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The phenomenon of informal economy: example of Serbia in the 2000s

Author: Pavel Dubrouski

“The devastating 1990s”
After beginning of the collapse of Yugoslav federation in early 1990s accompanied by wars, sanctions, bombardment, large-scale economic mismanagement, lack of adequate reforms and general widespread chaos economy of Serbia fell into sharp decline. All basic macroeconomic indices deteriorated drastically while ordinary people could barely make ends meet. As statistics illustrates, industrial activity in the country fell by 50 % during the first half of the 1990s and per capita GDP plummeted to 1969 level. Open unemployment and underemployment that originated in poor condition of industrial sector were exacerbated by the influx of nearly 700 000 refugees from other ex-Yugoslav republics. In such dramatic circumstances the further development of informal and criminal economy was particularly remarkable since for many people participation in them was the only way to survive. As a result, over the 1990s the ratio of informal economy to registered GDP in Serbia was approximately one-third.

“The disappointing 2000s”
After political changes in early 2000s and consolidation of power by new democratic government the economic reform package was launched, being aimed at accelerating the transition to a market economy. However, the course of transition was marked by numerous delays, impediments and obstacles, and large informal sector was undoubtedly one of the main causes.

The basic characteristic of informal sector is so-called informal employment meaning that a person officially registered as unemployed in fact might have a job. The case of Serbia was particularly conspicuous. According to the estimates, over the period between 2002 and 2008 the average rate of informally employed workers was about 600 000 people (or every fourth worker). Moreover, general tendency in the development of informal employment was progressive: while in 2002 it was at the rate of 30 % of total labor force, the relative indicator from 2008 was 35 %. The most affected branches were construction, trade, tourism and catering, handcraft and service sector, etc.

The causes for existence of such a large informal employment were primarily related to failure of the government to organize an efficient and well-functioning private sector that was supposed to overtake a lion’s share of job creation task. Delays and miscalculations as well as generally poor implementation of privatization reform led to a simple inability of private sector to absorb much of the labor force available in the market. State enterprises also were incapable of fulfilling this task due to their terrible financial and technical condition. Social welfare system could hardly provide people with sufficient financial means to enable them to lead a normal live. Thus, most of the people had no incentive to join formal sector.

It is not surprising that such state of affairs did not contribute to fast and easy transition of Serbia to market economy. The informal sector that was expected to diminish has expanded even more in fact, impeding a general pace of this process. Precisely due to this fact large informal sector was very often blamed by Serbian politicians and economists for its counteracting the reforms and doing harm to the economy of the country.

Informal economy: contagion or lifebelt?
Like in case of other countries with similar experience, the most common negative effects of informal economy in Serbia at that period were slower economic growth, insufficient tax revenue, corruption, unhealthy relationship between state and its citizens, distortion of ethical values in society, etc. From microeconomic perspective large informal economy led to the situation when small and medium firms tended to run their businesses informally in order to reduce labor costs. As a consequence, inefficient use of resources was in place.

However, from the viewpoint of average citizens who found themselves on the edge of poverty after the enforcement of sweeping reform package informal sector became an important safety net. As it was mentioned earlier, participation in informal economy was for many the only way to survive. This fact must be taken into consideration when the effects of informal sector are discussed. Even if from long-term perspective informal economy is widely believed to be harmful, its role in resolving short-term problems of ordinary citizenry cannot be underestimated. This statement could be applied to Serbia where informal economy made it possible for many people to provide themselves with basic things during times of hardship.

It seems that at this point when certain successes in transition had already been achieved, the main responsibility of Serbia’s government should be the enforcement of active and efficient measures to reduce the size of informal economy. The fulfillment of this task might help to tackle other problems related (e.g. corruption). At the same time it needs to be emphasized that total elimination of informal sector is impossible due to the fact that for some reason it exists even in the most developed economies. Thus, its significant reduction must be the priority of Serbia’s government in its striving for better Serbia.

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About Łukasz Fleischerowicz