The Blessings of the Black Economy
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Some call it the "unofficial" or "informal"
economy, others call it the "grey economy" but the old
name fits it best: the "black economy". In the USA
"black" means "profitable, healthy" and this
is what the black economy is. Macedonia should count its
blessings for having had a black economy so strong and thriving
to see it through the transition. If Macedonia had to rely only
on its official economy it would have gone bankrupt long ago.
The black economy is made up of two constituent
- Legal activities that are not reported to
the tax authorities and the income from which goes
untaxed and unreported. For instance: it is not illegal
to clean someone's house, to feed people or to drive them. It is, however, illegal to hide the income generated by
these activities and not to pay tax on it. In most
countries of the world, this is a criminal offence,
punishable by years in prison.
- Illegal activities which, needless to say,
are also not reported to the state (and, therefore, not
These two types of activities together are
thought to comprise between 15% (USA, Germany) to 60% (Russia) of
the economic activity (as measured by the GDP), depending on the
country. It would probably be an underestimate to say that 40% of
the GDP in Macedonia is "black". This equals 1.2
billion USD per annum. The money generated by these activities is
largely held in foreign exchange outside the banking system or
smuggled abroad (even through the local banking system).
Experience in other countries shows that circa 15% of the money
"floats" in the recipient country and is used to
finance consumption. This should translate to 1 billion free
floating dollars in the hands of the 2 million citizens of
Macedonia. Billions are transferred to the outside world (mostly
to finance additional transactions, some of it to be saved in
foreign banks away from the long hand of the state). A trickle of
money comes back and is "laundered" through the opening
of small legal businesses.
These are excellent news for Macedonia. It
means that when the macro-economic, geopolitical and (especially)
the micro-economic climates will change billions of USD
will flow back to Macedonia. People will bring their money back
to open businesses, to support family members and just to consume
it. It all depends on the mood and on the atmosphere and on how
much these people feel that they can rely on the political
stability and rational management. Such enormous flows of capital
happened before: in Argentina after the Generals and their
corrupt regime were ousted by civilians, in Israel when the peace
process started and in Mexico following the signature of NAFTA,
to mention but three cases. These reserves can be lured back and
transform the economy.
But the black economy has many more important
The black economy is a cash economy. It is
liquid and fast. It increases the velocity of money. It injects
much needed foreign exchange to the economy and inadvertently
increases the effective money supply and the resulting money
aggregates. In this sense, it defies the dictates of "we
know better" institutions such as the IMF. It fosters
economic activity and employs people. It encourages labour
mobility and international trade. Black economy, in short, is
very positive. With the exception of illegal activities, it does
everything that the official economy does and, usually,
So, what is morally wrong with the black
economy? The answer, in brief: it is exploitative. Other parts of
the economy, which are not hidden (though would have liked to be),
are penalized for their visibility. They pay taxes. Workers in a
factory owned by the state or in the government service cannot
avoid paying taxes. The money that the state collects from them
is invested, for instance, in infrastructure (roads, phones,
electricity) or used to pay for public services (education,
defence, policing). The operators of the black economy enjoy
these services without paying for them, without bearing the costs
and worse: while others bear the costs. These encourages them, in
theory to use these resources less efficiently.
And all this might be true in a highly
efficient, almost ideal market economy. The emphasis is on the
word "market". Unfortunately, we all live in societies
which are regulated by bureaucracies which are controlled (in
theory, rarely in practice) by politicians. These elites have a
tendency to misuse and to abuse resources and to allocate them in
an inefficient manner. Even economic theory admits that any
dollar left in the hands of the private sector is much more
efficiently used than the same dollar in the hands of the most
honest and well meaning and well planning civil servant.
Governments all over the world distort economic decisions and
misallocate scarce economic resources.
Thus, if the goals are to encourage employment
and economic growth the black economy should be welcomed.
