Illegitimate Economic Practices in Croatia: Findings from a Representative Survey of 2,000 Citizens

This report presents the findings of a survey on illegitimate economic practices in Bulgaria conducted between July and October 2015. This representative survey of 2005 citizens focused on the experiences of Bulgarians with undeclared work, envelope wages and the practice of “pulling strings”, as well as on their opinion about these types of dishonest behaviour. According to the respondents, illegitimate economic practices are strongly ingrained in Bulgarian society. According to the estimation of Schneider (2013), the undeclared economy accounts for 31% of GDP in Bulgaria in 2013, which is the highest estimation for any country in the EU-28. According to the enterprise surveys of World Bank (2009), 54% of corporations admitted participation in the undeclared economy. In our survey, more than seven out of ten respondents were certain that at least one in five citizens regularly violates tax and labour laws. The most important reasons are believed to be the lack of formal employment opportunities and high tax burden. When it comes to the use of personal connections to circumvent rules and procedures, 74.5% of Bulgarians perceive this particular type of misbehavior as important or very important for achieving certain goals in Bulgaria. Moreover, one in four citizens has a positive attitude towards this illegitimate practice, while a further three in ten are neutral in their attitude towards such practices. It is thus unsurprising that there is a high prevalence of these illicit activities. The survey reveals that 17.1% of Bulgarians acquire goods from the undeclared economy, 22.2% pay for undeclared services, 9.6% of employees are employed without a work contract, 15.3% of registered dependent employees earn more than is stated in their contract, 30.1% of Bulgarians rely on illegitimate help/favours from people, and that 15.0% of the population provides such help/favours. However, these should all be treated as lower-bound estimates, given that surveys tend to under-report participation when sensitive issues are being investigated. Analysing involvement in undeclared work, nevertheless, the findings reveal that tax morale and personal views on the extent to which others participate are key determinants. The lower one’s tax morale, the higher the propensity to participate in the undeclared economy (and this applies to both the demand and supply sides). Likewise, the higher is the perceived number engaged in such activity, the stronger is one’s personal inclination towards such behaviour. However, the extent of personal views is an important factor on the supply side because in Bulgaria a purchaser of undeclared goods and services is not punished, only the supplier. Undeclared work is found to be particularly prevalent in agriculture and the construction industry. More than one-third of the informal buyers had purchased agricultural products (milk, meat, crops, fruits, etc.) without a receipt over the 12 months prior to the survey, while more than one quarter admitted to having hired an undeclared individual for home repair and maintenance tasks. On the supply-side, 14.6% of those reporting participation in undeclared work had provided home repair and renovation services, while 8.9% were selling agricultural products. Social ties play an essential role in unregistered economic transactions in Bulgaria. 26.5% undeclared transactions in Bulgaria are for or by a close social relation. For instance, from the demand side, 48.3% and 13.6% of the surveyed individuals buy undeclared goods and services from “other private persons or houlsholds” and “friends, colleagues or acquaintance”, respectively. This finding that undeclared work is often conducted for close social relations is also reflected in the fact that, one-third of the providers of informal goods and services asserted that both parties benefited from it. Indeed, 19.9% respondents assets that this is a normal way how this is done among friends, neighbors or relatives and 8.1% respondents participate to help someone out. The undeclared economy in Bulgaria thus seems to be a parallel universe to the declared economy, offering a similar range of goods and services but for a lower price than the formal market, with this being identified as the most important motivation by purchasers of undeclared goods and services. This was also confirmed on the supply side: 35.9% of undeclared workers admitted that mutual financial benefit of both parties was a key reason to conceal the transaction from the authorities. Also, 28.6% individuals were engaged in unregistered activities simply due to the lack of government credibility, and 24.7% of suppliers assert that high tax burden is an important determinant of undeclared work. Also, 22.3% of the individual was engaged in unregistered activities simply due to the lack of formal employment, which therefore indicates that undeclared work indeed has an important role in making ends meet for many individuals in Bulgaria. This in large part explains why unemployed and self-employed individuals are more likely to work undeclared in Bulgaria than other occupational groups. Citizens earning more than 1000 euros and citizens without income are also top of the list of groups regarding the prevalence of envelope wages in Bulgaria, with 20.4% and 17.4% respectively of the formal workforce in these two groups receiving more than they report to the authorities. As in the case of completely undeclared work, tax morale and the perceived commonality of undeclared work (i.e., the lack of vertical and horizontal trust) are key determinants of envelope wage practices in Bulgaria. Under-declaration of wages in Bulgaria is most commonly instigated by the employer Indeed, this type of noncompliance seems to primarily serve as an efficient tax and social contribution evasion strategy for employers. In general, underreporting of wages was found to be most common among new entrants to the labour market. Analysing pulling strings to get things done, the survey reveals that Bulgarians most often circumvent procedures related to job seeking, with 5.6% of participants admitting to having relied on personal connections to find a job. Bulgarians also heavily rely on pulling strings for maintenance services, as well as when getting foodstuffs. Also, 2.9% of participants rely on pulling strings to seek services at a better quality or a better price. Almost 70% of participants requested friends to pull strings for them, while 30% used relatives. This explains why pulling strings in Bulgaria is rarely a monetary transaction, given that in most cases either only verbal gratitude was expressed to the provider of the favour/help, or the favour was returned later. In general, younger people are far more likely to provide or use such favours than older generations, while there is no significant difference between genders in this respect. Analysing how illegitimate practices can be tackled, Bulgarians do not believe that increased penalties for violators would be an effective approach, and the same applies to awareness raising campaigns alone. Instead, the prevalent opinion is that undeclared work in Bulgaria cannot be reduced without improving the psychological contract between the authorities and citizens (i.e., vertical trust), and this should be done first and foremost by changing formal institutions. Citizens widely believe that there is a need for a change in the way in which enforcement agencies treats citizens. This primarily refers to more collaboration and less coercion on the part of the inspectors, as well as the provision of equal treatment across all groups of citizens. Finally, citizens believe that ensuring a sense of fair treatment in public and government institutions would reduce the use of personal connections.