People in the Baltic Countries See the Same Causes of Smuggling – High Taxes and Low Income

Lithuanians, Latvians and Estonians think that the primary cause of smuggling is taxes higher than the living standards in these countries, which generates differences in prices and gives rise to incentives to consume, or trade in, illegal goods. People of the three Baltic countries estimate that smuggling has been on the rise during the past three years. The largest portion of respondents who neither fully tolerate nor strictly condemn smuggling is in Lithuania. “Wages in envelopes” are the most spread in Latvia.

Such results were revealed by a first representative sociological survey initiated by the Lithuanian Free Market Institute and carried out by market and public research company “Spinter tyrimai” which polled 3056 permanent residents in Lithuania, Latvia and Estonia. In Latvia fieldwork was carried out by SIA Data Serviss, in Estonia – by Turu-uuringute AS.

According to the poll, people in the three Baltic countries see the same causes of smuggling. They think that the primary cause of smuggling is the opportunity to earn from differences in prices between the Baltic countries and the neighbouring countries where minimal EU-required excise duties are not applied to fuels, alcohol products and cigarettes. The main reasons for the prevalence of smuggling and illegal production of and trade in goods are big price differences compared to neighbouring non-EU countries caused by big taxes (50% in Lithuania, 54% in Latvia, 51% in Estonia), as well as increasing product prices, low and decreasing people income and possibilities to buy legally (43% in Lithuania, 60% in Latvia, 65% in Estonia).

“People of all three Baltic countries indicate similar causes of smuggling, which is a perfect illustration of the problem of smuggling – the issue that the Lithuanian Free Market Institute highlighted already long ago. Lithuania, Latvia and Estonia have a combination of factors conducive to smuggling. These are big price differences, compared to neighbouring non-EU countries, and relatively low income and high prices of legal goods,” – says Vytautas Žukauskas, policy analyst at the Lithuanian Free Market Institute.

As the survey shows, the consumption of illegal goods has been increasing during the last 3 years in all three countries. Almost two thirds (64%) of respondents in Lithuania believe that the consumption of illegal cigarettes has been increasing during the last three years. The respective result in Latvia is less disappointing (54%), while in Estonia it is the lowest (34%). When it comes to illegal alcohol products, increase in their consumption is less evident compared to cigarettes: 43% in Lithuania, 45% in Latvia and 26% in Estonia. The same result for change in consumption of illegal fuel appears to be similar to the result for cigarettes: 62% in Lithuania, 49% in Latvia and 32% in Estonia.

People of the Baltic countries believe that the most effective ways to fight smuggling is to cut taxes to lower prices of legal goods and to loosen government regulations that set barriers for business. The reduction of excises taxes to lower prices is the most often seen as an effective way to fight smuggling and illegal production and trade in goods in all three countries: 75% in Lithuania, 84% in Latvia, 73% in Estonia.  In Lithuania and Latvia, the 2nd most effective way to fight smuggling is the reduction of government regulations setting barriers for business (65% in Lithuania and 66% in Latvia), while Estonians put the strengthening of border control to the 2nd position (69%).
According to V. Žukauskas, the opinion poll demonstrates that people think consistently and prudently: smuggling must be fought in the most effective way – via lowering excise duties.
“It is interesting to note that people see the reduction of government regulations that erect barriers to legal business activity as the second most important measure to combat smuggling. This indicates that a large share of the shadow economy occurs as a result of aggravated conditions to work and earn legally. This is closely related with the need to improve the business conditions and reduce taxation of the labour force. Business conditions are more favourable in Estonia, that’s why Estonians are less critical about the regulations that inhibit legal activity,” – sums up LFMI’s policy analyst.

According to the survey, the portion of respondents who fully justify smuggling and illegal consumption of illicit goods is similar in Lithuania, Latvia and Estonia – 19%, 18% and 15% respectively. Lithuanians appear to be the most undecided in terms of their views of smuggling: the portion of those polled who are more likely to justify smuggling is the largest in Lithuania 42% as compared to 25% in Latvia and 21% in Estonia.  In addition, the portion of those polled who completely do not justify smuggling is 10% as compares to 20% in Latvia and 22% in Estonia.

“There is a number of people in all three Baltic countries who completely or partially justify smuggling, which encumbers the work of state institutions. When majority of residents justify smuggling, fighting smuggling becomes a complicated task especially when only administrative and punitive measures are employed. Lithuanians are slightly more tolerant to smuggling than Latvians and Estonians. This can be explained by the fact that Lithuanians are more open in answering questions when they are polled.  The portion of respondents who did not provide any answers was the smallest in Lithuania,” – states V. Žukauskas.

Wages “in envelopes” are mostly spread in Latvia, while in Lithuania and Estonia this way of hiding taxes is less evident. The biggest spread of wages “in envelopes” or other ways of hiding taxes is noticed in Latvia: 43% of respondents indicated they know people close around who received at least part of wages in such form or hid part of their taxes in other way in year 2011. In Lithuania and Estonia, this share is lower: 24% and 20% respectively.

“Not only this poll, but also other international surveys, e.g. a study on the shadow economy by the Stockholm School of Economics in Riga, confirm that the shadow economy is the largest in Latvia. It is important to have in mind that the standard of living in Latvia is the lowest in the Baltic countries. This doesn’t mean that the situation in Lithuania and Estonia is good. One-fourth of Lithuanian respondents reported that they know people close around who received unreported income, and this is a big portion. The main reason for “envelope wages” in Lithuania is high taxation of the labour force, more than 40%.”

The sociological survey of people’s perceptions of smuggling in the three Baltic countries has been done for first time. It was carried out during the period February 9th – 28th, 2012, using an Omnibus study. In Latvia fieldwork was carried out by SIA Data Serviss, in Estonia – by Turu-uuringute AS.

Counting its 22nd year of active performance, the Lithuanian Free Market Institute is a leading free-market NGO in Lithuania and one of champion thinks tanks in the region. LFMI was the pioneer of independent policy advocacy in Lithuania and stood at the forefront of the country’s economic and social transition to the free-market economy. In 2011, LFMI has been recognized as one of the top think tanks in Central and Eastern Europe for the fifth year in a row in the study of the world‘s top think tanks done by the University of Pennsylvania (USA).