Lithuanian Free Market Institute (LFMI) introduces a new periodical publication “Lithuanian Shadow Economy“. The publication provides data about shadow economy in Lithuania and more specific data and insights in alcohol, fuel and cigarette markets. Figures indicate a growing trend of the Lithuanian shadow economy since 2008.

“In collaboration with state institutions and market participants, we released a new publication, in which data about Lithuanian shadow economy is provided. We define the shadow economy as economic activity (i.e. goods manufactured or services provided) pursued without applying applicable laws or requirements which is not officially recorded with the purpose of evading taxes or regulations. It is important that this publication provides an overview of the shadow economy in the markets of alcohol and fuel – there has not been much information on the topic before and it was very fragmented. Together with our partners, we also created a new assessment methodology of illegal alcohol market,“a senior expert of LFMI Vytautas Žukauskassays.

According to international studies, shadow economy was about 30 percent of GDP of in Lithuania in 2010. According to the latter indicator, Lithuania holds the 4th place among 31 European countries. According to the findings from the Survey of the Lithuanian Economy conducted by LFMI in July 2012, the share of the shadow economy in relation to GDP was growing rapidly since 2008 and accounted for as much as 28 per cent of the country’s GDP in 2010, followed by a slight decrease down to 26 percent during 2011 and 2012.

Investigation and calculations carried out by LMFI, show that in the market of fortified and strong drinks, illegal goods constitute 36 percent of the total market in 2012. In the market of cigarettes, the shadow market constitutes 29 percent. Illegal market of fuel reaches about 18 percent. The assessments of LMFI are based on surveys of heads of wards (the smallest administrative divisions of Lithuania), citizens, market specialists, previous investigations and the data from excised market participants.

Survey of heads of wards showed that in most Lithuanian wards, it is possible to buy illegal alcohol beverages. 60 percent of those who participated in the survey said that in their wards, it is possible to buy illegally produced alcohol. Only 17 percent argued that there is no illegally produced alcohol in their wards.

Investigation focuses on the reasons for shadow economy. The main reason for shadow economy is defined as the level of regulation and taxation.

“Taxation and regulation are legal inputs of activity. Therefore, the higher the taxes and more compulsory the regulation of those who are working legall, the greater incentive there is for market participants to avoid them and operate in the shadow,“V.Žukauskas says.

The extent to which the level of taxation and regulation affects a country‘s shadow economy depends on the country‘s economic situation and on the income and standards of living. In countries with higher income and living standard, citizens can devote a greater portion of their income to other things than just first necessity goods and services. The situation is different in low-income and low living standard countries, where increasing taxes and decreasing income, force population to find alternative ways to purchase goods, as cheaper goods and services in shadow economy.

“Even the same size of tariff tax can have a different impact on the shadow economy in countries with different income and standards of living. For example, although excise duties in Lithuania compared with other EU countries are not the biggest, Lithuanian population hardly purchases excisable goods due to lower living standards,“ LMFI expert said.

Tolerance of Lithuanian population to  the shadow economy also creates favorable conditions for its existence. The shadow economy is neither often condemned, nor rejected as an immoral activity in Lithuania. For example, from the data of population survey, 33 percent of the population of the country entirely justifies or tends to justify the illegal consumption of alcoholic beverages. Lower prices of fuel, cigarettes and alcohol in neighboring Belarus and Russia are conducive to contraband. High level of country‘s corruption reduces the risk and inputs of shadow activity – it is easy to bribe officers and contravene the law.

In the following publications, it is envisaged that an overview will be presented not only of alcohol, cigarettes and fuel markets, but also other parts of shadow economy, as moonlighting and informal wage.

The full report is available here: LFMI – Shadow economy Lithuania 2012.