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Insight into CEE border-town smuggling economics

2018


Disclaimer

The present report was funded by PMI IMPACT, a grant award initiative of Philip Morris International (“PMI�). In the performance of its research, Grantee maintained full independence from PMI. The views and opinions expressed in this document are those of Grantee and do not necessarily reflect the views of PMI. Responsibility for the information and views expressed in this report lies entirely with Grantee. Neither PMI, nor any of its affiliates, nor person acting on their behalf may be held responsible for any use which may be made of the information contained herein.

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Contents

Page

Purpose of the report

4

Executive summary

5

Subject - What is shadow economy and why it matters

6

Methodology – Why behavioral economics

8

Methodology – What was our methodology

9

Results for Estonia

10

Results for Latvia

12

Results for Lithuania

14

Results for Romania

16

Final words and next steps

18

3


Purpose of the report and thinking behind it What this report is about? Low income levels or absence of economic opportunities in borderland areas are considered the main drivers of shadow economy. While there are various components of shadow economy (such as illegal trade and smuggling, underreporting, “envelope wages”, undeclared work), the one component for borderland municipalities stands out – illegal trade. The major source of illegal trade gains comes from tobacco smuggling. Due to significant differences in taxes and tariffs between EU and non-EU countries, tobacco smuggling is one of the most widespread illicit activities and additional source of income among inhabitants of border regions. For example, in 2015, almost 20% of cigarettes smuggled in Europe came through border-towns near Ukraine, Russia, Belarus and Moldova. Only from Belarus illegal smuggling accounted for appx. 18 bn cigarettes (47% of total cigarette production in Belarus)1.

What is the purpose of this report? In order to help eradicate the illegal activities, three ultimate goals of the study are raised:

While it is important to admit prevalence of share of tobacco smuggling in EU-border municipalities shadow economy sizes, other drivers of shadow economy shouldn’t be neglected. Dominance of one driver (such as tobacco smuggling) ultimately creates environment for many other illicit activities, even more menacing to social and economical welfare of a country – due to the fact that they are driven by the same reasons.

EU border countries: Estonia, Latvia, Lithuania, Romania;

Non-EU counter-side countries: Russia (incl. Kaliningrad), Belarus, Moldova, Ukraine.

1.

Explore the size of shadow economy generated in part by cigarette smuggling in border municipalities (less than 60 km to border) within Central and Eastern Europe;

2.

Examine factors that motivate border municipalities inhabitants to participate in shadow economy;

3.

Provide clear guidelines and action plans for governments and municipalities how to reduce size of shadow economy.

The study takes a detailed look at the economic situation of 48 border municipalities that are strategically situated between 8 countries - both from statistical indicators perspective and from inhabitants behaviour analysis perspective:

Why our approach is different? Chosen approach allowed to look at shadow economy from behavioural economics perspective to understand the drivers behind participation in shadow economy. This approach is different in three ways: •

It allowed to estimate shadow economy size on municipality level using MIMIC model based on all publicly available data on tax expenditures, economy structure and socialdemographical data on municipality level; It used inputs from modelling (previous stage) to design attitudinal questions specifically tailored to municipality profile. Responses to these questions were gathered via face-to-face interviews at each municipality to determine which attitudes are behind different shadow economy sizes; It used attitude information and already gathered insights as inputs to design focus group discussions at particular municipalities a) to understand which activities shape attitudes impacting shadow economy size, b) verify existing hypotheses.

As a result, our integrated approach provided tailored recommendations to tackle shadow economy based on the features of a studied municipality in specific multistage fashion, not focusing on outcome of a particular approach, but enhancing and verifying it in more iterations.

1 - Belrynok, Belstat, Uniter, GTF “Neman”, Resolution of the Council of Ministers of the Republic of Belarus № 361,as amended on October 28, 2016, Civitta Belarus research, Satio research

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Executive summary:

Shadow economy can be changed by altering attitudes of citizens 1

Shadow economy can be decreased by changing tax expenditure at municipality level

Various indicators shape shadow economy sizes in different countries. For instance, in Latvia and Estonia increasing investments of municipality budget on public order and security, healthcare and economy as a whole will bring share of shadow economy down. While In Romania increased investments of municipality budget on fuel and energy, housing and communal economy will decrease shadow economy size. In Lithuania municipalities can bring share of shadow economy down by decreasing their expenditures on general government services and decreasing investments in fixed tangible assets, while focusing more on investments in education sector.

