Before we turn to testing this last hypothesis with a panel survey, we need a better understanding of informality in the CIS-7 and of the relationship between informality and self-employment.

# **Informality**

The question of self-employment and the transition from self-employment to SMEs is closely related to the question of informality. In the Soviet Union, belonging to a recognized category was essential for obtaining any formal right including pension, health insurance, access to schools and others. People outside formal categories were not officially contemplated and the real unemployed or people who had no interest in joining the labor force had to find some form of licit or illicit mean to be recognized as a formal category.

This type of attitude continued during the transition period. Owners of informal or illegal activities would still have the incentives to be registered formally somewhere, usually as self-employed, to keep a pension or a health record alive. Thus, informality is not necessarily expressed in terms of non registered activities but in terms of registered activities or self-employed who in fact conduct most of the business in informal or illegal form. By far, informality in the East (and in the West) occurs in formally registered activities with the known system of 'double accounting'<sup>18</sup> .

Estimates of the informal sector for transition countries are numerous and the methodologies for these estimates variable. Kaufmann and Kaliberda (1996) have pioneered estimates based on electricity consumption, Johnson et Al. (1997) and Lacko (2000) have also followed this approach reaching very large estimates of the informal sectors in transition. Alexeev and Pyle (2003) have been somehow critical of the approach and of the causes that explain the informal sector and Hanousek and Palda (2004) have shown that this approach may be unsound. Schneider and Klinglmair (2004) review these approaches and also propose a different estimation procedure reaching their own figures on estimates of the informal sector in transition and non transition economies.

Tables 4.2 and 4.3 report the various estimates for the CIS-7 countries and for the averages calculated for other CIS and non-CIS countries. Schneider and Klinglmair (2004) figures show that the size of the shadow economy varies in percentage of GDP from a minimum of 34.1% in Uzbekistan to a maximum of 67.3% in Georgia (1999/2000). These shares are higher on average for the CIS-7 (48.9%) than for Non-CIS countries (29.6%) with the other CIS countries following very closely (47.4%).

The size of the shadow economy seems to have declined in all transitional economies in the decade preceding the transition period (1979-1989) while it rose dramatically between 1989 and 1995 in all countries considered with the exception of Uzbekistan (table 4.2). Later figures are not easily comparable because coming from different sources and methodologies but it would appear a certain tendency to stabilization of the figures moving toward the year 2000 (table 4.3).

From the figures we dispose of, the shadow economy seems to have increased in parallel with self-employment during the recession years and has stabilised in parallel with the growth of selfemployment during the growth years. Being a measure of output itself, the fact that the shadow economy grows during recessions and contracts during growth evidently reduces GDP variance. Including the estimates of shadow output would reduce the scale of the output decline and would increase growth marginally less for every growth year. Given the different GDP performances of different transitional economies, the shadow economy contributes to reduce inequality in GDP

> 18 We refer to 'double accounting' to indicate that enterprises tend to keep two sets of accounting records, a white set for the tax authorities and a black set to register all transactions. Skilled accountants in this practice are in high demand in CIS countries.

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