RIGA, May 16 (LETA) - In 2021 the shadow economy in Latvia grew by 1.1 percentage points, reaching 26.6 percent of the national gross domestic product (GDP), said Arnis Sauka, director of the Sustainable Business Center of the Riga School of Economics (SSE Riga), at the annual shadow economy conference today.

At the same time, Lithuania reported a rise of 2.7 percentage points to 23.1 percent of GDP, while Estonia reported a 2.5 percentage points rise in shadow economy to 19 percent of GDP.

In monetary terms, the total lost tax revenue from the shadow economy in Latvia exceeds EUR 2.7 billion. Due to the Covid-19 pandemic, the size of the shadow economy in 2021 has also increased in Lithuania and Estonia.

According to the calculations of the shadow economy index, which have been carried out in the Baltic states since 2009, the level of the shadow economy in Latvia tended to decrease in 2015 and 2016, when it reached 21.3 percent and 20.7 percent of GDP, respectively. While in the following years, the size of the shadow economy in Latvia either did not change significantly or increased: In 2017, the shadow economy in Latvia was 22 percent of GDP, in 2018 - 24.2 percent, in 2019 - 23.9 percent, in 2020 - 25.5 percent, but in 2021 - 26.6 percent of GDP.

An increase in the shadow economy in 2021 is also observed in Lithuania and Estonia. Namely, compared to 2020, the shadow economy in Estonia increased by 2.5 percent in 2021, reaching 19 percent of GDP. In Estonia, this is the highest figure of the shadow economy since 2012, when the shadow economy reached 19.2 percent of GDP. 

While in Lithuania, the size of the shadow economy increased by as much as 2.7 percent in 2021, reaching 23.1 percent of GDP. In Lithuania, this is the highest indicator of the size of the shadow economy since 2009. Thus, most likely, due to the Covid-19 pandemic, the shadow economy in 2021 has increased in all three Baltic countries. Although the difference between the size of the shadow economy in Latvia and Lithuania is relatively smaller than in previous years, it is still highest in Latvia.

Sauka noted that that policy makers, especially in Latvia, have not done well in reducing the shadow economy even in the years of economic growth, before the pandemic. This year, in addition to the Covid-19 pandemic, there has also been uncertainty, incl. economic uncertainty caused by the war Russia has started in Ukraine. 

"In such very difficult circumstances, the reduction of the shadow economy in the coming years should not be forgotten, and new, more modern solutions should be found to reduce it. Because still great resources are wasted in the shadow economy that would be useful both for strengthening national defense and for health, education and science, social protection and other areas," Sauka said.

The results of the study show that the most important component of the shadow economy in Latvia, Estonia and Lithuania in 2021 was envelope wages, which account for 46.2 percent of the total shadow economy in Latvia, 42.7 percent in Estonia and 38.8 percent in Lithuania.

In 2021, undeclared income made up 30 percent of the shadow economy in Latvia, and undeclared employees accounted for 23.8 percent. In 2021, unreported employees, in Estonia and Lithuania, respectively, accounted for 30 percent and 23.5 percent of the total shadow economy, while undeclared income accounted for 27.2 percent and 37.7 percent of the total shadow economy.

According to the results of the study, in 2021 compared to 2020, the share of the average salary that entrepreneurs hide from the state, or the envelope wages, increased in all three Baltic countries. In Latvia, however, this increase is relatively small, only by 0.3 percent, with envelope wages increasing to 23.8 percent in 2021. In Estonia, the amount of envelope wages in 2021 has increased by 3.8 percent, reaching 17 percent, but in Lithuania by 0.9 percent, increasing to 16.2 percent. As professor Sauka emphasizes, the amount of envelope wages is still significantly higher in Latvia, which largely explains the differences in the overall shadow economy between the Baltic states.

An increase in all Baltic countries is also observed in the area of non-disclosure of income (profit), as in Latvia the average share of income hidden by entrepreneurs from the state increased by 0.6 percent in 2021, reaching 18.6 percent, in Estonia - by 0.5 percent, reaching 12.1percent, but in Lithuania - by 1 percent, reaching 16.8 percent. At the same time the amount of non-disclosure of employees (average percentage of the total number of employees employed without a contract) in 2021, compared to 2020, slightly decreased in Latvia and Lithuania, respectively - by 0.2 percent, to 10.7percent and by - 0.4 percent to 8.9 percent. In Estonia, the non-disclosure of employees in 2021 increased by 1.5 percent, reaching 10.5 percent, which is the highest figure since the shadow economy in Estonia has been measured.

The results of the study indicate that the overall level of bribery (as a percentage of the income unofficially paid by businesses as ‘grease money’) has increased in all Baltic countries in 2021, compared to 2020. The largest increase is observed in Lithuania, where this indicator has increased by 3.9 percent, reaching 12.3 percent. In Estonia, general bribery has increased by 0.6 percent, reaching 7 percent in 2021, and in Latvia - by 0.9 percent, rising up to 9.2 percent. The level of general bribery in Latvia has not been so high since 2014, in Lithuania since 2015, but in Estonia this is the highest indicator since this study has been made. The results of the study also show that in all the Baltic states in 2021, compared to 2020, the average percentage of the contract amount to ensure public procurement has increased. Namely, in Latvia there is an increase of 1.1 percent, reaching 8 percent, in Lithuania - by 2.1 percent, reaching 7.7 percent, but in Estonia - by 0.1percent, with this component of the shadow economy increasing to 4 percent.

The highest levels of shadow economy in Latvia is observed in Riga Region, Kurzeme and Zemgale. In terms of sectors, the highest share of shadow economy in Latvia still comes from the construction sector.

Evaluating the latest data on the shadow economy, professor Sauka acknowledges: “Although the trends are generally negative, given the context, the growth of the shadow economy in Latvia, Estonia and Lithuania in 2021 could have been higher. The shadow economy is likely to continue to grow over the next 2-3 years, especially if adequate resources are not devoted to reducing it. In this regard, co-operation between various institutions with an aim to reduce the shadow economy should be further strengthened in Latvia, especially at the operational level." 

"It would urge policy makers not only to concentrate resources on reducing the shadow economy in the most problematic areas, but also to take a comprehensive approach to reduce the shadow economy by introducing a number of interrelated measures. The shadow economy is a complex phenomenon that cannot be reduced by one, single measure. We should not forget about raising the government's reputation among entrepreneurs and the population, incl. the publicly fair trial of corruption and other economic crimes,” Sauka said.

SSE Riga carries out its ‘Shadow Economy Index for the Baltic Countries’ study once a year, surveying businesses in the Baltic states. The authors of the study are the head of the SSE Riga Centre for Sustainable Business, professor Dr Arnis Sauka and SSE Riga professor Dr Talis Putnins. In order to estimate the size of the shadow economy as a percentage of GDP, the index includes calculations of undeclared business income, unregistered/hidden employees, as well as undeclared envelope wages.