General Labour Inspectorate [Online]. Available: http:// www.gli.government.bg/upload/docs/2013-06/SKMBT_DOKLAD_IA_GIT_2012.pdf (Accessed 4 April 2014).

  • Gerxhani K. 2004a. The informal sector in developed and less developed countries: a literature survey. Public Choice 120: 267-300.

  • Gerxhani K. 2004b. Tax evasion in transition: outcome of an institutional clash? Testing Feige’s conjecture in Albania. European Economic Review 48(7): 729-45.

  • Goev V. 2009. Estimating the Hidden Economy in Bulgaria. South-East Europe Review for Labour and Social Affairs 12(1): 77-93.

  • Helmke G. and Levitsky S. 2004. Informal institutions and comparative politics: a research agenda. Perspectives on Politics 2: 725-740.

  • Hudson J Williams C. C. Orviska M. and Nadin S. 2012. Evaluating the impact of the informal economy on businesses in South East Europe: some lessons from the 2009 World Bank Enterprise Survey. The South-East European Journal of Economics and Business 7: 99-110.

  • ILO. 2013. Women and Men in the Informal Economy: statistical picture available at http://laborsta.ilo.org/informal_economy_E.html (last accessed 18 November 2014)

  • ILO. 2014. Transitioning from the informal to the formal economy. Report V (1) International Labour Conference 103rd Session (2014). Geneva: ILO.

  • KC2 Ltd. and Industry Watch Group. 2010. Food Voucher Issuance in Bulgaria: Economic and Fiscal Impact. Sofia: KC2.

  • Legge K. 1995. Human Resource Management: rhetorics and realities. Basingstoke: Macmillan.

  • Lewis A. 1959. The Theory of Economic Growth. London: Allen and Unwin.

  • Loukanova P. and Bezlov T. 2007. Undeclared Work from SYSDEM Correspondent. Bulgaria. European Employment Observatory [Online]. Available: http://www.euemployment-observatory.net/resources/reviews/NationalArticles/BulgariaUDW2007.pdf (Accessed 31 October 2014).

  • Maloney W. F. 2004. Informality Revisited. World Development 32: 1159-1178.

  • Mathias B. D. Lux S. Crook T. R. Autry C. and Zaretzki R. 2014. Competing against the unknown: the impact of enabling and constraining institutions on the informal economy. Journal of Business Ethics http://dx.doi.org/10.1007/s10551-013-2030-6.

  • Meagher K. 2010. Identity Economics: social networks and the informal economy in Nigeria. New York: James Currey.

  • Ministry of Finance. 2010. The grey economy: approaches for measuring and modelling. Brief methodological analyses. Sofia: Ministry of Finance.

  • Molero J. C. and Pujol F. 2012. Walking inside the potential tax evader’s mind: tax morale does matter. Journal of Business Ethics 105: 151-162.

  • Murphy K. and Harris N. 2007. Shaming shame and recidivism: a test of re-integrative shaming theory in the white-collar crime context. British Journal of Criminology 47: 900-917.

  • Murphy K. 2005. Regulating more effectively: the relationship between procedural justice legitimacy and tax non-compliance. Journal of Law and Society 32: 562-589.

  • Murphy R. 2012. Closing the European Tax Gap: a report for Group of the Progressive Alliance of Socialists and Democrats in the European Parliament. Downham Market: Tax Research LLP.

  • Nenovsky N. and Hristov K. 1999. A Study of the Money in Transaction after Establishing the Currency Board in Bulgaria. Bulgarian National Bank Working Paper. Sofia: Bulgarian National Bank.

  • North D. C. 1990. Institutions Institutional Change and Economic Performance. Cambridge: Cambridge University Press.

  • Nwabuzor A. 2005. Corruption and development: new initiatives in economic openness and strengthened rule of law. Journal of Business Ethics 59: 121-138.

  • OECD. 2012. Reducing Opportunities for Tax Non-Compliance in the Underground Economy. Paris: OECD.

  • Perachi F. Perotti V. and Scarpetta S. 2007. Informality and Social Protection: Preliminary Results from Pilot Surveys in Bulgaria and Colombia. World Bank Social Protection Discussion Paper No. 0717. Washington D.C.: World Bank Group.

