Explaining the Shadow Economy in Europe: Size, Causes and Policy Options

30 Pages Posted: 22 Jan 2020

See all articles by Ben Kelmanson

Ben Kelmanson

International Monetary Fund (IMF)

Koralai Kirabaeva

International Monetary Fund (IMF)

Leandro Medina

George Washington University - Department of Economics; International Monetary Fund (IMF) - Western Hemisphere Department

Borislava Mircheva

International Monetary Fund (IMF)

Date Written: December 2019

Abstract

This paper examines the drivers, and reestimates the size of shadow economies in Europe, with a focus on the emerging economies, and recommends policies to increase formality. The size of shadow economies declined across Europe in recent years but remains significant, especially in Eastern Europe. In the emerging European economies, the key determinants of shadow economy size are regulatory quality, government effectiveness, and human capital. The paper argues that a comprehensive package of reforms, focused on country-specific drivers, is needed to successfully combat the shadow economy. The menu of policies most relevant for Europe's emerging economies include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness, as well as improving tax compliance, automating procedures, and promoting electronic payments.

Keywords: Shadow economy, Labor market reforms, Labor force participation, Labor market regulations, Labor market policy, informal economy, WP, government effectiveness, percent of GDP, formal sector, informality, informal worker

JEL Classification: O17, O52, H26, E01, E2, Z13, H2, I3

Suggested Citation

Kelmanson, Ben and Kirabaeva, Koralai and Medina, Leandro and Mircheva, Borislava, Explaining the Shadow Economy in Europe: Size, Causes and Policy Options (December 2019). IMF Working Paper No. 19/278, Available at SSRN: https://ssrn.com/abstract=3523151

Ben Kelmanson (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Koralai Kirabaeva

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Leandro Medina

George Washington University - Department of Economics ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

International Monetary Fund (IMF) - Western Hemisphere Department

700 19th Street NW
Washington, DC 20431
United States

Borislava Mircheva

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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