THE SHADOW ECONOMY AND INSTITUTIONAL CHANGES IN TRANSITION COUNTRIES

VESIĆ Dr Dobrica (Ph.D., Senior Research Fellow, Institute of Belgrade), dobrica@diplomacy.bg.ac.rs

The shadow economy is a challenge for economic and social policy – not only in OECD countries, but also in transition countries. the evolutionary theory of the shadow economy explains its expansion to official institutions and rules – what leads to institutional change. In addition, the causes and effects of the rise of the shadow economy are discussed. Failing economic policy is confirmed to be the most important cause for the strong increase in shadow economic activity. A high tax burden, high regulation density and inadequate supply of public goods (like the guarantee of property rights, the provision of infrastructure) are important reasons for the migration into the shadow economy. In transition countries the lack of stable institutions, inefficient administration and corruption are – in combination with reduced (tax) morality and decreased loyalty to the state – are also driving forces of informal economic activities. the tendency to engage in shadow economic activities should be perceived by the politicians as a warning signal. there is an increased reseed by the adoption of a ‘two pillar strategy’. the strategy suggests measures that will help to decrease the attractiveness of the ‘Exit option’ and to strengthen the ‘Voice-Option’.

Keywords: shadow economy, transition countries, institutional change