The shadow economy, tax evasion and corruption in SEE countries

What is it about?

Economic theory and practice of developed countries have shown that the good functioning of market economies requires the existence of stable institutions that are effective in the application of legal rules as a precondition for the proper functioning of the economic and fiscal system. In the process of building a market economy in Southeast European countries, along with the sector of legal economy there coexists a large sector of shadow economy, tax evasion and high levels of corruption. Analyses made by many authors and relevant national and international institutions estimate that the amount of the shadow economy, tax evasion and corruption in the analyzed countries despite a declining trend in the last decade continues to be at the level of 25-50% compared with the legal sector of the economy. The author aims through a comparative approach to analyze the level of the shadow economy, tax evasion and corruption in the economies of Southeast Europe and provides some recommendations for governments to overcome these negative phenomena.

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Why is it important?

In the case of SEE countries the phenomenon of the shadow economy is not the result of huge fiscal burdens but of ineffective and selective implementation of tax laws and government regulations that create favorable preconditions for the development of the shadow economy, and of tax evasion associated with high levels of institutional corruption. A faster integration of SEE countries into NATO and the quality fulfillment of the criteria of Copenhagen in the process of integration into the EU are substantial prerequisites for improving the institutional reforms as preconditions of successfully fighting the shadow economy, tax evasion and corruption. Fighting the shadow sector of the economy, tax evasion and corruption should be implemented and practiced as a joint responsibility of government, the legal economic sector, nongovernment and civil organizations and the population. Only a functional coordination between all parties within a national strategy can provide positive results in fighting these negative phenomena in the long run. The high level of the shadow economy, tax evasion and corruption is the result of a low cultural level and civilization of the SEE countries that find answers in the well- known declaration of the great German economist Joseph Schumpeter: ''The soul of a people, its cultural level, its social structure, which jobs its policy may offer, all those are recorded in its tax history. Who knows how to listen to these messages will know how to hear the cries of world history more clearly than from any other source’’.