2

Preference for legal income over underreported salaries can be increased via countryspecific attitudinal changes and behavioural shifts

In all of the studied countries, except Estonia, preference for legal income is one the of main determinants for decreasing shadow economy size. For Latvia this preference can be increased via showing personal benefits as a result of paid taxes and expression of gratitude to diligent tax payers. In Lithuania preference for legal income will increase by explaining that social benefits will be provided only to the most disadvantaged social group, while in Romania – if incentives to pay via payment cards rather than cash will be introduced (e.g. cash back programs).

3

Increased satisfaction with the quality of expenditures made by municipalities is important to bring share of shadow economy down

Besides actual amounts spent and preferences for legal income, satisfaction with the quality of expenditures made by municipalities is important to decrease shadow economy size. In Estonia satisfaction with expenditures is related to perception of safety on streets at night, In Latvia - satisfaction with overall spending on economy, while in Romania – satisfaction with transport. Thus most of the actions taken by municipalities should be in a scope of communicative, administrative and educational measures, tailored to specific municipality background.

4

Net tax contributors are the primary audience for all of proposed communication activities

Municipalities should start to engage more with net tax contributors – people that pay more rather than receive via tax redistribution. It is crucial, as they are the ones mostly impacting tax budget and having the most negative attitude towards tax payments at the same time. As a social group, net tax contributors should receive clear information on tax allocations, participate actively in public discussions to point out importance of their individual vote, and receive basic gratitude to taxes that were duly paid by them.

5

More focus should be dedicated to EU-border municipalities to decrease shadow economy efficiently

Shadow economy indexes in border municipalities’ (less than 60km to the border) are usually higher than corresponding inland municipalities’ indexes (more than 60km to the border, chosen based on economic and statistical similarities to a particular border municipality). This indicates that shadow economy in EU-border municipalities is mainly driven by illegal trade from CIS. Therefore, these municipalities should receive more attention and resources to decrease shadow economy levels, rather than inland municipalities.

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What is shadow economy in CEE and why it matters? Shadow economy encompasses all business activities that are either not declared or underreported. In EU only the size of shadow economy is more that 2 trillion EUR – is it larger than combined GDP of Spain and Portugal. The share of shadow economy in GDP depends on the country and varies from 7% (Switzerland) to more than 30% (Bulgaria)1.

The formidable size of shadow economy and widespread social acceptance of this phenomenon have an immense impact not only on unearned governmental revenues (due to taxes lost), but as well on unfair distribution of welfare (wage cuts, taxes for legal participants are higher) and crime risks (absence of regulation of illegal activities results in violence and coercion)2.

Exhibit 1 ES, LV, LT, and RO are mostly affected by illegal trade from CIS (70%+ of illicit cigarette import share from CIS)5 CIS countries - source of illegal trade flows to EU from East EU countries with share of illegal cigarette import from CIS of >70% Other EU / non-EU countries affected by CIS illegal trade

Among the sectors that are mostly involved in shadow economy, the trade sector (wholesale, retail, etc.) is always a standalone – by various estimations it is always a top driver to the size of shadow. Reasons behind illegal trade are various – high tax burden on domestic sales, recessions, intense internal market competition, unemployment, corruption and many others. Illegal trade itself usually includes cigarettes, alcohol, pharmaceuticals, fuel and other products prone to significant taxation differences among the countries. On European level, impact of illegal trade is hard to estimate – but billions of unearned euros are attributed to it, in addition to numerous non-monetary consequences (crime increase, labour abuse, health impact, etc.3). There are several streams of illegal trade routes towards EU, but majority of illicit products come to Europe either through Northern African countries (Morocco, Algeria, Libya)4 or through non-EU Eastern European countries (CIS – Russia, Belarus, Ukraine, Moldova). As it is shown on Exhibit 1, the significant impact of illegal trade is put on EUborder countries – Estonia, Latvia, Lithuania, Romania – due to geographical presence and some shared history / social views. Consequently, illegal consumption is one of the highest in these countries which does not only undermine local economies, but has certain impact on other EU countries too.

