Last year, the level of grey economy in Latvia had declined slightly in comparison with the year before. Estonia and Lithuania, on the other hand, had experienced an increase of grey economy, as concluded in a study published by the Stockholm School of Economics in Riga on 12 May.
The proportion of grey economy from Latvia’s GDP was 21.3% in 2015 (15% in Lithuania and 14.9% in Estonia). Over the course of the year, Latvia’s volume of grey economy has declined by 2.2% of GDP. Nevertheless, the proportion of grey economy in Latvia remains higher than that of Lithuania and Estonia.
‘Although the main reason for the decline of Latvia’s grey economy was the reduction of unaccounted income of businesses and the volume of envelope wages, these indexes remain very high,’ – admits the author of the study, SSE Riga’s associated professor Dr. Arnis Sauka. The highest grey economy level is noted in Riga and Kurzeme.
The biggest portion of grey economy in Latvia is made up of tax avoidance, reaching 45% of Latvia’s total grey economy level. In addition, the level of tax avoidance in Latvia is higher than that of neighbouring countries (19.9% in Latvia, 10.5% in Lithuania and 7.5% in Estonia). In addition, results of the study show that unregistered companies form 5-7% of all companies in Latvia.
The second largest portion of Latvia’s grey economy consists of so-called envelope wages. It is worth mentioning, however, that the proportion of envelope wages in Latvia has been declining since 2010. This tendency continued in 2015. Envelope wages are a serious problem in Estonia, where they form 60% of the total grey economy volume.
The highest bribery level among Baltic States is found in Lithuania, where an increase in bribery was noted in general business (from 10.2% to 12.7% of income) and state procurements (from 10.9% to 11.5% of the state procured order’s total value) in 2015.
Construction industry is at risk of bribery the most in Latvia – 40% of activities of this industry are in the grey area.
According to data of the study, small companies generally have a higher risk of working in the grey area than larger companies. Nevertheless, differences in size of businesses involved in illegal activities are not particularly notable – even some of the larger companies contribute to the grey economy.
Similar to previous years, Latvia featured the highest level of residents’ dissatisfaction with the established tax policy among the three Baltic States. Companies dissatisfied the most with the government’s tax policy are more prone to getting involved in grey economy. Companies satisfied with rules and regulations are less likely to engage in shady business practices.
Authors of the study suggest providing a more stable tax policy, establish more justified tax rates and provide better transparency for the use of taxes. Potential involvement in grey economy activities can also be reduced by increasing the possibility of the crime being discovered. The study also concludes that ethnic background also affects the level of grey economy. This is because minority groups do not feel too involved in decision-making processes in the country. Authors of the study also believe social cohesion and matters of integration of minorities can also help reduce grey economy.