Volume of the unofficial economy in the Western Balkan region

Abstract

Western Balkan (WB) economies are lagging behind more advanced post-transitional countries in terms of economic development and the quality of the institutional framework and public services. As a response to the rigidity in the business environment and high taxation, private entrepreneurs shift part of their activities into the unofficial sector. We aim to estimate the volume of the unofficial economy (UE) in seven WB economies: Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Kosovo and North Macedonia. In providing reliable estimates of the range of the UE, we applied two different methods: multiple indicators, multiple causes (MIMIC) and a direct survey of 21,000 individuals. The highest size of the UE, based on the average of both methods, is estimated for Montenegro. Slovenia, the most developed economy included in the sample, has the lowest share of the UE. The direct survey provides results on the propensity of different socioeconomic groups to engage in unofficial activities. The improvement of the institutional environment, quality of public services and lower tax burden are expected to be more effective than repression measures in the combat against the UE.