Informal Tourism Economy and EU Funding: The Case of Romania

Abstract

Although on a downward trend, the informal economy in Europe is still as large as 18% of all economic activity. In Eastern European countries, the informal economy holds an even larger share that in some cases to close to 30% of the GDP. Romania is no exception, with an informal sector of 28% of the national GDP, the second largest in the EU. There are several factors that have enabled the development and maintenance of such a large informal sector, including a high level of tax evasion, labour practices and overregulation. In spite of some efforts to combat the informal economy by stimulating the use of bank transactions, it is estimated that the size of the Romanian informal economy exceeded 40 billion euros in 2015. According to an analysis conducted by AT Kearney, one of the economic sectors that is significantly affected by the informal economy is tourism. Although the actual volume of informal transactions taking place in this sector remains largely unknown, the National Agency of Travel Agencies in Romania estimates that over 20% of all accommodation services provided on the Romanian sea-side are sold ‘underground’. The informal economy in tourism is generated both through undeclared work (e.g. accommodating tourists in private homes), as well as by underreporting (e.g. providing services without issuing invoices). It has been suggested that the implementation of EU-funded projects may pose a positive impact on the reduction of informal economy, by discouraging economic agents to engage in informal transactions. Still, no study has been conducted so far with regard to the scope and scale of this impact. In this context, the present paper aims to identify and analyse the main factors that enable informal economy in tourism, as well as the mechanisms through which this phenomenon develops. Moreover, authors will examine the implications of EU-funded projects on the propensity of economic agents in tourism and tourism-related fields to refrain from declaring their work or under-report. Based on these findings, a series of measures to tackle the informal tourism economy at local, regional and national levels will be proposed. Structured interviews with economic agents active in the field of tourism will be used to determine the enablers of informal economy, as well as the impact of EU funding on the propensity to conduct informal transactions. Interviewees include both current and former beneficiaries of EU-funded projects, as well as representatives of entities who have not benefitted from such funding. Thus, the authors will seek to determine whether significant differences in the behaviour of these two categories of economic agents actually exist, as well as provide practical solutions to manage and even change patterns of misconduct.