Almost half Ukraine’ s able-bodied population seek refuge from tax plague in unofficial economy

Everybody seems fed up with the shadow economy in the post-Soviet countries. However, state officials take little interest in this, and any kind of more or less serious research in this field is only possible, including in Ukraine, with the assistance of international organizations. A shadow, by its very essence, makes it difficult to see what it covers.

Information on this subject is ambiguous, for different figures are often furnished on the same issue. For example, the percentage of shadow capital in the country’s GDP can be assessed by the ratio between electric power consumption and the growth (decline) of output, but this can also be done by comparing the dynamics of this output and domestic consumption. As a department chair at the Institute of Economics attached to the Ministry of Economics of Ukraine, Doctor of Economics Antonina Bazyliuk, told The Day, various studies show that the shadow economy percentage in Ukraine’s GDP is 50-60%. At the same time, Ms. Bazyliuk claims, many sources consider such figures exaggerated and estimate the shadow sector at about 35% (which is also rather high: according to various data, this percentage is 11-13% in the US and 3- 10% in the most developed countries of Europe). The percentage of cash circulating outside the banking system of Ukraine is, again according to different sources, an average 50% (as The Day was told by the National Bank, the population now keeps about UAH 9 billion in cash at home). In general, the following relationship is being discerned in the shadow sector: GDP— employment—money mass in circulation.

One of the most important aspects of the shadow sector problem is the social problem of workforce flowing from the state and legal private sector into the shadow business sphere. This was high on the agenda of the round table on The Effect of the Shadow Economy on the Employment Level held on December 1 as part of a project on the Social Problems of the Shadow Economy of Ukraine worked out by the Intellectual Prospects charitable foundation. The project research supervisor, economics Ph.D. Yuri Sayenko, gave a brief account of the reasons (imperfect tax legislation, outdated administrative command methods of management, and omnipresent corruption) why Ukraine has such a well-developed shadow sector, and used the very apt word, tax plague (podatkomor) to characterize what is now going on in the nation’s economy, which he thinks is the main cause of the existing situation. According to participants in this action, one should distinguish between the crime-related shadow economic activity (to be more exact, criminal activities themselves) and the informal activities only associated with tax evasion (though, from the formal juridical angle, any kind of tax evasion is at least an administrative offense). The statistics revealed at the round table referred exactly to the latter so-called informal variety of entrepreneurship.

The speech of Hulbarshyn Mimandusova (Center for Sociological Expert Examination and Forecasting of the Institute of Sociology) abounded in specific figures. Institute experts conducted a poll in several regions of Ukraine and the cities of Kyiv and Simferopol. The main conclusions, based on the data received, are as follows:

first, the employment rate of the population polled is quite high, owing to the majority sharing different types of employment;

secondly, while the state sector is still ahead in the number of people employed, it is the private sector that provides most new jobs (which in fact shows the expansion of this sector);

thirdly, the private sector is characterized, compared to the state sector, by a tighter work process schedule (in plain English, one has to work harder), which is expressed in the ever-increasing percentage of privately-employed respondents who spend on their work even more time than is stipulated by law; and

fourthly, the report identified the most widespread activities in the informal sector of Ukraine’s economy: a) sale and resale of homemade farm produce, b) doing odd jobs for private persons, c) sale and resale of goods, d) so-called construction and mounting work, better known as moonlighting, and e) carriage of people and cargo in one’s own car (mostly in urban areas).

The poll data say that the informal sector now accounts for 45% of the respondents, leaving aside the fact that practically every family has at least one person engaged in this kind of activity. Among all respondents employed in the state or private sector, 46% simultaneously work in the shadow sphere. 50% of those polled spend two to four hours a day on this activity, 24% up to two hours, 17% five to eight hours, and 9% over eight hours.

Naturally, one should take these data with a grain of salt. For instance, it is in fact inevitable that the respondents distort the true state of affairs for reasons of secrecy, which was pointed out during the debates by Oleksandr Paskhaver, director of the Economic Development Center. But, in our opinion, the data at least adequately reflect certain trends dominating on the real labor market (which hardly fits in with the situation at the official labor exchange).

The same poll testifies that there are quite a few highly-skilled workers and a lot of young people in Ukrainian shadow business, for the state itself has created fertile ground for the illegal economy to absorb the most industrious and skilled personnel whose work (paid for, of course) should instead promote, in theory, the development of production and ensure earnings to the proverbial budget.

It turned out, finally, that over half of the respondents (65%) are reluctant to found an enterprise in the established order or become self-employed. Out of these, 45% take a categorical stand, and 11% think that a step like this is too risky. Almost 40% would like to take up private business under certain conditions, such as starting capital, reduced and/or reformed taxes, and removal of administrative obstacles. Only 1% see no obstacles to launching a business of their own, and 3% have already founded one.

An interesting picture, in general. On the one hand, there seem to be more and more go-getters who found and develop their own businesses. Moreover, far from all those working in the shadow are (so far) inveterate law-breakers; they would be glad to legalize their business if the state (which should be first of all interested in this) allowed earning money without placing on entrepreneurs unbearable bureaucratic shackles of taxes, licenses, laws, and regulations. On the other hand, there is a clear indication of a massive spread of the passive pattern of economic (and social) behavior. This is, incidentally, the most difficult point in the battle against the shadow economy. According to Dr. Paskhaver, it is necessary that every citizen “become conscious of his guilt” over the situation in this country, i.e., what we need is civil society with a more or less adequate legal culture of the population. However, the ensuing debate on this subject led to the expected, if paradoxical, conclusion: what is needed for strengthening the institutions of civil society is a normal attitude by the state, if not direct subsidies. This in turn requires that the public has an impact on the state, i.e., the presence of civil society. What can break this vicious circle is perhaps the will of the political leadership to form the institutions of civil society, on the one hand, and a more realistic interpretation by the state of its own role in the economy, on the other.