Greece’s shadow economy


BERLIN taxi-drivers tend to argue that if all Greeks paid their taxes the euro zone would be in less of a pickle. But that line of thought may be wrong. Greece’s shadow economy—the activities of those who pay neither tax nor social insurance—seems to be something of a safety-net preventing the country from going into free-fall.

Friedrich Schneider, a professor at the Johannes Kepler University in Linz, Austria, has been assessing shadow economies for years. He reckons that much of Greece’s shadow economy, perhaps as much as half, actually complements activities in the official economy, adding to welfare and overall GDP. Stamping it out altogether might do more harm than good.

House cleaners, casual labourers, moonlighting plumbers and street buskers may pay no tax or social insurance on the cash they are paid. But a lot of that cash ends up being spent in supermarkets, petrol stations, on utilities and mobile phone bills—on which value-added (VAT) and other taxes are charged.

A government has the challenge of deciding whether the shadow economy is a blessing or a curse. And, argues Mr Schneider in a paper he has been circulating, it may not have a great interest in reducing it, for the following reasons:

Income earned in the shadow economy increases the standard of living of one-third of the working population
Between 40% and 50% of these activities have a complementary character, which means additional value-added and an increase in overall output
Foregone taxes may be moderate since at least two-thirds of the income earned in the shadow economy is immediately spent in the official economy
People who work in the shadow economy have less time for other things such as going on demonstrations
Mr Schneider has been researching such ideas with Aristidis Bitzenis, associate professor at the University of Macedonia in Thessaloniki. “We believe that transferring part of the shadow economy to the real economy is a way to overcome the deflationary spiral,” says Mr Bitzenis. But how can that be done, fairly, without making captive taxpayers such as civil servants rush to the barricades?

Mr Schneider has some suggestions. The state should create bridges between the shadow and official economies. One model is a voucher system as already introduced in Belgium for household help, which is a discreet state subsidy to bring shadow workers into the social security system. Another is offsetting VAT payments on supermarket receipts against income tax liability.

Corruption, commonly defined as the misuse of public power for private benefit, is a different aspect of the shadow economy which is indisputably worth stamping out. Mr Schneider uses corruption rankings by Transparency International to calculate the “damage” done by corruption to a country’s GDP. Although Greece’s corruption ranking has been improving in recent years, the overall damage has been rising from an annual €19.7 billion in 2008 to €27.3 billion in 2011, he calculates. For comparison, corruption “damage” to the German economy, a dozen times the size of Greece’s, was €150 billion in 2011.

It will take a long time to separate the wheat of the shadow economy from its chaff. Without the safety-valve of unofficial employment, however, rioting on the streets of Athens would probably be even worse.

CAKTO NJE TAKIM+355 52 230334



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