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Shadow Economy as a Driving Force
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Recently, the Department of Statistics and Sociology has announced that the share of shadow economy (SE) in Moldova is 31.6% to GDP, according to the “Measuring Unseen Economy” methodology recommended by the Organisation for Economic Co-operation and Development (OECD, Paris). Meanwhile, our statistics has been claiming this indicator to be no more than 14–17% right up till the end of the 90s. One third of the economy is “in shadow”. Is this a lot or a little? It is normal, if compared to Europe. This is the level of Greece, Italy or Spain. In Scandinavia, Germany and Austria this “shadow” is smaller.
The problem, though, is that according to the unofficial estimates (based on employment, consumption of electric energy and cement, import of oil products and food, transportation volume), the share of informal economy in Moldova is much bigger — about half of the GDP.
And, involuntarily, it became apparent through the Government Decision “On results of the RM Government Report to the Parliament” No. 894 of 21 July 2003, in which the problems conditioned by natural disasters, shadow economy, smuggling are mentioned as top-priority[1].
As regards the level of negative impact upon the state budget, shadow economy is indeed like a natural disaster. But unlike drought or heavy showers, it is a handmade phenomenon.
It should be admitted, though, that at the beginning of the transition period the shadow economy played the role of a social shock-absorber and was a source of additional incomes for the population, workplaces, as well as cheap goods. Now, when the metastases of half-legal and criminalised shadow economy and corruption stroke the young state, they create evident barriers to attraction of investments and development of civilised forms of entrepreneurship. Shadow economy aggravates property differentiation of the population, exacerbates problem of poverty that the state will not be able to solve (even given high GDP growth rates), if the budget is replenished only by the legal sector of the economy and there is no efficient mechanism of entrepreneurial income redistribution.
The shadow economy is many-sided. It originates from imperfection of the legislation, labyrinths of regulatory bureaucracy, clannish business, “transparency” of customs borders and “benevolence” of tax bodies. Its effects are also many-sided: macroeconomic, budget, regional and social.
One can judge on the level of the shadow economy by the contrast between Moldova’s 14% GDP growth over the last three years and the difficult situation of the country’s budget, which lacks funds not only for investments and education, but also for daily social tasks.
Anyone know what the main, most profitable shadow economy goods are: oil products, food and alcohol, tobacco products, medicines; while the most “unobserved”, unaccounted for by the statistics branches are trade (where shadow economy is 60%), constructions and transportation, restaurant business and real estate operations.
Shadow flows of oil products and alcohol are striking. Their increase over the last years is by implication also confirmed by the statistics. Thus, according to the RM energy balance, officially accounted import of liquid fuel to Moldova dropped from 1,5 million tons of conventional fuel in 1996 down to 577–645 thousand tons in the last years; alcohol — from 29,7 million USD in 1996 to 3,0 million USD.[2]
But with all this going on in the oil products market capacity of Moldova is currently estimated at 1,0–1,2 million tons. The main consumer of oil products (gasoline and diesel fuel) is motor transport and real sector machinery. The number of registered motor vehicles in Moldova reached 900 thousand units, including 280 thousand cars, 15,2 thousand buses and minibuses, etc. Meanwhile, statistics states that oil products consumption of motor transport is just half as much of the mid-90’s indicator (in agriculture it is less than a third).[3]
One of the prerequisites for the shadow overflow of oil products from abroad has formed on the 1 April 2003, when TMR lowered excises for gasoline (40 USD per ton) and diesel fuels (20 USD per ton). In the Republic of Moldova these excises are set to 88,9 USD and 37,04 USD per ton respectively. As a rule, the measures taken to curtail the oil products smuggling have been scarce and yielded no practical results (marking of gasoline with special dyestuffs, creation of mobile tax stations on roads, control at gasoline stations, introduction of sales registers).
The shadow economy’s regional aspect is mostly showing in the municipality of Chisinau and “Moldovan-Moldavian trade” with Transnistria. In Chisinau and its suburbs, real estate operations, different types of trade, pharmaceuticals and restaurant business are the most profitable and the least controllable. Obtaining construction permissions — town-planning certificates and authorisations — remains the most difficult problem for economic units. It takes up to 170 days and a minimum of 1 thousand USD to get all the necessary acts for building or commissioning a finished building.
In addition, the so-called “Transdnistria conflict” has become a large-scale business for both parties long ago. Transdnistrian import volumes are worth paying attention: in 2002 for instance they exceeded export by 206,2 million USD or 82.4% to the region’s GDP, while this indicator in Moldova accounted only for 24.2%. Statistics records imports of specific goods in volumes that exceed the regional needs considerably (oil products, alcohol, cigarettes, sugar, cosmetics, medicines, etc.) and their subsequent re-export, to the Republic of Moldova primarily, whose share within the Transdnistria’s “export” officially accounts for no less than 25%, while within the import to the region — only 7–8%. Substantial misbalance of Transdnistrian external trade and such countries as Ukraine and Belarus is also interesting: import in 2001, for example, exceeded export by 7,8 and 5,3 times respectively. Noteworthy is the fact that this excess is a new know-how of the latest time. Earlier, statistics recorded an inverse situation: in 1997, for instance, export of Transdnistrian goods to Ukraine was twice as much as import, to Belarus — 2,4 times more.
There are different “schemes” of “export” to the Republic of Moldova of goods previously imported to Transnistria or produced there. Most of them take advantage of gaps and “ambiguities” in legal documents of Moldova related to its economic relations with Transnistria. There has also developed a phenomenon of smuggling, which employs economic agents both from Moldova and Transnistria, as well as those of third countries.
How can the shadow economy be reduced? Should it be suppressed, fought or legalised? World Bank has recently carried out a research in Moldova “State Regulation Costs Assessment” in 13 areas of economic activity regulated by the state, which covered 630 enterprises of different legal forms, sectors and localities.[4]
The conclusion is obvious — an efficient government policy is necessary to reduce the shadow economy through:
- Raising efficiency of state bodies and reforming the state regulation system;
- Stimulation of legal business, support of small and medium entrepreneurship and creation of a favourable regime for this sector;
- Creation of stimuli for legalisation of the shadow capitals, strengthening the protection of property and entrepreneurs;
- Forced suppression of the illicit shadow economy, smuggling and criminal drugs and human trafficking in particular.
All these actions have to be taken on the background of purposeful and consequent market reforms given the concurrent strengthening of legal and financial state control over the economy. And the main thing to remember is: shadow economy must not be considered a natural disaster!