Sources: 1 - The Shadow Economy in Europe, 2013, AT Kearney; 2 - The Shadow Economy, Friedrich Schneider, 2013; 3 - Causes and consequences of underground economy, Eugenia-Ramona Mara, 2011; 4 - Illicit cigarette trade in the Maghreb region, KPMG, 2017; 5 - Project SUN, KPMG, 2016

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EU-border countries function as a “tunnel” of illegal trade from CIS countries towards Western Europe, and therefore in-depth analysis of these adjoining countries is required. Among other reasons for considerable size of illegal trade from CIS to EU – extensive gains, low risks of detection and “parttime” basis of activities stand out. Example of big profits in short periods of time can be best illustrated by Exhibit 2 average price differences in cigarettes among countries.

borderline countries, like Estonia, Lithuania and Latvia, suffer most. Another major driver of shadow economy is what is called “undeclared work” – any lawful paid activities that are not declared to public authorities2. It differentiates from previously discussed illicit trade and illegal activities as it implies “fair” distribution of wealth but without reporting to the authorities – which ultimately allows not to pay taxes while accepting the service provided.

Exhibit 2 EUR average price range of a cigarette pack per country1 x4 15 10,4

10

x6

5,5

4,8

3,1

3,8

12,1

The major drivers of undeclared work are “envelope wages” (wages paid to employees without notification of authorities) and goods and services provided without reporting (household and car repairing, cleaning, healthcare, IT assistance, etc.). According to the study made by European Commission in 20142 (presented on Exhibit 3), share of undeclared work in shadow economy varies by country. However, it can be confirmed by the survey of EC (26.563 respondents) that perception of undeclared work is the most favorable in Baltic countries (LT, LV), where at least 18% of respondents consider payments without entitlement acceptable – this highlights necessity of preventive measures to be undertaken in these countries so that to change attitudes towards shadow economy.

3,6

3,2

1,6

2,8

SE Europe

Baltics

Central South Western Nordics Europe Europe Europe

Combination of the factors above makes illicit cigarettes one of the major contributors to the total size of illegal trade market. For instance, for 2016 the total number of smuggled and illegally produced cigarettes accounted for 48 billion cigarettes, which represents the tax loss of more than 10 billion EUR (in addition to other factors).

However, the impact of undeclared work on shadow economy is similar to illicit trade – it significantly decreases tax revenue of authorities, undermines social justice perception and conceals employment situation.

Unacceptable

Acceptable

For instance, according to Exhibit 2, a smuggler from CIS can realise up to 6 times increase in profit by simply crossing the border of the nearby EU country; while making further advances to Nordics (Norway) can bring him up to 24 times increase in the price of pack sold. This high reward in addition to relatively low risk and effort of crossing the border puts EU countries in jeopardy. Specifically the

Fairly acceptable

Refused to answer

5 0

1,0 0,5 CIS

4,1

5,4

These evidences combined about shadow economy (illicit trade and undeclared work) and absence of comprehensive research on shadow economy matters in border EU countries (LT, LV, EE, RO) enhance the importance of necessary activities to be done so that to come up with ideas on how to tackle shadow economy issues.

Exhibit 3 Reception of payments without entitlement2, n=26.563

3%

3%

9%

8%

Don’t know

5%

4%

2% 5%

11%

11%

9%

82%

83%

83%

PL

IE

EE

3% 5%

10% 20% 78%

90%

67% LV

LT

Other

Sources: 1 - Project SUN, KPMG, 2016; 2 - Undeclared work in the European Union, Conducted by TNS opinion & social at the request of the European Commission, 2014

