Monetary and fiscal policy during 2009 in Albania

Informal Economy

Informal Economy

Informal Economy

These ten years of transition from a centralized economy to a market economy can be briefly described as a transition from an almost entirely state-owned economy to an economy where the private sector plays a dominant role. The experience of transition countries shows that the degree of formalization of the economy has been positively linked to how the economy has been reformed, and democratic and regulatory institutions have stabilized. In particular, institutional weakness can be considered one of the primary sources of the economy’s informality in these countries.

These countries’ experience, including Albania, shows that the informal economy and corruption go hand in hand, and there is a strong positive correlation between them. Informal economy means non-compliance with the rules. It includes both legal but unreported (or unaccounted) activities as well as illegal activities. Generally, types of the informal economy can be classified according to the rules that are violated. The informal economy is challenging to measure. This makes it necessary to use several methods at once and compare the respective results. Studies on the casual economy level in Albania give different figures, which differ significantly from each other.

There is a close connection between the economy and informal activities, when the state begins to falter and especially in the absence of contracting between social partners, which are essential tools in guaranteeing the mechanisms that properly regulate the labour market, that guarantee participation, control, seriousness, fair implementation of the law without distinction, hinder clientele, but on the other hand make it possible to limit unfair competition and avoid liabilities, which are with very negative consequences, for a country.

In this way, the study tries to make a modest contribution to the national strategy for poverty reduction to realize the Millennium’s most important objectives. This study’s primary purpose is to analyze informality phenomena, particularly black labour, including the three social partners who have been an active part of this study and have given their direct contribution, which provides this study with high credibility. A significant obstacle to increasing budget revenues is the dimensions of the informal economy. In various materials, the figure ranges from 40 to 60 per cent of GDP.

It should be noted that so far, there is no complete study of the size of the informal economy, in all the dimensions of its occurrence. Informal labour market studies provide a figure of approximately 25 per cent, a relatively significant figure for the dimensions of the total labour market. Given that these estimates only include undeclared employment, and it is even more difficult to fully estimate due to the under reporting of wages to workers involved in the system, this phenomenon’s dimensions are even more significant. Consequently, it is also an essential source of increasing social security revenues, which have attracted a considerable share of state transfers (about 2% of GDP). These funds could be reallocated to other areas of the social sector and social protection. Fiscal evasion

(avoidance of private entities from paying customs duties), in addition to significant effects on the breakdown of the country’s economic structure and market distortions, has created an invaluable flow for the country’s finances. Even in this aspect, there are no accurate estimates of the degree of evasion. Aside from the anecdotal stories often rumoured in the press, sober assessments have not yet been made. Some research institutes estimate that the evasion figure goes to about $ 500 million a year. While the efforts have materialized in creating a fiscal, legal framework of advanced standards in the legislative aspect, the institutional reforms in developing a modern, efficient and transparent fiscal administration have proven to be much more difficult. It is for these reasons that the equality of entities in the payment of obligations is not observed. The media has given many examples of firms, often well-known ones, reporting losses for years, avoiding paying taxes.

Tax inspectors do not have the necessary authority to establish tax entities’ equality, and mechanisms have not been developed to ensure this equality, even for registered firms. At the same time, the number of firms conducting unregistered economic activities remains too high. Although it is difficult to quantify in figures, the fact that media outlets reflect (sporadic) actions of the tax police and seizures of such firms’ assets is evidence that sound control mechanisms are not developed. On the other hand, companies’ advance payment of profit tax seems to be a discriminatory procedure.

The firms complain that the amount of tax liabilities is based more on the budget revenue plan and not on the activity’s actual profitability indicators. VAT refunds continue to be a chronic problem, putting the activities of entities in liquidity difficulties. The balance sheet audit system has continued to remain chronically abusive, creating challenges for the tax authorities. Audit by the tax authority is impossible to cover 100 per cent of registered firms.
On the other hand, accounting experts’ responsibility in certifying the balance sheets of firms is profoundly underdeveloped. Customs procedures create large spaces for subjectivity by customs agents, which makes additional costs for the business.

Overall, the climate of cooperation between tax and customs institutions and the company continues to be distrustful. On the one hand, entities complain that fiscal authorities obstruct them through subjective, arbitrary and discriminatory procedures. On the other hand, many firms continue to carry out economic activity outside the budgetary system. The black economy is a complex of production, service and use of products and services openly avoid statistical records. This category includes undeclared work, such as paid work performed by the “unemployed”, pensioners, housewives, students, and the second undeclared work.

A type of hidden black economy is the criminal economy, which includes illegal activities, such as smuggling, prostitution, games, drug sales, organized theft, etc. Sectors of the economy where Illegal employment is encountered at relatively higher levels are a) Construction sector; b) Small and medium production; c) Services sector; d) Transport; e) Trade; f) Private fishing activity; etc. The hidden economy and undeclared work distort statistics, directly proportional to its relative size, making it less accurate to analyze the real economic situation.

However, the difficulties in giving a relatively straightforward concept and classification are numerous for hidden and uncontrolled activities. They include groups of activities and groups of people, very different from each other. Actions in the informal sector often interact with each other and create new forms of production-consumption relations. In reality, we are dealing with unaccounted for unregistered, immeasurable activities, which are often based on models of cooperation, mutual assistance, invisible to the competent bodies.

The informal sector often creates special, reciprocal, complimentary reports, official production, labour, and financial markets. E.g. small manufacturing enterprises and small service companies, which are often a source of remote work, have a turnover very often associated with the formal economy. This is also one of the main reasons, which makes it challenging to define this sector accurately and especially its negative aspect, as the opposite of the formal one, which finds many obstacles: First is that most people live in a double ratio of daily work relationships, between the traditional and the informal sector. Secondly, the formal economy can offer more valuable products and has more efficiency.

The material informal economy systematically satisfies the current interests and social relations reciprocity, which the formally organized market can not realize. Third, the informal sector can not be defined as the opposite of the formal one, since they have as a standard thing market rules, despite the different intensity and spread. The Albanian labour market has undergone significant changes after 1991.

The economic transformation has undergone substantial changes in the structure of the production and employment sectors. The development of the private sector has become parallel with the formalization of the economy in general and undeclared work. The Albanian state has left room for the informal market’s flourishing, which is of considerable value in other countries of south-eastern Europe. This graph presents the reasons for the informal economy.

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