Rethinking Albania’s informal economy

By Ridvan Bode
Over the past few years there has been growing public anxiety over the damage caused by the informal section of the economy, parallel to a re-dimensioning of this section of the economy and its mounting pressure on the rest of the economy. Some of the aberrant phenomena that have accompanied economic developments in our country during this period are linked with and conditioned by the proportions of the informal economy and the factors that have favoured it within these proportions.
The definitions of informal economy differ in many aspects, but, in every case they are linked, first and foremost, with phenomena of fiscal evasion and illegal labour. They comprise the entirety of economic activities that shirk payment of legal obligations, hence neglecting and by-passing any respect to meet legal obligations, in an all-out effort to secure illegal, immediate and unfair profits, at all times detrimental to the State.
In Albania, signs of an informal economy first appeared during the initial phase of the country’s transition to a market economy, when the rates of the development of an institutional, fiscal and regulating legal framework fell well behind the development of the sector of private business. Later on, it became a structural part of the economy and its most dynamic sector, because interests of politics, subjected to corruption that overcomes every segment of the state, found in informality the instrument through which they had access to immediate and colossal sums of money as well as the means to selectively ruin rivals or dynamic parts of the economy. International institutions that have assisted the country during this period, such as the European Commission (2003), the World Bank (2004), the OECD (study of the compact of investments, 2004), etc., have provided findings of such an analysis too.
The informal economy and the criminal economy, frequently described as the grey and black economies, are not one and the same thing, however, in the conditions of our country, where, for no mean length of time organized crime did become a structural part of the government, the informal part of the economy was used to justify the super profits gained from criminal activities.
The war against the informal economy, as the most successful index of the domination over the phenomena of corruption and fiscal evasion, constitutes one of the cardinal priorities of our Government’s program. The drafting of an adequate and successful action platform requires in-depth knowledge of all the factors and components of this economic informality. Of course the existence of a clear political will to fight the above mentioned phenomena is vital, but not sufficient if programmed and institutional action is not taken against them.
Among the defining factors of the dominating level of the informal economy, or of the illegal part of the economy, is, first of all, the huge dissemination of corruption, this disease which like an epidemic, infected the entire pyramid of government and which created feelings of a national fate. The loss of confidence and trust in the government, its administration, accompanied by inconsistent and arbitrary laws and sub-statutory legislation, massively enhanced the pull towards informality. In the face of businesses of the state officials and those linked to them, legitimate businesses often found themselves facing the one alternative of concealing parts of their businesses in exchange for a bribe, selling out their freedom once and for all to the small time tax collectors of the government officials.
Another factor that has stimulated informality has to do with the multiplied bureaucratic procedures of the administration, the increased number of clerical windows, all the permits and licenses a businessman needs before he is granted the right to exercise economic activity.
High levels of taxes in general, high levels of direct taxes, income taxes, incite both employers and employees, in circumstances of low retribution risk because of the wide-spread corruption, to try and steer a part of their business towards informality. The growth of informality as a result of higher taxes, leads, in these conditions, to the insufficiency of public financial sources to correctly discharge the natural functions of the government, committed to the state budget, and this is why it incites political decision-making towards a new growth of taxes. This is a vicious circle, where high taxes encourage informality and high level informality leads to a further growth of taxes, to subsequently produce because of this, new and an even higher degree of informality. Due to this vicious circle, within six years, the legal burden of income taxes went up 24 percentage points above the GDP and the fiscal income moved up only 3 percentage points above the GDP.
Other factors that encourage the growth of the informal part of our economy and facilitate exercising it, are related to structural aspects of our economy, such as the existence of predominant family businesses and small businesses, more than 90 per cent; no clear definition of ownership rights for such a very long time; the absence of a standard that provides final and accurate identification of citizens, which would decrease possibilities of operating activities under false identities, or transforming businesses with bad legal track records to other individuals; a regulating reform of the market has still not been implemented in our country and so on.
