Lithuanian Shadow Economy No. 1. LFMI releases a new publication on shadow economy in Lithuania

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Lithuanian Free Market Institute (LFMI) introduces the new periodical publication “Lithuanian Shadow Economy“. The publication provides data about shadow economy in Lithuania and more specific data and insights in alcohol, fuel and cigarette markets. Figures report growing trend of the Lithuanian shadow economy since 2008.

“In collaboration with state institutions and market participants we released a new publication, in which data about Lithuanian shadow economy is provided. We define the shadow economy as economic activity (i.e. goods manufactured or services provided) pursued without applying applicable laws or requirements which is not officially recorded with the purpose of evading taxes or regulations. It is important, that this publication provides an overview of the shadow in the markets of alcohol and fuel – there has been not much information on the topic before and it was very fragmented. Together with the partners we also created a new assessment methodology of illegal alcohol market,“ a senior expert of LFMI Vytautas Žukauskas says.

According to international studies, share of GDP of shadow economy in Lithuania 2010, was about 30 percent. According to the latter indicator, Lithuania holds the 4th place among 31 European countries. According to the findings from the Survey of the Lithuanian Economy conducted by LFMI in July 2012, the share of the shadow economy in relation to GDP was growing rapidly since 2008 and accounted for as much as 28 per cent of the country’s GDP in 2010 followed by a slight decrease down to 26 percent during 2011 and 2012.

Investigation and calculations carried out by LMFI, shows that in the market of fortified and strong drinks, illegal goods have 36 percent of total market in 2012. In the market of cigarettes, the shadow reaches 29 percent. Illegal market of fuel reaches about 18 percent. The assessments of LMFI are based on surveys of heads of wards (smallest administrative divisions of Lithuania), citizens, specialists of markets, previous investigations and the data from excised market participants.

Survey of heads of wards showed that in most of Lithuanian wards, it is possible to buy illegal alcohol beverages. 60 percent of them, who participated in the survey, said that in their wards it is possible to buy illegal produced alcohol. Only 17 percent argued that there is no illegal produced alcohol in their wards.

Investigation focuses on the reasons of shadow economy. The main reason of shadow economy is defined as the level of regulation and taxation.

“Taxation and regulation are legal inputs of activity. Therefore, the higher taxes and more compulsory regulation have those who are working legally, the greater incentive for market participants to avoid them and operate in the shadow,“ V.Žukauskas says.

The extent to which the level of taxation and regulation affects a country‘s shadow economy depends on the country‘s economic situation and on the income and standard of living. In countries with higher income and living standard, citizens can devote the greater share of income not for the first necessity goods and services. The situation is different in low-income and low living standard countries, where increasing taxes and decreasing income, force population to find alternative ways to purchase goods, as cheaper goods and services in shadow economy.

“Even the same size of tax tariff can have a different impact for the shadow economy in countries with different income and standard of living. For example, although excises in Lithuania compared with other EU countries are not the biggest, Lithuanian population excisable goods purchases hardly due to lower living standards,“ LMFI expert said.

Tolerance of Lithuanian population for the shadow economy also creates favorable conditions for the shadow. The shadow economy is neither often condemned, nor rejected as immoral activity in Lithuania. For example, from the data of population survey, 33 percent of population of the country entirely justifies or is tend to justify the illegal consumption of alcoholic beverages. Lower prices of fuel, cigarettes and alcohol in neighboring Belarus and Russia are conducive for contraband. High level of country‘s corruption reduces the risk and inputs of shadow activity – it is easy to bribe officers and evade in contravention of the law.

In the following publications, it is envisaged to overview not only markets of alcohol, cigarettes and fuel, but also other parts of shadow economy, as moonlighting and informal wage.