Researching the Main Causes of the Romanian Shadow Economy at the Micro and Macro Levels: Implications for Sustainable Development

Abstract

The Sustainable Development Goals (SDGs) that were established by the United Nations for the year 2030 are considered the blueprint for reaching a sustainable future through addressing poverty eradication, education, social protection, environmental protection, climate change, health, job opportunities, and strong institutions. Until now, sustainable development has focused mainly on the formal sector, somehow neglecting the potential contributions of the informal sector to sustainable futures. In this context, the paper aims to analyze the main causes of the Romanian shadow economy (SE) both at the micro and macro levels, and how they can make a considerable impact on achieving a more sustainable future. The main purpose of the paper is to highlight the relevance of knowing the main determinants of this phenomenon, emphasizing that keeping the incidence of the shadow economy and its causes under control could offer an alternative in the process of achieving sustainable development. In order to do that, we use an improved MIMIC (Multiple Causes Multiple Indicators) specification of the causal variables that is grounded in an evidence-based approach through using the points of view of the Romanian entrepreneurs. Their opinions are based on a national representative survey that is based on quarterly data covering the period 2000–2017. The empirical analysis pointed out the roles of tax avoidance, bribery, a lack of trust in public officials, the poor quality of business legislation, the poor government support for entrepreneurs, high social contributions, a relatively high of corruption, high tax rates, and uncertainty about regulation policies in increasing incidences of shadow economic activity. The macroeconomic results that were revealed to be the main causes for the Romanian SE were self-employment, unemployment, part-time employment, and the lack of trust in public institutions. Therefore, policymakers need to focus on building reliable and transparent institutions with a lower level of corruption, regulations, and bureaucracy, regaining people’ confidence in public institutions, and elaborating effective strategies for tackling the undeclared activities that will contribute to the achievement of sustainable development desideratum by the fulfillment of two main SDGs. These are Goal 8: Decent work and economic growth, and Goal 16: Peace, justice, and strong institutions.