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Why behavioral economics? Starting with basic individual values so that to ultimately change the behavior As we have discussed previously, perceived social acceptance, attitude to risk and morale towards tax evasion are important factors shaping individual decisions about participation in shadow economy. One of the ways to impact these decisions – is to look at decision making process of involved parties from perspective of behavioural economics, which helps to evaluate effects of psychological, social, emotional and cognitive factors on economic decisions of citizens. This approach allows to unveil qualitative drivers of shadow economy participants, tailored to their origin, habits and world views (social values) and also provides recommendations on how to impact these drivers. Behavioural approach is specifically accomplished to decrease shadow economy as it takes into account various backgrounds of particular individuals. Same concepts can be viewed completely differently not only by citizens of the same country, but also by members of the same family. As fast car driving might be thrilling and exciting for some people, it can be as frightful and dire to others. Same construct applies to tax morale – due to the fact that people view it differently. For some groups paying taxes might be a way of expressing country patriotism or indication of participation in collaborative development of a particular country. While for others taxes might seem a waste of personal welfare (as they don’t see the end result of their tax spend) -

and can be as frightening as fast driving for others. It is important to positively stimulate people that duly pay taxes, however, the substantial decrease in shadow economy can only be achieved when “other side” citizens, the ones with positive attitude to tax evasion, are taken into account. Perception of tax morale is shaped by internal factors of a particular citizen (background, values, social views) and external (e.g. clarity on governmental tax spending and beliefs in corruption). While perception of external side is influenced mostly by explicit actions of government (duly highlighting specifics of governmental spend), internal side of citizens is driven by their values and beliefs – and here is where behavioural economics can give us a hand to design impact aligned with these values.

cameras will impact the speed in certain road sections it will not significantly decrease the average speed on other roads, as it will not change the attitude to fast driving or even make this activity even more exiting as they will believe it to be unfair and restrictive. A deeper look into individual’s motives is required (Exhibit 4). To ultimately impact the behaviour, we have to start with root behind it – with individual values forming beliefs that lead to participation in unwanted activities. Underlying values of citizens have to be taken into account so that to accomplish the governmental aim. Gradually changing the individual’s beliefs will eventually nudge them to participate less in such activities. Same principles apply to tax morale – carefully changing attitudes to tax evasion by exemplifying their detrimental nature will ultimately decrease shadow economy participation. No flagrant bans and prohibitions are required, but only progressive nudges to underlying values based on one’s background.

Trying to directly influence behaviour of individuals will not only be ineffective, but will also cause resistance and even more fear and defensiveness. Going back to the example with fast car driving, putting speed

Exhibit 4 In order to change behavior one has to start with values1 Behavior Behavior intentions Attitude and norms Value orientation Values

1 – Jones, N. A., S. Shaw, H. Ross, K. Witt, and B. Pinner. 2016. The study of human values in understanding and managing social- ecological systems. Ecology and Society 21(1):15.

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What was our methodology1 Recommendations were formulated in 3 phases – modelling, quantitative and qualitative research STEP 1

STEP 2

STEP 3

Data gathering and modelling

Quantitative research

Qualitative research

MIMIC model was created based on available data, which allowed to identify the drivers of shadow economy and estimate its size for studied municipalities. More specifically, indexes of shadow economies of border and inland towns were created – so that to validate the drivers of shadow economy and adapt them to specific municipality profiles. To accomplish these activities, process included several stages: 1. Border towns were identified that were affected mostly by illegal trade; 2. Available data was gathered from various sources; most important indicators were combined and short-listed based on statistical approaches; 3. MIMIC modelling was executed, which allowed to calculate shadow economy indexes taking into account various statistical indicators.

190

EU/NON-EU TOWNS ANALYSED

85.000+

Face-to-face surveys were launched in each studied municipality – so that to evaluate attitudes of inhabitants to causal variables of shadow economy (derived in Phase 1) and formulate preliminary hypotheses on how to decrease the shadow economy size. Quantitative approach included several steps: 1. Preparation of attitudinal questionnaires based on the shadow economy drivers, tailored to a specific country profile; 2. Launch of quantitative surveys in each studied municipality (face-to-face interviews); 3. Analysis of results from perspective of: • Attitudes and beliefs impacting shadow economy • Profiles of particular towns based on attitudes • Formulation of hypotheses to decrease shadow economy.