This is precisely what it does and, by definition, it does so
more efficiently than the government. The less tax dollars a
government has the less damage it does. This is an opinion
shares by most economists in the world today. Lower tax rates are
an admission of this fact and a legalization of parts of the
The black economy is especially important in
times of economic hardships. Countries in transition are a
private case of emerging economies which are a private case of
developing countries which used to be called (in less politically
correct times) "Third World Countries". They suffer
from all manner of acute economic illnesses. They lost their
export markets, they are technologically backward, their
unemployment skyrockets, their plant and machinery are
dilapidated, their infrastructure decrepit and dysfunctional,
they are lethally illiquid, they become immoral societies (obligations
not honoured, crime flourishes), their trade deficits and budget
deficits balloon and they are conditioned to be dependent on
handouts and dictates from various international financial
institutions and donor countries.
Read this list again: isn't the black
economy a perfect solution until the dust settles?
It enhances exports (and competitiveness
through imports), it encourages technology transfers, it employs
people, it invests in legitimate businesses (or is practised by
them), it adds to the wealth of the nation (black marketeers are
big spenders, good consumers and build real estate), it injects
liquidity to an otherwise dehydrated market. Mercifully, the
black economy is out of the reach of zealous missionaries such as
the IMF. It goes its own way, unnoticed, unreported, unbeknownst,
untamed. It doesn't pay attention to money supply targets (it
is much bigger than the official money supply figure), or to
macroeconomic stability goals. It plods on: doing business and
helping the country to survive the double scourges of transition
and Western piousness and patronizing. As long as it is there,
Macedonia has a real safety net. The government is advised to
turn a blind eye to it for it is a blessing in disguise.
There is one sure medicine: eliminate the
population and both unemployment and inflation will be eliminated.
Without the black economy, the population of Macedonia would not
have survived. This lesson must be remembered as the government
prepares to crack down on the only sector of the economy which is
still alive and kicking.
The implementation of these recommendations and
reforms should be obliged to be GRADUAL. The informal economy is
an important pressure valve for the release of social pressures,
it ameliorates the social costs inherent to the period of
transition and it constitutes an important part of the private
As we said in the body of our report, these are
the reasons for the existence of an informal economy and they
should be obliged to all be tackled:
- High taxation level (in Macedonia, high
- Onerous labour market regulations;
- Red tape and bureaucracy (which often
leads to corruption);
- Complexity and unpredictability of the tax
Reporting Requirements and Transparency
- All banks should be obliged to report
foreign exchange transactions of more than 10,000 DM (whether
in one transaction or cumulatively by the same legal
entity). The daily report should be submitted to the
Central Bank. In extreme cases, the transactions should
- All the ZPP account numbers of all the
firms in Macedonia should be publicly available through
the Internet and in printed form.
- Firms should be obliged by law to make a
list of all their bank accounts available to the ZPP, to
the courts and to plaintiffs in lawsuits.
- All citizens should be obliged to file
annual, personal tax returns (universal tax returns, like
in the USA). This way, discrepancies between personal tax
returns and other information can lead to investigations
and discoveries of tax evasion and criminal activities.
- All citizens should be obliged to file bi-annual
declarations of personal wealth and assets (including
real estate, vehicles, movables, inventory of business
owned or controlled by the individual, financial assets,
income from all sources, shares in companies, etc.).
- All retail outlets and places of business
should be required to install over a period of 3
years cash registers with "fiscal brains".
These are cash registers with an embedded chip. The chips
are built to save a trail (detailed list) of all the
transactions in the place of business. Tax inspectors can
pick the chip at random, download its contents to the tax
computers and use it to issue tax assessments. The
information thus gathered can also be crossed with and
compared to information from other sources (see: "Databases
and Information Gathering"). This can be done only
after the full implementation of the recommendations in
the section titled "Databases and Information
Gathering". I do not regard it as an effective
measure. While it increases business costs it is
not likely to prevent cash or otherwise unreported
- All taxis should be equipped with
taximeters, which include a printer. This should be a
- Industrial norms (for instance, the amount
of sugar needed to manufacture a weight unit of chocolate,
or juice) should be revamped. Norms should NOT be
determined according to statements provided by the
factory - but by a panel of experts. Each norm should be
signed by three people, of which at least one is an
expert engineer or another expert in the relevant field.
