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The informal economy in Bulgaria: Policy responses in an economic crisis
 
The annual Hidden Economy Index in Bulgaria for 2008 has registered a moderate decline. In comparison, the index was 40% higher in 2002 when it was first constructed. The decline is due to the shrinking of the hidden economy in all its dimensions – tax evasion, hidden turnover and employment. However, business perceptions regarding the extent of the hidden economy in Bulgaria have kept on rising since 2006. There is a major risk of a rise in the levels of hidden economic activity in Bulgaria with the increased risks of an economic slowdown or recession in most developed countries in the world, including the Euro zone.

The global financial and economic crisis is evolving into a global recession, which is expected to be the deepest and most prolonged in the last few decades. The risk of depression remains elevated. The way this affects the Bulgarian economy and society depends on a number of factors, including:
  • the local starting conditions, and
  • (in)adequacy of the local policy reaction.

  • Bulgaria has several strong starting conditions compared to the rest of the EU Member States from Central and Eastern Europe such as balanced public finances, including a low level of public debt, budgetary surpluses and a sound financial system which was not exposed to toxic assets. Nevertheless, Bulgaria, much like most of the other EU peripheral economies, remains excessively vulnerable to external shocks, especially to the ongoing credit crunch and recession in the Euro zone. The main vulnerabilities include the possible institutional uncertainty, higher levels of the hidden economy, corruption and crime, combined with a large external deficit, credit boom, overpriced (real estate) assets, high levels of private external debt (over 90% of GDP), loss of competitiveness, and limited, albeit increasing, local demand. In this situation, the sense of a lack of leadership on the part of the Bulgarian government in alleviating the negative effects of the crisis reinforces perceptions of institutional instability.

    Due to the deteriorating international economic environment, it is expected that pressures for the expansion of the hidden economy in its three main aspects will intensify:
  • social (a surge in subsistence farming, or the production of goods for personal consumption among the poorest and socially or economically excluded communities);
  • economic (pressures on the incomes of enterprises and households, combined with the weakening of control mechanisms, including in relation to the higher levels of administrative uncertainty due to the upcoming parliamentary elections and the expected decrease of budget revenues and the availability of public resources, will bolster incentives for tax evasion; and
  • criminal and oligarchic (reduced economic activity will lead to a greater dependence of firms on the government’s decisions, including in regard to public procurement and concessions, which will strengthen incentives for the redistribution of public resources by utilizing strong political connections. At the same time, the probable increase of unemployment, depending on the duration and depth of the crisis, will lead to the increase of labour supply for criminal organizations, including for VAT drain).


  • The effects of the crisis on the Bulgarian economy can be attenuated by the elaboration of a strictly implemented preventive, moderate, and mobilizing programme, which should include the following elements:
  • retaining the fiscal and financial stability of the currency board until Bulgaria becomes a member of the Eurozone;
  • maintaining a stable fiscal position by substituting the planned increases in fiscal expenditure for greater efficiency of public outlays, as well as by avoiding major changes in the revenue structure;
  • prudent fiscal policy is the main guarantee for sustaining the financial stability of Bulgaria and it should not be exposed to additional pressures;
  • seeking alternative solutions for assisting and restructuring the economy by emphasizing greater export competitiveness;
  • increasing the requirements for efficiency of the control and law-enforcement bodies;
  • seeking long-term support from the European Central Bank and the European Commission for the stability of Bulgaria’s fiscal and financial system.


  • Round table: The informal economy in Bulgaria: Policy responses in an economic crisis, 3 December 2008
    Presentation of Ruslan Stefanov, Coordinator, Economic Program, Center for the Study of Democracy, 3 December 2008
    Round Table Discussion: Grey Economy: Trends and Challenges, 27 May 2008
    Press-conference: Bulgaria’s International Competitiveness 2008, 14 May 2008
    CSD Brief No 13: Effective Policies Targeting the Corruption – Organized Crime Nexus in Bulgaria: Closing Down Duty-Free Outlets
    CSD Brief No 15: Levelling the Playing Field in Bulgaria. How Public and Private Institutions Can Partner for Effective Policies Targeting Grey Economy and Corruption
    CSD Brief No 16: Bulgaria and the Lisbon Strategy: Challenges and Opportunities
    Informal Economy topic
     
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