The coronavirus pandemic in all 36 member states of the Organization for Economic Co-operation and Development (OECD) had a strengthening effect on the shadow economy as a percentage of GDP. As a result, the share of services offered in the “shadow economy” increased significantly in 2020, compared to a year ago. In fact, especially in the 28 EU countries (including the United Kingdom), the increase between 2019 and 2020 is estimated to be the highest in the last 20 years!
These estimates are made by economist Freidrich Schneider, an honorary professor at the Research Institute of Banking and Economics at Johannes Kepler University in Austria and considered a leading expert in informal economics.
Evidence of his assessment, he cites the results of research conducted during the pandemic using the MIMIC method, the findings of which were included in a study entitled “Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2012 : Some New Facts» (https: //researchgate.net/publication/268185661_Size_and_Development_of_the_Shadow_Economy_of_31_European_and_5_other_OECD_Countries_from_2003_to_2012_Some_New_Facts).
The rise in 2020, which came to halt the downward trend of the shadow economy in almost all 36 countries, from 2003 onwards, seems to have stalled again in 2021 (provisional data), during which it is estimated that moderate decline of the informal economy.
Why did the shadow economy grow in a period of “frozen” activity?
As Professor Snyder explains, in 2020, rising unemployment and the recession caused by a sharp decline in GDP in almost all countries due to Covid-19, led more people into the shadow economy to make up for lost income. As a result, in the 36 OECD countries the “shadow” economy is estimated to have approached 17% of GDP in 2020 (16.48% last year, compared to 14.98% in 2019). In 2021, due to the gradual economic recovery that occurred, it is estimated that it fell to 16.07% (forecast).
In the 28 EU Member States (including the United Kingdom, which left the united Europe on 31 January 2020), the shadow economy is estimated to have grown in the first pandemic year to 17.87%, up from 16.28% in 2019, before declining slightly last year, to 17.42% (unweighted average of 28), according to the professor’s forecasts, which are based – as he explains – on the official data of the countries for growth and unemployment. The figures for some countries in 2020, he adds, relate to projections.
In which countries did the “shadow economy” weigh the most?
The highest growth of the shadow economy for 2020 is recorded, according to the professor, in Croatia (29% of official GDP compared to 26.4% in 2019). It is followed by Bulgaria, which maintains the highest shadow economy among the Community states (32.93% of official GDP in 2020 compared to 30.12% in 2019). In contrast, the most anemic growth occurred in Finland (from 10.59% in 2019 to 11.36% of GDP in 2020) and in Denmark (from 8.92% to 8.92%).
In the midst of a pandemic, Austria maintained the lowest shadow economy in a united Europe (at 7.23% of GDP in 2020 compared to 6.10% in 2019).
By 2021, the professor expects a small reduction in the informal economy in a united Europe. More specifically, this decrease is expected to come as a result of large public investment in infrastructure and subsidies to companies and individuals, which he hopes will lead to a large increase in GDP, accompanied by a moderate decrease in unemployment. He also clarified that the forecasts were made at a time when the pandemic is in progress, when the scenarios are still open for when Covid-19 will end and the real economic recovery will begin.
He emphasizes that in any case, to enter the official economy activities that are currently taking place in the “shadow economy” would be a blessing for every country. To this end, he supports the establishment and implementation of targeted policy incentives, in order to entice those who are currently active in the informal economy to leave the “shadow economy”.
How can the shadow economy be reduced?
The main reasons for the aid are:
- The increase of undeclared employment
- The increase in costs for services.
Reducing the shadow economy in the medium to long term requires:
1. On the one hand, reducing income inequalities,
2. Stimulating reciprocity.
3. Improving the competitiveness of the countries’ economies for the creation of sustainable jobs.
4. Investments in the human capital of the economy in question, for a transition to a more competitive productive structure,
5. Reduction of income inequalities.
6. Increase public spending on the social protection of those workers who will not have the necessary skills to follow this new transition of the new productive structure.