Thought should be dedicated to the possibility of
employing independent laboratories to determine norms and
- Payments in wholesale markets should be
done through a ZPP counter or branch in the wholesale
market itself. Release of the goods and exiting the
physical location of the wholesale market should be
allowed only against presentation of a ZPP payment slip.
Reduction of Cash Transactions
- Cash transactions are the lifeblood of the
informal economy. Their reduction and minimization is
absolutely essential in the effort to contain it. One way
of doing it is by issuing ZPP payment (debit) cards to
businesses, firm and professionals. Use of the payment
cards should be mandatory in certain business-to-business
- All exchange offices should be obliged to
issue receipt for every cash transaction above 100 DM and
to report to the Central Bank all transactions above 1000
DM. Suspicious transactions (for instance, transactions
which exceed the financial wherewithal of the client
involved) should be duly investigated.
- The government can reduce payroll taxes if
the salary is not paid in cash (for instance, by a
transfer to the bank account of the employee). The
difference between payroll taxes collected on cash
salaries and lower payroll taxes collected on noncash
salaries should be recovered by imposing a levy on
all cash withdrawals from banks. The banks can withhold
the tax and transfer it to the state monthly.
- Currently, checks issued to account-holders
by banks are virtually guaranteed by the issuing banks.
This transforms checks into a kind of cash and checks are
used as cash in the economy. To prevent this situation,
it is recommended that all checks will be payable to the
beneficiary only. The account-holder will be obliged to
furnish the bank with a monthly list of checks he or she
issued and their details (to whom, date, etc.). Checks
should be valid for 5 working days only.
- An obligation can be imposed to oblige
businesses to effect payments only through their accounts
(from account to account) or using their debit cards.
Cash withdrawals should be subject to a withholding tax
deducted by the bank. The same withholding tax should be
applied to credits given against cash balances or to
savings houses (stedilnicas). Alternatively, stedilnicas
should also be obliged to deduct, collect and transfer
the cash withdrawal withholding tax.
- In the extreme and if all other measures
fail after a reasonable period of time, all foreign trade
related payments should be conducted through the Central
Bank. But this is really a highly irregular, emergency
measure, which I do not recommend at this stage.
- The interest paid on cash balances and
savings accounts in the banks should be increased (starting
with bank reserves and deposits in the central bank).
- The issuance of checkbook should be made
easy and convenient. Every branch should issue checkbooks.
All the banks and the post office should respect and
accept each other's checks.
- A Real Time Gross Settlement System should
be established to minimize float and facilitate interbank
- Firms competing for government tenders
should be obliged to acquire a certificate from the tax
authorities that they owe no back-taxes. Otherwise, they
should be barred from bidding in government tenders and
RFPs (Requests for Proposals).
Databases and Information Gathering
- Estimating the informal economy should be
a priority objective of the Bureau of Statistics, which
should devote considerable resources to this effort. In
doing so, the Bureau of Statistics should coordinate
closely with a wide variety of relevant ministries and
committees that oversee various sectors of the economy.
- All registrars should be computerized:
land, real estate, motor vehicles, share ownership,
companies registration, tax filings, import and export
related documentation (customs), VAT, permits and
licences, records of flights abroad, ownership of mobile
phones and so on. The tax authorities and the Public
Revenue Office (PRO) should have unrestricted access to
ALL the registers of all the registrars. Thus, they
should be able to find tax evasion easily (ask for
sources of wealth- how did you build this house and buy a
new car if you are earning 500 DM monthly according to
your tax return?).