Tests of initial hypotheses and recommendations were conducted via deeper customer interactions (focus group discussions) and verification sessions with experts. Additionally, expert knowledge and know-how were applied to enhance formulated recommendations. Qualitative research consisted of: 1. Preparation and conduct of focus groups in EU border towns – deep discussions to understand in details reasoning behind responses in surveys; 2. Formulation and shortlisting of recommendations based on focus group feedback; 3. Expert sessions to evaluate existing recommendations, adaptation of actions based on expert feedback and know-how; 4. Finalisation of recommendations to specific municipalities.

FOCUS GROUPS CONDUCTED CITIZEN INTERVIEWS CONDUCTED

6.400 INTERVIEWS 1.400 HOURS

20 GROUPS 40 HOURS

TOTAL DATA POINTS ANALYSED

EXPERTS INVOLVED

30 EXPERTS 1 – comprehensive methodology description is available at technical report

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Estonia – overview

Shadow economy in Estonia can be decreased by improving safety and credit/debit card ownership Narva Sillamäe

24% Shadow economy index of the border municipality as % of its economy 24% Shadow economy index of the corresponding inland municipality as % of its economy

33%

SILLAMÄE Population – 13.700 Monthly earnings – 865 EUR Unemployment rate – 12,4% Inland match – Tartu

31%

ESTONIA Population – 1.318.705 Monthly earnings – 1.271 EUR Unemployment rate – 5,3%

NARVA Population – 58.200 Monthly earnings – 817 EUR Unemployment rate – 12,4% Inland match – Rapla

33% 24%

COUNTRY PROFILE IN RELATION TO SHADOW ECONOMY1 Expenditure-driven Factors of Shadow Economy Attitudinal drivers Of Shadow Economy

Shadow economy can be decreased by: • Spending more of municipality budget money on public order and security, healthcare and economy as a whole Shadow economy size will decrease if: • Perception of safety will increase • Ownership of credit/debit card will increase

Ways how goods are smuggled

• •

By hiding smuggled goods in a car or a truck By bypassing the borderline and carrying it in backpacks or clothes

Routes of smuggling

Border checkpoints (Ivangorod) – smuggling or by making deals with officials

1 – comprehensive methodology description with profound explanation how these statements were obtained is available at Technical report

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Estonia –

Recommendations regarding communication, administration, education and law

Communication Campaigns on individual benefits generated by payments of taxes: 1. Health insurance; 2. Pension; 3. Paid holidays; 4. Sickness/maternity leave; 5. Ability to get loan. Information campaigns on safety of credit/debit cards payments (in partnership with operating banks). Campaigns on actions taken to increase public safety. Information campaigns on non-verified quality of illegal cigarettes – potential danger to people health (possible partnership with legal cigarettes producers).

Administration Initiatives to increase public safety – focusing on homeless, mentally ill people, young people gangs, drug addicts and alcoholics on the streets by decreasing their visibility in the town. Initiate changes in the administration of the school – attract more teachers who speak Estonian. Initiate negotiations with local banks for longer working hours in banks and more ATMs in the places, which have high flow of citizens. Initiate inhabitants of the city to declare their living place (e.g. offering some free public services, events for inhabitants that are official city residents).

Education Career development – provide counselling and coaching on requalification of unemployed specialists or post-graduates, and increase the availability of education on areas of specialization that satisfies market needs.

Compliance with law Information campaigns on the consequences of non-compliance with national legislation (e.g. penalties for receiving envelope salary).

