POLICY RESEARCH **WORKING PAPER** 1691

# Summary findings

Kaufmann and Kaliberda challenge the conventional view of how post-socialist economies function by incorporating the unofficial economy into an analysis of the full economy. Then they advance a simple framework for understanding the evolution of the unofficial economy, and the links between both economies, highlighting the main characteristics of "unofficialdom," contrasting conventional notions of "informal" or "shadow" economies, and focusing on what determines the decision to cross over from one segment of the economy to the other.

The empirical evidence, based on both microsurveys and top-down ("macro-electricity consumption") comparative country methodology, suggests the usefulness of the framework.

Integrating the unofficial economy into the analysis of the whole economy sheds a different light on interpretations of national income, of sectoral trends (such as trade, services, and exports), and of labor markets and household patterns, often leading to a different interpretation.

Europe, the average is close to one-quarter. Intraregional variations are great: in some countries 10 to 15 percent of economic activity is unofficial, and in some more than half of it. The growth of unofficial activity in most post-socialist countries, and its mitigating effect on the decline in official output during the early stages of the transition, have been marked.

The initial empirical results seem to support hypothetical explanations of what determines the dynamics of the unofficial economy. Kaufmann and Kaliberda emphasize the speedy liberalization of markets, macro stability, and a stable and moderate tax regime. Although widespread, most "unofficialdom" in the - region is found to be relatively shallow subject to reversal by appropriate economic policies.

The framework and evidence presented have implications for measurement, forecasting, and - policymaking calling for even faster liberalization and privatization than already advocated. And the lessons ir social protection and taxation policy differ from conventional advice.

Over a third of economic activity in the former Soviet countries was estimated to occur in the unofficial economy by the mid-1990s; in Central and Eastern

- - This paper a product of Country Department IV, Europe and Central Asia was presented as a draft at the Odes!;a conference on "Economic Transition in the Newly Independent States," August 1995, and will be published in _Economic Transition in Russia and the New States of Eurasia,_ edited by B. Kaminsky (M.E. Sharpe, 1996). Copies of this paper al e available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Sylvia Torres, room H.i169, telephone 202-473-9012, fax 202-522-0010, Internet address storres@worldbank.org. December 1996. (43 pages)

_The_ **_Policy Research Working Paper Seoes disseminates the findings_** _of_ **_work in progress to encourage the exchange_** _of_ **_ideas arout development issues. An objective_** _of_ **_the series is to get the findings out quickly, even_** _if_ **_the presentations are less shan fully polished._** _The_ **_papers carny the names_** _of_ **_the autbors and should_** _be_ **_cited accordingly._** _The_ **_findings, interpretations, and conclusions expressed in this paperare entirely those_** _of_ **_the autbor. They_** _do_ **_not necessarily represent the view_** _oftbe_ **_WorldBank, its Executive Directors, or the countries they represent._**

## Produced by the Policy Research Dissemination Center