- The PRO should have complete access to the
computers of the ZPP and to all its computerized and non-computerized
- The computer system should constantly
compare VAT records and records and statements related to
other taxes in order to find discrepancies between them.
- Gradually, submissions of financial
statements, tax returns and wealth declarations should be
computerized and done even on a monthly basis (for
instance, VAT statements).
- A system of informants and informant
rewards should be established, including anonymous phone
calls. Up to 10% of the intake or seizure value
related to the information provided by the informant
should go to the informant.
- Tax inspectors and customs officials
should receive police powers and much higher salaries (including
a percentage of tax revenues). The salaries of all tax
inspectors regardless of their original place of
employment should be equalized (of course, taking
into consideration tenure, education, rank, etc.).
- Judges should be trained and educated in
matters pertaining to the informal economy. Special
courts for taxes, for instance, are a good idea (see
recommendation below). Judges have to be trained in tax
laws and the state tax authorities should provide BINDING
opinions to entrepreneurs, businessmen and investors
regarding the tax implications of their decisions and
- It is recommended to assign tax inspectors
to the public prosecutors' office to work as teams
on complex or big cases.
- To establish an independent Financial and
Tax Police with representatives from all relevant
ministries but under the exclusive jurisdiction of the
PRO. The remit of this Police should include all matters
financial (including foreign exchange transactions,
property and real estate transactions, payroll issues,
- Hiring and firing procedures in all the
branches of the tax administration should be simplified.
The number of administrative posts should be reduced and
the number of tax inspectors and field agents increased.
- Tax arrears and especially the interest
accruing thereof should be the first priority of the ZPP,
before all other payments.
- All manufacturers and sellers of food
products (including soft drinks, sweetmeats and candy,
meat products, snacks) should purchase a licence from the
state and be subjected to periodic and rigorous
- All contracts between firms should be
registered in the courts and stamped to become valid.
Contracts thus evidenced should be accompanied by the
registration documents (registrar extract) of the
contracting parties. Many "firms" doing
business in Macedonia are not even legally registered.
Reforms and Amnesty
- A special inter-ministerial committee with
MINISTER-MEMBERS and headed by the PM should be
established. Its roles: to reduce bureaucracy, to suggest
appropriate new legislation and to investigate corruption.
- Bureaucracy should be pared down
drastically. The more permits, licences, tolls, fees and
documents needed the more corruption. Less power
to state officials means less corruption. The One Stop
Shop concept should be implemented everywhere.
- A general amnesty should be declared.
Citizens declaring their illegal wealth should be
pardoned BY LAW and either not taxed or taxed at a low
rate once and forever on the hitherto undeclared wealth.
The Tax Code
- To impose a VAT system. VAT is one the
best instruments against the informal economy because it
tracks the production process throughout a chain of value
added suppliers and manufacturers.
- The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes,
customs and excise taxes, fees and duties. To restore progressivity, the government should directly compensate
the poor for the excess relative burden.
- After revising the tax code in a major way,
the government should declare a moratorium on any further
changes for at least four years.
- The self-employed and people whose main
employment is directorship in companies should be given
the choice between paying a fixed % of the market value
of their assets (including financial assets) or income
- All property rental contracts should be
registered with the courts. Lack of registration in the
courts and payment of a stamp tax should render the
contract invalid. The courts should be allowed to
evidence and stamp a contract only after it carries the
stamp of the Public Revenue Office (PRO). The PRO should
register the contract and issue an immediate tax
assessment. Contracts, which are for less than 75% of the
market prices, should be subject to tax assessment at
market prices. Market prices should be determined as the
moving average of the last 100 rental contracts from the
same region registered by the PRO.
- Filing of tax returns including for
the self-employed should be only with the PRO and
not with any other body (such as the ZPP).
