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Www.cesmecon.com Excellence in advice, precision in execution INFORMAL ECONOMY IN SERBIA Prepared by: Mirko Cvetkovic Belgrade, September, 2005.

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Presentation on theme: "Www.cesmecon.com Excellence in advice, precision in execution INFORMAL ECONOMY IN SERBIA Prepared by: Mirko Cvetkovic Belgrade, September, 2005."— Presentation transcript:

1 www.cesmecon.com Excellence in advice, precision in execution INFORMAL ECONOMY IN SERBIA Prepared by: Mirko Cvetkovic Belgrade, September, 2005

2 Excellence in advice, precision in execution DEFINITION AND SCOPE OF PRESENTATION What is informal economy Illegal economic activities Legal, but unregistered, economic activities

3 Excellence in advice, precision in execution INFORMAL ECONOMY IN SERBIA (ROUGH ESTIMATIONS) In mid-nineties Over 50% share in GDP The biggest and the most profitable markets included cigarettes (more than 90%), petroleum products (more than 50%), retail trade, household repairs and maintenance services, civil engineering materials and works Participation: practically the entire population Immediately after the year 2000 Share in GDP about 35%, The most attractive sectors included retail trade, household repairs and maintenance services, building construction works Participation: about 1.2 mill. people

4 Excellence in advice, precision in execution INFORMAL ECONOMY IN SERBIA - Continued The most recent estimation for 2003-2004 based on field research (sample of 51 municipalities with population of 2.8 mill.) Share in GDP probably between 25 and 30% Distribution sectorwise: a) retail trade 35.98% b) tourism and catering 32.90% c) household repairs and maintenance services 31.76% d) civil works 26.80% e) agriculture 21.61% f) production of goods 20.18% Note: Estimations are rather rough due to the nature of the activity. Some believe that the figures are substantially underestimated.

5 Excellence in advice, precision in execution MAIN GENERATORS OF INFORMAL ECONOMY General Crisis of the system and economic crisis Supremacy of politics over economy Restrictive economic policy towards private sector, and poor control of social and public sectors Low earnings and the decrease of living standard High unemployment Unregulated taxation system, inadequate tax policy and insufficient control Inefficiency of state institutions, and specifically of the legal system Mild penalties, i.e. low risk relative to the expected gain Serbia specific generators War and war-related migrations (refugees) International economic blockade and UN sanctions Enormous number of the employed on paid leave Distrust in the state and its institutions and low level of morality with regard to tax duties Social ownership and belief that everything belongs to everybody Slow transition compared to the expectations of the population Some of the above generators are no longer present, but they significantly contributed to the informal economy level faced at present

6 Excellence in advice, precision in execution SERBIAN INFORMAL ECONOMY CONTROVERSY Supporting Arguments It is considered that the informal economy was the only way to survive under Sanctions No one is blaming the refugees’ involvement in informal economy since no alternative is offered (once you look favorably at one category, the next step is that others enter informal economy and rationally expect equal treatment) Both sellers and buyers believe that informal economy is adding the value to their standard of living: for sellers it is tax-free income, and for buyers it is a cheap product or service (note: during the sanctions some products were only available through informal economy channels) The massive participation and long lasting immense influence of informal economy on the global country economy created a positive image of informal economy; the majority of population does not consider informal economy to be a criminal activity Some economist believe that certain informal economy activities remain profitable only if informal

7 Excellence in advice, precision in execution SERBIAN INFORMAL ECONOMY CONTROVERSY Opposing Arguments It is clear that in the long run informal economy produces devastating effects not only on the economic activity but on the morality of the entire society Negative effect on public revenues and uneven distribution of tax burden Unfair competition against formal economy Discouraging effect on setting up small and micro enterprises that cannot compete with informal economy; this is the main reason for low pace in founding of micro companies or entrepreneurship, and, as a consequence, for a very high unemployment rate

8 Excellence in advice, precision in execution MEASURES AGAINST INFORMAL ECONOMY Traditional positive measures – removing the causes that generate informal economy Development of economy and increase in standard of living Accelerating transition and giving strong support to free market economy Elimination of social ownership Introducing transparency and anticorruption as the main anchor of the system Producing and implementing the legal framework in line with the free market economy environment at all levels (a recent favorable example is the introduction of the value added tax system as opposed to the previous sales tax system) Providing the way of legalization of actual informal economy activities Traditionally negative measures Introducing the penalties that will increase the risk and make trade off in favor of formal economy Improve the efficiency of legal system including efficiency of procedures and courts

9 Excellence in advice, precision in execution ADDITIONAL - NON-TRADITIONAL MEASURES The traditional measures are necessary, but the results will be gradual and in line with general improvement of economy and living standard. Non-traditional measures aim at increasing public awareness that informal economy is, in its essence, a criminal act. These measures are focused on mobilizing population and turning around the perception of informal economy. The following actions are proposed: To reach a political consensus among the ruling parties and the opposition, To hire a PR company that would prepare a wide PR campaign. The participants should be political players (both ruling and opposition) at various levels. High politicians might make one or two appearances on TV, and medium level might be engaged in a road show. In addition, inexpensive leaflets might be produced on a large scale and distributed to the population.


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