The Underground Economy in Croatia

This article is a succinct description of research into the underground economy (UE) in Croatia in the 1990 to 2000 period. The circumstances surrounding and the reasons for the origin of the UE are explained, the dimensions of and changes in the UE are estimated at the level of the whole of the economy and in terms of certain industries. Also the socio-cultural and institutional dimensions of the UE are analysed, including the influence of formal and informal norms, privatisation, poverty, self-employment and so on. Various evaluation methods give different results . the national accounting discrepancy between income and expenditures method (below: national accounting discrepancy method) shows a growth of the UE from 1990 to a maximum of 37% of GDP in 1993 and a steady reduction to 7% of GDP in 2000. In accordance with that method in the 1990-1995 period, the UE came on average to about 25%, and in 1996-2000 to an average of 10% of GDP. The Eurostat method and estimates of tax evasion coincide with these trends, while two monetary methods and the consumption of electrical energy method show a rise in the UE in the 1995-1999 period, with trends at annual levels of between 22 and 34% and a fall in 2000. With reservations because of the uneven results obtained by these various methods and because of uncertainty whether this is a matter of a genuine reduction of the UE or of an improvement in statistics, we nevertheless have to conclude that this research indicates that there has been a genuine reduction in the UE. The results of the project indicate a negative correlation between the UE and GDP growth, then work .on the black. as the main reason for the UE, and the differentiation of statistical and economic reasons for the UE. Reasons for the reduction of the UE might be an improvement of the statistical system, a change in the structure of consumption, the introduction of VAT, the stabilisation of the large retail systems, the entry of foreign firms into the Croatian market, a change in the image of the government and so on. Unfortunately, there is still a lack of the kind of transparency and quality of public services that would have a considerable impact on the further reduction of the UE. The basic recommendation of this research is that for any reduction of the UE, it is more important to prevent the causes than to penalise the consequences, and in connection with this it is the institutional sphere that is crucial, the relationship of the government and the economy, i.e., the speed with which the government redefines its role in the market. Basic recommendations are also put forward for the improvement of institutions, for example, of the government, the process of privatisation, statistics, the tax system, the pensions system and so on.