Note 10 – August 2003 

Shadow economy as a driving force
by Ion Olan

Recently, Department of Statistics and Sociology announced that share of shadow economy (SE) in Moldova is 31.6% to GDP, according to the “Measuring unobserved economy” methodology recommended by the Organization for Economic Cooperation and Development (OECD, Paris). Meanwhile, our statistics has been claiming this indicator to be no more than 14-17% right up till the end of the 90s. One third of the economy is “in shadow”. Is this a lot or a little? It is normal, if compared to Europe. This is the level of Greece, Italy or Spain. In Scandinavia, Germany and Austria this “shadow” is smaller. 

The problem though is that according to the unofficial estimates (based on employment, consumption of electric energy and cement, import of oil products and food, transportation volume) share of informal economy in Moldova is much bigger – about a half of the GDP. 

And, involuntarily, it became apparent through the Government Decision “On results of the RM Government report to the Parliament” #894 of July 21, 2003: “problems conditioned by natural disasters, shadow economy, contraband are mentioned as top-priority”[1] (italicized by I.O.). 

As regards the level of negative impact upon the state budget, SE is indeed like a natural disaster. But unlike drought or heavy showers it is a handmade phenomenon. 

It should be admitted though that at the beginning of the transition period SE played the role of a social shock-absorber and was a source of additional incomes for the population, workplaces, as well as cheap goods. Now, when metastases of semi-legal and criminalized SE and corruption stroke the young state, they create evident barriers to attraction of investments and development of civilized forms of entrepreneurship. SE aggravates property differentiation of the population, exacerbates problem of poverty that the state will not be able to solve (even given high GDP growth rates), if the budget is replenished only by the legal sector of the economy and there is no efficient mechanism of entrepreneurial income redistribution. 

SE is many-sided. It originates from imperfection of the legislation, labyrinths of regulatory bureaucracy, clannish business, “transparency” of customs borders and “benevolence” of tax bodies. Its effects are also many-sided: macroeconomic, budget, regional and social. 

One can judge on the level of SE based on the contrast between 14% Moldova’s GDP growth over the last three years and the difficult situation of the country’s budget, which lacks funds not only for investments and education, but for daily social tasks as well. 

Anyone can see the main, the most profitable SE goods: oil products, food and alcohol, tobacco products, medicines; while the most “unobserved”, unaccounted by the statistics branches are trade (where SE is 60%), constructions and transportation, restaurant business, real estate operations. 

Shadow flows of oil products and alcohol are striking. Their increase over the last years is by implication also confirmed by the statistics. Thus, according to the RM energy balance, officially accounted import of liquid fuel to Moldova dropped from 1,5 mil ton of conventional fuel in 1996 down to 577-645 thou ton in the last years; alcohol – from 29,7 mil USD in 1996 to 3,0 mil USD[2]. 

But with all this going on oil products market capacity of Moldova is currently estimated at 1,0-1,2 mil ton. The main consumer of oil products (gasoline and diesel fuel) is motor transport and real sector machinery. Number of registered motor vehicles in Moldova reached 900 thou units, including 280 thou cars, 15,2 thou buses and minibuses, etc. Meanwhile, statistics states that oil products consumption of motor transport is just a half of the mid-90’s indicator (in agriculture it is less than a third)[3]. 

One of the prerequisites for the shadow overflow of oil products from abroad has formed on the 1^st of April, 2003, when TMR lowered excises for gasoline (40 USD per ton) and diesel fuel (20 USD per ton). In the Republic of Moldova these excises are set to 88,9 USD and 37,04 USD per ton respectively. Rare initiatives to curtail the oil products smuggling yield usually no practical result (marking of gasoline with special dyestuffs, creation of mobile tax stations on roads, control at gasoline stations, introduction of sales registers). 

SE regional aspect is mostly showing in municipality of Chisinau and “Moldovan-Moldavian trade” with Transnistria. In Chisinau and its suburbs real estate operations, different types of trade, pharmaceuticals and restaurant business are the most profitable and the least controllable. Obtaining construction permissions – town-planning certificates and authorizations – remains the most difficult problem for economic units. It takes up to 170 days and a minimum of 1 thou USD to get all necessary acts for construction or commission of a finished building. 

Besides, so called “Transnistrian conflict” became a large-scale business for both parties long ago. Transnistrian import volumes are worth paying attention: in 2002 for instance it exceeded export by 206,2 mil USD or 82.4% to the region’s GDP, while this indicator in Moldova accounted only for 24.2%. Statistics records import of specific goods in volumes that exceed the regional needs considerably (oil products, alcohol, cigarettes, sugar, cosmetics, medicines, etc.) and their subsequent re-export, to the Republic of Moldova primarily, whose share within the Transnistria’s “export” officially accounts for no less than 25%, while within the import to the region – only 7-8%. Substantial misbalance of Transnistrian external trade and such countries as Ukraine and Byelorussia is also interesting: import in 2001, for example, exceeded export by 7,8 and 5,3 times respectively. Noteworthy is the fact that this excess is a new know-how of the latest time. Earlier, statistics recorded an inverse situation: in 1997, for instance, export of Transnistrian goods to Ukraine was twice as much as import, to Byelorussia – 2,4 times more. 

There are different “schemes” of “export” to the Republic of Moldova of goods previously imported to Transnistria or produced there. Most of them take advantage of gaps and “unclear spots” in legal documents of Moldova related to its economic relations with Transnistria. There is also a manifest smuggling which employs both economic agents of Moldova and Transnistria, as well as those of third countries. 

How can SE be reduced? Should it be suppressed, fought or legalized? World Bank has recently realized a research in Moldova “State Regulation Costs Assessment” in 13 areas of economic activity regulated by the state, which covered 630 enterprises of different legal forms, sectors and localities[4]. 

The conclusion is obvious – an efficient government policy is necessary to reduce the SE through:

• Raising efficiency of state bodies and reformation of the state regulation system;

• Stimulation of legal business, support of small and medium entrepreneurship and creation of a favorable regime for this sector;

• Creation of stimuli for legalization of the shadow capitals, strengthening the protection of property and entrepreneurs;

• Forced suppression of the criminal SE, contraband and criminal drug and human traffic especially.

All these actions have to be realized at the background of purposeful and consequent market reforms given the concurrent strengthening of legal and financial state control over the economy. And the main thing is: shadow economy must not be considered a natural disaster!