Primary recommendation

Secondary recommendation

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Latvia – overview

Rezekne has the highest shadow economy index of 33%

Alūksne

Ludza Rezekne Daugavpils county Daugavpils

Kraslava

24% Shadow economy index of the border municipality as % of its economy 24% Shadow economy index of the corresponding inland municipality as % of its economy

ALŪKSNE Population – 15.600 Monthly earnings – 554 EUR Unemployment – 7,4% Inland match - Talsi DAUGAVPILS COUNTY Population – 22.900 Monthly earnings – 558 EUR Unemployment – 8,0% Inland match - Cesu

26% 33% 32% 23%

DAUGAVPILS Population – 85.900 Monthly earnings – 601 EUR Unemployment – 5,2% Inland match - Liepaja KRASLAVA Population – 15.900 Monthly earnings – 558 EUR Unemployment – 8,5% Inland match - Jekabpils

28% 24% 26% 31%

LATVIA Population – 1.953.200 Monthly earnings – 738 EUR Unemployment – 8,1% LUDZA Population – 13.300 Monthly earnings – 553 EUR Unemployment – 12,3% Inland match - Jūrmala REZEKNE Population – 29.300 Monthly earnings – 639 EUR Unemployment – 7,4% Inland match - Stopinu

27% 23% 33% 22%

COUNTRY PROFILE IN RELATION TO SHADOW ECONOMY1 Expenditure-driven Factors of Shadow Economy Qualitative drivers Of Shadow Economy

Shadow economy can be decreased by: • Spending more of municipality budget money on public order and security, education and economy as a whole Shadow economy size will decrease if: • Satisfaction with spending on economy to improve it will increase • Perception of citizens of tax evasion will improve from current “moneysaving” position to gratitude towards benefits provided due to taxes paid

Ways how goods are smuggled

• •

By hiding smuggled goods in a car or a truck By smuggling goods in a train

Routes of smuggling

Border checkpoints (Terehovo, Grebneva) – smuggling or by making deals with officials 1 – comprehensive methodology description with profound explanation how these statements were obtained is available at Technical report

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Latvia –

Recommendations in relation to communication, administration and education Communication Communicate existing improvements in long-term infrastructure (new buildings, roads, tourism, EU projects), highlight improvements in tangible facilities (playgrounds, security cameras in the city). Communicate actual examples of support by municipality: 1. Communicate how quality of life has improved over time 2. Show real examples of supported individuals, communicate how this support was done and why. Communicate budget and economy splits for development of economy to engage citizens more actively. Initiate campaigns on individual benefits generated by taxes: 1. Highlight the notion that paying taxes creates an image of a responsible citizen, patriot; 2. Highlight benefits of public transport, education and healthcare which arise due to taxes.

Administration Improve safety in the municipality: 1. Increase visibility and activity of police; 2. Implement preventive measures against vandals and street gangs. Actively engage with youth: 1. Look for jobs that would be interesting for youth; 2. Support new families at the beginning of their life together. Improve accessibility to city for families who live in rural areas. Optimize administration procedures (e.g. decrease level of bureaucracy in the regulatory system). Support local entrepreneurs in development of their business (e.g. provide co-working facilities). Develop hubs and co-working spaces so that to support technical innovations and focus on providing attractive conditions for young people to start their business.

Education Improve and modernize teaching process by providing modern equipment, making learning process less formalized

Primary recommendation

Secondary recommendation

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Lithuania – overview

Šalčininkai has the highest shadow economy index of 38,9%

Visaginas

Švenčionys

Marijampolė Alytus

Šalčininkai

Druskininkai

24% Shadow economy index of the border municipality as % of its economy 24% Shadow economy index of the corresponding inland municipality as % of its economy

MARIJAMPOLĖ Population – 56.400 Monthly earnings – 626 EUR Unemployment – 5,1% Inland match – Panevėžys ALYTUS Population – 53.600 Monthly earnings – 657 EUR Unemployment – 6,7% Inland match – Kaunas

28% 26% 25% 20%

DRUSKININKAI Population – 20.200 Monthly earnings – 600 EUR Unemployment – 5,9% Inland match – Prienai ŠALČININKAI Population – 32.000 Monthly earnings – 527 EUR Unemployment – 6,9% Inland match – Rietavas

29% 34% 39% 30%

LITHUANIA Population – 2.810.865 Monthly earnings – 885 EUR Unemployment – 9,1% ŠVENČIONYS Population – 24.900 Monthly earnings – 592 EUR Unemployment – 5,6% Inland match – Ukmergė VISAGINAS Population – 19.500 Monthly earnings – 779 EUR Unemployment – 8,2% Inland match – Jonava

