Measuring the Shadows

Economic News

22 Jul 2010
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When hidden transactions are said to equate to anywhere between a quarter and a third of a country's GDP, any government should rightly get alarmed - and Bulgaria has been no exception in this regard. In the face of a number of seemingly troubling estimates of the scope of the country's dodgy accounting practices, the Bulgarian government has taken measures to ensure businesses pay the sovereign no matter what their accounts show. Problem is, trying to get a handle on the accuracy of grey economy estimates remains a controversial business.



Online magazine Business Global, for example, recently estimated that Bulgaria's grey economy - which is generally defined as all transactions not officially accounted for - equals 36.4% of Bulgaria's official GDP of USD15.563bn. This figure puts Bulgaria only behind Serbia-Montenegro in the south-eastern European region in terms of such illicit activities.



Meanwhile though, the Centre for the Study of Democracy, a Sofia-based think tank that recently held a round table discussion on corruption, estimates grey market activity at the equivalent of 25% of GDP.



If you ask most Bulgarians, chances are they would agree that illicit economic and legal practices are a major problem. A recent survey by the anti-corruption group Coalition 2000 showed that 56% of Bulgarians still single out corruption as the country's primary problem. When asked to identify those most likely to engage in corrupt activities, most respondents accused customs agents - who earn only the equivalent of USD$155 per month - of accepting bribes - or in more colloquial terms "favours" - when issuing licenses. They also accused members of parliament of graft in public tenders, and the police of committing blatant traffic violations.



Alexander Stoyanov, the Director of Vitosha Research, the social and marketing survey research unit affiliated with the Bulgarian Centre for the Study of Democracy, says that "corruption has become so commonplace that it is tolerated by businesses as a relatively effective mechanism for dealing with problems. This is a dangerous trend."



This tendency to 'deal with problems' off record also spreads into accountancy. Yet the degree to which grey market activity impacts upon the economy as a whole is also contested. In recent comments to the Oxford Business Group, Resident Representative of the International Monetary Fund (IMF) in Bulgaria Piritta Sorsa downplayed the grey economy's overall impact by calling into question the subjective nature of the methodology often used in gauging such an elusive economic indicator.



"I'm very sceptical in trying to place a precise number on the grey economy's effect on the Bulgarian economy," he said. "The 36 - 40% [of GDP] rate is a number that the think-tanks tend to come up with and reflects a variety of things. Partly it's a reflection of the business environment and the mounting financial costs and internal sacrifices companies often face in their attempts to become legitimate players in the current business environment. Moreover, if there are too many barriers, these companies, will have no other choice but to continue operating within the grey economy."



The 'barriers' businesses face are also multifarious, but often boil down to the increasing pressure on companies for better bottom lines. As competition heats up with greater economic liberalisation, businesses often engage in a number of 'under the table' accounting practices, including neglecting to maintain accurate inventories of their employees, refusing to get involved in long-term employee contracts, and avoiding paying social security taxes.



In response to the reported illicit activity, the government has tried a number of measures to 'tax where the money is,' no matter what official accounts show. The most successful, albeit controversial, to date has been the levying of a patent tax - a tax assessed on government assumptions of company profits. The tax has been successful in tapping into retail and service industries that have traditionally made up the bulk of the grey economy.



The increased presence of tax collectors has also reportedly played a significant role in reigning in the grey economy. According to one local journalist, tax collectors (known as 'crown agents') now even regularly patrol the open-market of the Sophia suburb of Iliyantsy - a market long synonymous with the country's black market. Nevertheless, the issuing of invoices has not been implemented.



As a strong contender for NATO accession - the alliance is expected to ratify Bulgaria's remaining protocols at the May 2004 Istanbul summit - and an aspirant to the European Union by 2007, government officials are keen to emphasise internationally the government's efforts to reign in illicit activity. At a meeting for Bulgarian and German businessmen in early June, the former Minister of Economy and now Minster of Transportation and Communications and Deputy Prime Minister Nikolai Vassilev assuaged concerns over the perceived growth of the underground economy.



"Corruption is not among the top issues of our society as it used to be for businesses some seven or eight years ago", Vassilev said.



The minister identified a number of inherent structural problems at the root of corruption, including a shortage of qualified, conscientious civil servants to deal effectively with the issue, the still excessive state intervention within the economy and the need to reform Bulgaria's flawed judicial system.

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