What are the determinants of a strong economy? How is the entrepreneurial environment encouraged by state institutions? What is lacking in the country’s legislation to make it economically and socially competitive? Questions that we find it difficult to answer. Decisions taken in favor of certain interest groups but not in favor of all citizens lead to the reduction of the country’s credibility to foreign investors, which may have a considerable contribution to the evolution of the Moldovan economy, but most importantly, local entrepreneurs lose confidence and turn to alternative sectors.
These alternative sectors are found entirely in the underground economy, an emerging problem in the Republic of Moldova. This sector of the economy represents all the unregistered economic activities that could be quantified and would add value to GDP formation if they were registered. Tax evasion, informal employment, money laundering, or even worse, criminal activities, are the main types of activities underlying the underground economy.
Analyzing the statistics of internationally renowned researchers, the situation in the Republic of Moldova is terrible.The highest level of the underground economy is registered in 2009, when the share of the underground economy in GDP was estimated at 72.2% of GDP, which is about 3.3 billion dollars, as GDP in 2009 was $ 5.4 billion, a colossal amount for an economy as vulnerable as that of the Republic of Moldova. Even though there is a slight reduction in the economy over the last 10 years, that is worth about 40% of GDP of the underground economy, our country is at a level with such countries as Ukraine or Russia.
Chart 1 The share of the underground economy in GDP, between 1999 and 2017
Source: F. Schneider.
1. Tax evasion
Numerous tax changes that come to “help” the business community in their activities are announced to the general public. How credible, but most important, how effective these changes are, remains to be seen. The skepticism that businessmen feel about fiscal policies best describes the lack of trust in the system, which generates a low level of low tax morality. Obstacles encountered by entrepreneurs and high tax burden make them turn to the gray sector of the economy. The money that could be collected at the state budget from the tax revenues could be oriented towards carrying out impact actions for the Republic of Moldova.
2. Informal employment
Employing people in the informal sector or working in the black is an emerging issue facing the Republic of Moldova at the moment. This phenomenon is described by the engagement of people without labor law and tax legislation being respected. Typically, people with a low level of training are in this sector, mainly due to the fact that there is an acute need for unskilled labor, but also because the burden of social contributions is very high. In the long run, undeclared work has quite serious implications, both at the individual and at country level, because people employed in the informal sector do not benefit from social insurance and the state has to spend more money to cover social insurance for a larger number of people.
Even the National Bureau of Statistics measures the evolution of informal employment in the Republic of Moldova, and the data presented show an alarming situation. Despite the “favorable economic conditions”, 24.8% of the total population of Moldova (~ 443.3 thousand people) are found in the informal sector. Thus, in 2016, about one fourth of the population of the Republic of Moldova worked in the informal sector, which means that these workers are outside the social and medical insurance system. If out of the total number of Moldovan citizens, we remove about 1 mln. of the people who emigrated, then there are 500,000 citizens who carry out their work properly, the country’s budget being supported by them, because other 443,000 citizens work illegally and do nothing to spill GDP.
Chart 2 Population employed in the informal sector in Moldova, 2003-2017, (% of the total population)
Alexei Repede, president of AOAMP, states the following:
“The economic reality is tough. The authorities are not trying to improve the situation, but on the contrary, plotting and making decisions to the detriment of Moldovan citizens, decisions such as “passing” the return of the money from theft of the billion on the shoulders of the citizens. We can not have claims against businesses that practice economy, if even political decision-makers are well-known for their illicit activities, such as pimping, bribery, tax evasion or trafficking of influence.
Reducing the underground economy should become the number one priority of current policy makers. Money circulating in the informal sector could be directed to hospital rehabilitation, road infrastructure building, school improvement, massive investment in state programs to develop the skills of the population interested in continuing education, high quality university education, and many other areas to improve the standard of living of the citizens of the Republic of Moldova.
The solutions I propose to eradicate the underground economy are:
- Reducing the number of employees in the public sector, in order to reduce bureaucracy and diminish corruption among civil servants;
- Applying incentives to new firms entering the market as a way of encouraging entrepreneurship;
- Reducing tax burdens, including social security contributions, for low income people;
- Elimination or reformulation of tax laws that are interpretable;
- Transparency of public spending, combating corruption and improving the quality of public services, actions that will rebuild citizens’ confidence in state institutions;
- Destruction of cartels and encouraging fair competition at the level of trade and production.
In conclusion, I can say that redirecting activities from the informal economy to the official economy is possible. An impressive effort is required and the results will be felt by all the citizens of the country, as well as the divergences and revenue polarization will decrease. The interests of the population must prevail and become the main objective of the current political class.”