33% 30% 22% 23%

COUNTRY PROFILE IN RELATION TO SHADOW ECONOMY1 Expenditure-driven Factors of Shadow Economy Attitudinal drivers Of Shadow Economy

Shadow economy can be decreased by • Decreasing municipality spending on general government services as well as investmentы in fixed tangible assets Shadow economy size will decrease if: • Attitude towards tourists visiting particular municipality will increase • Preference for legal income over envelope wage will increase due to understanding that municipality will help only when problems are serious

Ways how goods are smuggled

• •

By hiding smuggled goods in a train, a car or a truck By smuggling goods through forests and waterways

Routes of smuggling

In Šalčininkai respondents were particularly sensitive to smuggling related questions 1 – comprehensive methodology description with profound explanation how these statements were obtained is available at Technical report

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Lithuania –

Recommendations regarding communication, policies, administration and law Communication Local information campaigns on municipality tax expenditures by showing specific tangible cases (e.g. infrastructure development: new/renovated roads, renovated school/hospitals, etc.) Communicating about the benefits generated by tourism to the local community: 1. New work places; 2. Income to the budget; 3. Infrastructure development. Campaigns that expose social services provided for disadvantaged people or for those who reached “the bottom” (e.g. alcoholics) only. Information campaigns on the consequences of non-compliance with national legislation (e.g. penalties for receiving envelope salary, tax evasion). Campaigns on individual benefits generated by legal income: 1. Health insurance; 2. Pension; 3. Paid holidays; 4. Sickness compensation; 5. Ability to use legal procedures if employer is insolvent. Campaigns on the importance of morality for the development of society – link between people willingness to be “clean” through working for “clean” employer. Local information campaigns on the use of public resources collected from taxes on education.

Administration Honesty in project implementation process – not to promise things that cannot be delivered. Transparency in municipality request submission and assistance processes. Induce social benefit receivers to work. Initiate organizational changes in the administration of the school – improvements of teachers’ competencies, motivations and attraction of young and inspirational staff to work at school. Make initiative to support families with kids bellow poverty line. Create more unpaid extracurricular activities for children personal development (e.g. leadership basics, logic).

Compliance with law Eliminate unequal treatment (e.g. all children at school need to have the same opportunity to participate in activities offered) and prevent bullying in schools Review policies how municipality government are working with net contributors to the budget, not net receivers. Primary recommendation

Secondary recommendation

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Romania – overview

Shadow economy can be decreased by spending more on fuel and energy sector Sighetu Marmației

Botoșani

Rădăuți

Satu Mare

Iași Huși

24% Shadow economy index of the border municipality as % of its economy 24% Shadow economy index of the corresponding inland municipality as % of its economy

SATU MARE Population – 122.600 Registered unemployment - 0,2% Inland match – Fălticeni SIGHETU MARMAȚIEI Population – 44.100 Registered unemployment - 0,8% Inland match – Focșan

34% 38% 37% 39%

RĂDĂUȚI Population – 33.200 Registered unemployment - 0,6% Inland match – Onești BOTOȘANI Population – 122.400 Registered unemployment – 0,6% Inland match – Târgu Mureș

36% 36% 37% 30%

ROMANIA Population – 19.638.000 Monthly earnings – 887 EUR Unemployment – 4,6% HUȘI Population – 30.500 Registered unemployment - 0,9% Inland match – Sibiu IAȘI Population – 363.300 Registered unemployment - 0.3% Inland match – Brașov

38% 32% 32% 32%

COUNTRY PROFILE IN RELATION TO SHADOW ECONOMY1 Expenditure-driven Factors of Shadow Economy Attitudinal drivers Of Shadow Economy Ways how goods are smuggled Routes of smuggling

Shadow economy can be decreased by: • Spending more of municipality budget money on fuel and energy, housing and communal economy Shadow economy size will decrease if: • Satisfaction with quality of transport will increase • Preference for legal income over envelope wage will increase due to increased payments via banking card (e.g. via cash back programs) •

