The underground economy in Lithuania

Nowadays the black market or underground economy exist in each country despite its size and has a significant influence on its economic development, habitant’s welfare and policy. Systems of law and tax can not be effective with a high level of the black market. According to Austrian ecomonics professor Friedrich Shneider, Lithuania takes the 4th place in the European ranking of black economy in GDP.

The underground economy slows the growth of Lithuanian economy. Firstly, taxes constantly get bigger to official assessable economy. Members of black economy avoid them and in this way the budget of the country is reduced. Secondly, informal production, incomes and expenses do not allow accurate rates of the country’s economic condition and the development of a rational economic and regulation policy. Such economy distorts official statistics data. If the country’s policy is based on incorrect information, it will be unreliable or simply irrational. Lithuanian economic growth is hampered by the effect of black economy.

In terms of data, the underground economy has been steadily increasing during the last decade. The black market has grown more than three times. The informal incomes ammounted about 2000 mil. LTL (~580 mil. EUR) in 2001 and the black  market rose to 7000 mil. LTL (~2000 mil. EUR) in 2011. Permanent changes of tax system and regulation of government had a significant impact on the growth of black economy.

The size of the shadow economy as a percentage of GDP in Lithuania shows a different shade of variation. Considering the level of black economy in Lithuania from 2000, there is an increasing trend. It can be noted that the high level of black economy (23% of GDP) at the beginning of this period was due to the country's historical situation. Lithuania regained its independence in 1990, but still had gaps on the law and judicial systems, as well as high levels of unemployment. However, the underground economy declined because of the economic situation’s improvement and increasing number of foreign investments. The level of black market accounted for  about 21% of GDP from 2001 to 2004. The greater reduction in the informal economy was after 2004. It reached 19% of GDP.

The main impact of the  underground economy had to do with entering the European Union. In this way, Lithuania had access to EU structural funds. Thus, new workplaces were created and the country’s economic situation was improved. The reduction in unemployment meant the reduction in incomes of the black market.

The lowest level of the shadow economy was in 2007 (17% of GDP). During the period of economic rise, Lithuania reached the lowest rate of unemployment (4.3%) and GDP was increasing. However, the economic situation deteriorated, when the global crisis began. The unemployment and taxes increased, at the same time GDP started to reduce.  These were the main reasons of the expansion of black economy. It reached 20% of GDP in 2008. The highest level of the shadow economy was recorded in 2010 and it was 27% of GDP. The average amount of unaccounted income was about 25% of GDP during the last two years.

The underground economy involves the exchange of goods and services in most economic sectors. The largest part (32%) of shadow economy consists of smuggling of cigarettes, fuel and alcohol. For example, from 20% to 30% of cigarettes are sold in the black market. The most popular cigarettes are cheap, low class brands, mainly produced in Russia, Belarus and Ukraine. According to unofficial data, in the internal market Lithuanian smugglers make profits of around 5 to 6 million EUR per year. The price of cigarettes can vary about three times. One pack of cigarettes cost about 3 EUR in the market while in the black market costs 1 EUR. In second place there is supplying of goods and services without paying taxes. It consists 25% of the underground economy. In third place (23%) there is illegal labor force and informal wages.

There are many ways to prevent the spread of the shadow economy in Lithuania. The government must carry a deep economic analysis in order to find out the reasons of black market existence and sectors with the largest unaccounted incomes. I supposed that the reducing of informal economy should not only interest the government or parliamentary, but also citizens of Lithuania. Habitants must understand that the shadow economy has an impact on their economic well-being. People need to realize that the support of the shadow economy is immoral. That is why the government should pay more attention on habitant education and prevention.

Karolina Zygmantaitė

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]