Due to the simultaneous and intense operation of either one or all the above mentioned factors, the level of the informal economy in Albania is the most wide-spread out of all the countries of the region and there is an upwards trend. If in the year 2002, Schneider believed that the level of informality in our economy stood at 33 per cent of the GDP, the OECD Report of 2004 quotes this level at up to 60 per cent of the GDP, which means that the informal part is 1.4 times greater than the part that operates within legal standards. This trend differs a great deal from the experience of our neighbouring countries (apart from Bosnia Hercogovina), which are placing under the control of the law the also very large parts of their economies that were informal too.
It is now broadly accepted that, irrespective of the fact that not the entire informal part of the economy is a loss of national assets of a country, the informal economy does play a tangible regressive role on the development rates and capacities of countries. Voices justifying economic informality have not been lacking in public debate on the subject in our country as well, however, following a long term of hesitation on the part of previous governments, the program of the current government embodies its final choice: to overcome informality at all costs as a synthesis of corruption and fiscal evasion.
Observations of our country too reveal that there is a full correlation between the growth of the informal economy and the insufficiency of public revenue and the growth of taxes. It is these two indices that are at the roots of the suffocating environment for business and of the growth of the public debt, which lead to the overall freezing of credits for private businesses. In the face of the high level of taxes and the lower level of fiscal performance, our country has been a unique example for low level crediting of the economy-only 7 per cent of the GDP (Croatia 55% of the GDP, less in Macedonia with 25% of the GDP). In less than one year and due to the growth of fiscal performance, the level of crediting private business trebled in relation to the GDP.
Informality of the economy, has not only gravely damaged competition on the market and has lowered its transparency to the same degree, but it has blocked re-allocation of funds and sources of capital in conformity with the advantages the country offers in the context of the regional economy and further a-field.
The structure of our economy tends to expand towards sectors based on informality (building industry), towards products that are unmarketable. This is accompanied by the growth of the country’s trade deficit and a deep-going distortion of the labour market. Due to this spreading informality a decline in the rates of the economic development of the country is being noted, and, according to many expert observations and research, there are gowning doubts as to whether or not high development rates for a medium-term period can be guaranteed.
Specific programs drafted by the Government to fight informality place the Ministry of Finance in the centre as the focal point, which, within the course of one year had made profound changes in terms of legislation. Legislation has been greatly improved; the legal framework has been totally reviewed to make it consistent and to minimize administrative arbitrariness. Time required to register a business has been cut back to 8 days and procedures have been liberalized on a great deal of licenses and patents that were previously required. The level of taxes has been reduced by $US320 million per annum, reducing the fiscal barriers by one fifth, allowing the entrance onto the market of those businesses which could not compete previously because the high level of taxes excluded them from any possible economic benefit. All these reductions have been made on direct taxes, where the corporative tax, within one year, has been reduced 15 per cent (from 23 to 25 per cent), labour tax 30 per cent( from 29 to 20 per cent), tax on small business has been halved and customs tax has been lifted on machinery, equipment and raw materials imported.
The results in the reduction of the informal economy are more than visible and there are indices that testify to this. Irrespective of the reduction of the levels of taxes, during 2006 alone, fiscal income in the budget rose 1.5 percentage points above the GDP (during 20012005 it rose only 0.9 percentage points in five years). The number of businesses registered has increased by 20,000 and the number of employed, on social welfare schemes has risen by 40,000 persons.
The initial results are only an encouragement. The total overcoming of the phenomenon remains a challenge of the government and this is why an adequate and coordinated program is required.
First it is a challange because the proportions of the phenomenon are extraordinary and beyond all comparison with similar experiences.
It is a challange, because the war on informality is waged together with government programs for the regulating of the state, for the liberalisation of procedures and licenses, for the improvement of the climate of business, for the growth of budget revenue. It is a challange because, in this process, the operation of the law and its penalizing force must be guaranteed.
The will of the government, its political decisiveness and the existence of a broad opinion opposing the factors and the centres that encouraged this informality, the growth of the technical capacity of the administration, constitute today arguments of the success called for in the fight against informality.