- The burden of proof in tax court cases
should shift from the tax authorities to the person or
- Special tax courts should be established
within the existing courts. They should be staffed by
specifically trained judges. Their decisions should be
appealed to the Supreme Court. They should render their
decisions within 180 days. All other juridical and appeal
instances should be cancelled except for an appeal
instance within the PRO. Thus, the process of tax
collection should be greatly simplified. A tax assessment
should be issued by the tax authorities, appealed
internally (within the PRO), taken to a tax court session
(by a plaintiff) and, finally, appealed to the Supreme
Court (in very rare cases).
- The law should allow for greater fines,
prison terms and for the speedier and longer closure of
- Seizure and sale procedures should be
specified in all the tax laws and not merely by way of
reference to the Income Tax Law. Enforcement provisions
should be incorporated in all the tax laws.
- To amend the Law on Tax Administration,
the Law on Personal Income Tax and the Law on Profits Tax
as per the recommendations of the IRS experts (1997-9).
Customs and Duties
- Ideally, the customs service should be put
under foreign contract managers. If this is politically
too sensitive, the customs personnel should be entitled
to receive a percentage of customs and duties revenues,
on a departmental incentive basis. In any case, the
customs should be subjected to outside inspection by
expert inspectors who should be rewarded with a
percentage of the corruption and lost revenues that they
- In the case of imports or payments abroad,
invoices, which include a price of more than 5% above the
list price of a product, should be rejected and
assessment for the purposes of paying customs duties and
other taxes should be issued at the list price.
- In the case of exports or payments from
abroad, invoices which include a discount of more than 25%
on the list price of a product should be rejected and
assessment for the purposes of paying customs duties and
other taxes should be issued at the list price.
- The numbers of tax inspectors should be
substantially increased and their pay considerably
enhanced. A departmental incentive system should be
instituted involving a percentage of the intake (monetary
fines levied, goods confiscated, etc.).
- The computerized database system (see
"Databases and Information Gathering") should
be used to compare imports of raw materials for the
purposes of re-export and actual exports (using invoices
and customs declarations). Where there are disparities
and discrepancies, severe and immediate penal actions
should be taken. Anti-dumping levies and measures, fines
and criminal charges should be adopted against exporters
colluding with importers in hiding imported goods or
reducing their value.
- Often final products are imported and
declared to the customs as raw materials (to minimize
customs duties paid). Later these raw materials are
either sold outright in the domestic or international
markets or bartered for finished products (for example:
paints and lacquers against furniture or sugar against
chocolate). This should be a major focus of the fight
against the informal economy. I follow with an analysis
of two products, which are often abused in this manner.
- I study two examples (white sugar and
cooking oil) though virtually all raw materials and foods
are subject to the aforementioned abuse.
- White Sugar is often imported as brown
sugar. One way to prevent this is to place sugar on the
list of LB (import licence required) list, to limit the
effective period of each licence issued, to connect each
transaction of imported brown sugar to a transaction of
export, to apply the world price of sugar to customs
duties, to demand payment of customs duties in the first
customs terminal, to demand a forwarder's as well as
an importer's guarantee and to require a certificate
of origin. The same goes for Cooking Oil (which
when it is imported packaged is often declared as
some other goods).
- All payments to the customs should be made
only through the ZPP. Customs and tax inspectors should
inspect these receipts periodically.
- All goods should be kept in the customs
terminal until full payment of the customs duties, as
evidenced by a ZPP receipt, is effected.
- The government should embark on a massive
Public Relations and Information campaign. The citizens
should be made to understand what is a budget, how the
taxes are collected, how they are used. They should begin
to view tax evaders as criminals. "He who does not
pay his taxes is stealing from you and from your
children", "Why should YOU pay for HIM?" "If we all did not pay taxes- there would be no
roads, bridges, schools, or hospitals" (using video
to show disappearing roads, bridges, suffering patients
and students without classes), "Our country is a
partnership and the tax-evader is stealing from
the till (kasa)" and so on.
The phrase "Gray Economy" should
be replaced by the more accurate phrases "Black
Economy" or "Criminal Economy".
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