Absolute majority mentioned cars as a way how goods are being smuggled

Border checkpoints (Albita, Stefanesti, Stanca Costesti, Sculeni, Targu, Frumos, Helmeu) – by hiding smuggled goods in a car 1 – comprehensive methodology description with profound explanation how these statements were obtained is available at Technical report

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Romania – output

Recommendations regarding communication, development, administration, education and law Communication Campaigns on individual benefits generated by paying taxes: 1. Health insurance; 2. Pension; 3. Ability to get loan. Information campaigns on the use of public resources collected from taxes on public investment/ services: education, health, social, local/public infrastructure. Transparency in public spending by showing specific tangible cases (e.g. infrastructure development: new/renovated roads, renovated school/hospitals and etc.). Information campaigns on national and local legislation (e.g. excise duty on cigarettes) and consequences of non-compliance (fines for taking envelope salary, buying smuggled goods). General information campaigns on the magnitude of the smuggling phenomenon and law violations and it consequences for the well-being of society.

Administration Transparency of public expenditures. Highlight what kind of things have been bought, for how much and from where. Honesty in public communication – not to promise things that cannot be achieved. Participatory budget/public debates related to opportunity and the need for public spending.

Compliance with law Anti-corruption campaigns for medical system (e.g. hotline to report about corrupted doctors could be established). Anti-corruption campaigns and remuneration of the whistle-blowing practice (offering a reward to those who provide information about corruption acts). Promoting campaigns done by law enforcement/ inspection/ control authorities (border police, local police, financial department, labour Inspection, etc.).

Development Support for local entrepreneurs – creating jobs by harnessing local opportunities. Tourism infrastructure development (promotion, information, connection, etc.). Career development – counselling and coaching (transition to a better paid job).

Primary recommendation

Secondary recommendation

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Final words and next steps About the study The study conducted by PMI and CIVITTA included a comprehensive analysis of shadow economy, its drivers and perception in border-line EU countries, that are affected mostly by illicit trade from CIS. Numerous insights were obtained and taken into account to provide highly elaborated recommendations tailored to specific municipalities based on their background to tackle shadow economy. This report is a shortened version of a Technical Report, which contains far more descriptive methodological approach and detailed sources of each recommendation. If you are interested in more specifics of the conducted Study, please directly write a request to one of our offices and we will shortly send you the full Technical Report - you can find our contacts on the next page. About the recommendations As per provided recommendations, we truly believe in their practical value of changing attitudes of citizens to the problems of tax evasion and, therefore, of shadow economy. Recommended actions in all spheres were not only based on data, statistical indicators, responses of citizens in surveys and focus groups, but on feedback of leading experts and scholars in problems of shadow economy, as well as politicians, deeply involved in day-to-day management of issues that arise due to desire to participate in shadow economy. About the next steps The next steps that naturally ensue from the conducted report are concentrated around implementation and facilitation. Implementation of the recommended course of actions in communicative, administrative, educational and other preventive measures to decrease shadow economy size depends now not only responsible politicians, but on the actions of particular individuals, contributors to prosperity of a studied country. Working jointly with authorities, in a sincere and frank way to achieve a greater goal, will greatly reinforce the recommended course of actions and skyrocket the forthcoming of better, efficient, and prosperous society, not darkened by a spacious loom of shadow economy.

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CIVITTA INTERNATIONAL Riia st. 24a, 51010, Tartu, Estonia, +372 735 280 2 info@civitta.com

CIVITTA LITHUANIA Gediminas Ave. 27, 01104 Vilnius, Lithuania, +370 685 266 80 info@civitta.lt

CIVITTA LATVIA Spīķeri, Maskavas iela 6, 1050 Rīga, Latvia +371 277 055 85 info@civitta.lv

CIVITTA ROMANIA Belgrad st. 10, 2nd floor 011805, Bucharest, Romania +403 180 535 88 info@civitta.ro

CIVITTA ESTONIA Lõõtsa st. 8, 11415 Tallinn, Estonia +372 646 448 8 info@civitta.ee

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Set of substantiated guidelines for investment strategy for goverments  
Set of substantiated guidelines for investment strategy for goverments  
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