  • Perotti V. and Sanchez Puerta M. 2009. Personal Opinions about the Social Security System and Informal Employment: Evidence from Bulgaria. World Bank Social Protection Discussion Paper No. 0915. Washington D.C.: World Bank Group.

  • Podrug N. 2011. Influence of national culture on decisionmaking style. South East European Journal of Economics and Business 6(1): 37-44.

  • Remeikiene R. Gasparaeniene L. and Kartasova J. 2014. Country-level determinants of the shadow economy during 2005-2013: the case of Greece. Mediterranean Journal of Social Sciences 5: 454-460.

  • Ristovska M. Mojsoska-Blazevski N. and Nikolov M. 2012. An alternative view to the tax evasion: the effect of tax morale on paying taxes in Macedonia and EU countries. Serbian Journal of Management 8: 169-183.

  • Round J. Williams C. C. and Rodgers P. 2008. Corruption in the post-Soviet workplace: the experiences of recent graduates in contemporary Ukraine. Work Employment and Society 22: 149-166

  • Schneider F. and Williams C. C. 2013. The Shadow Economy. London: Institute of Economic Affairs.

  • Schneider F. 2013. Size and development of the shadow economy of 31 European and 5 other OECD countries from 2003 to 2013: a further decline. Retrieved from http://www.econ.jku.at/members/Schneider/files/publications2013/ShadEcEurope31_Jan2013.pdf (accessed 6 November 2014).

  • Siqueira A. C. O. Webb J. and Bruton G. D. 2014. Informal entrepreneurship and industry conditions. Entrepreneurship Theory and Practice DOI: 10.1111/etap.12115

  • Slavnic Z. 2010. Political economy of informalisation. European Societies 12: 3-23.

  • Stanchev K. 2005. Ed. Study of Incentives Characteristics and Strategies of Firms Operating ‘in the Shadows’. Sofia: Institute for Market Economics.

  • Thompson P. and Alvesson M. 2005. Bureaucracy at work: misunderstandings and mixed blessings. In The Values of Bureaucracy edited by P. du Gay 121-140. Oxford: Oxford University Press.

  • Tobin J. 1958. Estimation of relationships for limited dependent variables. Econometrica 26: 24-36.

  • Torgler B. 2004. Tax morale in Asian countries. Journal of Asian Economics 15(2): 237-266.

  • Watson T.J. 2003. Sociology Work and Industry. London: Routledge.

  • Webb J. W. Tihanyi L. Ireland R. D. and Sirmon D. G. 2009. You say illegal I say legitimate: entrepreneurship in the informal economy. Academy of Management Review 34: 492-510.

  • Williams C. C. 2012. Cross-national variations in the underreporting of wages in South-East Europe: a result of overregulation or under-regulation? The South East European Journal of Economics and Business 7(1): 53-61.

  • Williams C. C. 2013. Evaluating cross-national variations in the extent and nature of informal employment in the European Union. Industrial Relations Journal 44: 479-494.

  • Williams C. C. 2014a. Confronting the Shadow Economy: evaluating tax compliance and behaviour policies. Cheltenham: Edward Elgar.

  • Williams C. C. 2014b. Out of the shadows: a classification of economies by the size and character of their informal sector. Work Employment and Society 28: 735-753.

  • Williams C. C. and Martinez A. 2014a. Explaining cross-national variations in tax morality in the European Union: an exploratory analysis. Studies in Transition States and Societies 6: 5-17.

  • Williams C. C. and Martinez A. 2014b. Why do consumers purchase goods and services in the informal economy? Journal of Business Research 67: 802-806.

  • Williams C. C. Nadin S. Kedir A. and Vorley T. 2013. Evaluating the extent and nature of the informalisation of employment relations in South-East Europe. European Journal of Industrial Relations 19: 91-107.

  • Williams N. and Vorley T. 2014. Institutional asymmetry: how formal and informal institutions affect entrepreneurship in Bulgaria. International Small Business Journal doi: 10.1177/0266242614534280

  • World Economic Forum. 2014. Global Competitiveness Report. Available at: http://www.weforum.org/reports/global-competitiveness-report-2013-2014

Search
Journal information
Impact Factor


CiteScore 2018: 0.86

SCImago Journal Rank (SJR) 2018: 0.224
Source Normalized Impact per Paper (SNIP) 2018: 0.395

Cited By
Metrics
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 244 163 3
PDF Downloads 136 98 2