4th November 2023, Skopje – Opportunity grasped or profit lost? Informal economy is much more than that. It does not always bring individual benefits, still, it is detrimental to the public interest. It creates market inequality and distorts the principles of fairness and competition, becomes source of money for corruption, destroys government institutions’ credibility, thus decreasing citizens’ loyalty to the state and awareness for protection of public interest, as well as the feeling of personal responsibility in coping with this phenomenon. Hence, it becomes part of our everyday life and a systemic problem which cannot be resolved with short-term and partial solutions, but rather with systemic, consistent and sustainable ones, in particular solutions for formalization of the informal economy. Making any compromise with informal economy is a driver of lower economic growth and less public services, i.e. lower quality of life. Informal economy cannot be completely eradicated, but it can be constantly reduced!


Ahead of 2024 Budget: How to Generate More Revenues without Imposing New Taxes?


Informal economy is one of the largest structural obstacles to convergence between developing and developed economies, which also holds for the convergence between our economy and the European Union. Amount of tax revenues by fully formalizing the informal sector, without any changes to the tax policy, equals this year’s budget expenditures. In fact, although difficult to measure, informal economy, according to certain estimates, accounts for around 30% of our country’s gross domestic product. 2023 GDP is estimated at EUR 14.4 billion, hence size of informal economy would be around EUR 4.32 billion. According to rough estimates, it is additional EUR 795 million as annual inflows on the basis of tax revenues in the Budget. Putting it differently, this amount equals the funds needed for construction of highway sections on Corridor 8 or Corridor 10-d, four clinical centers or reconstruction of all school buildings in the country. Above figure can fully cover the 2023 projected budget deficit, with additional EUR 100 million remaining, i.e. if everyone pays their fair share of taxes, there will be no need for the country to borrow. Considering the numbers, ahead of the 2024 Budget, it is entirely justified to ask what the Government does to overcome this pressing issue, and what is one of the main obstacles to faster development of the Macedonian economy.

Organization for Economic Cooperation and Development (OECD) defines grey economy (“shadow economy”) most broadly, including all activities, legal or illegal, which are not reported and therefore go untaxed. A World Bank study narrows the definition of informality as market-based legal production of goods and services that are hidden from public authorities for monetary, regulatory, and institutional reasons. The informal economy reflects activities that, if recorded, would contribute to GDP, and does not cover illegal activities or household production (Schneider, Buehn, and Montenegro). Informal economy includes goods and services market, capital market and labour market which deliberately hide from the public institutions in order to evade paying PIT, VAT or other taxes, social security contributions, avoid observing labour market legal stipulations, such as minimum wage, working hours, stipulated remuneration, etc., or adhering to prescribed administrative procedures, such as statistical questionnaires and administrative forms. In short, “grey” is all that is lucrative, but not recorded in the system.


Every Fourth Individual Worldwide Makes Their Living in the Informal Economy


Grey economy is widespread and, according to latest International Labour Organization (ILO) data, around 2 billion people worldwide work informally. Still, incidence of informality varies from economy to economy, as per its specific characteristics, with high incidence in the undeveloped and the developing economic compared to the developed economies. Informal economy in the highly developed countries accounts for around 19% of GDP and 16% of employment, being almost twice as high in the developing countries. Countries with high percentage of informal economy experience reduced tax revenues as a result of tax base erosion. On the other hand, tax burden falls more heavily on entities which are part of the formal sector, which tax burden, by itself, is yet another reason pushing them to operate in the informal sector. A study carried out in 2018, taking series of data for 158 countries worldwide, shows that the smallest informal economies are Switzerland with 7.2% and Austria with 8.9% of GDP, the largest ones being Zimbabwe with 60.6% and Bolivia with 62.3% of GDP. Enste’s “The Shadow Economy in Industrial Countries” (2018), analyzing data about shadow economy in industrial countries based on macroeconomic data for the period 2003 – 2018, notes that shadow economies are much smaller in the economically advanced OECD countries than in Central and Eastern European countries, i.e. they are half their size.

Macroeconomic conditions in the country, transition, tax burden, heavier regulatory burdens, level of corruption, trust in the government, tax morale and administration are just few key factors affecting the incidence of informal economy in a country. Economies with larger informal sectors tend to have lower labour productivity, slower physical and human capital accumulation, limited access to financial resources and modest fiscal capacity of the state budget. Moreover, some empirical evidence show that informality is directly associate with income inequality and poverty. Firms operating in the informal economy tend to have weak capital accumulation, limited growth and their investment activity is subdued because of their fear and unwillingness to adopt technologies that would make them more visible to tax authorities.


Informal Economy Accounts for One Third of GDP in the Balkans


When talking about the region, i.e. countries on the Balkan Peninsula, number of studies and analyses show that informal economy on average accounts for about 30%. According to one of the most renowned studies prepared by Schneider, Buehn, and Montenegro (2010) in the respective area, over the period 1999 to 2007, informal economy in the region significantly decreased, however it is still high (Albania 32.9%, Bulgaria 32.7%, Greece 26.5%, Bosnia and Herzegovina 32.8%, Croatia 30.4%, Macedonia 34.9%, Romania 30.2%, Slovenia 24.7%, Turkey 29.1%).  It has to be pointed out that estimates vary over time, but the analyses and the methodologies used (direct survey-based approach or indirectly through an electricity demand approach, multiple indicators multiple causes, currency demand approach, etc.), but the estimates, in general, show that informal economy accounts for around one third of the output of these countries.


Informality in the Republic of North Macedonia


According to the latest institutional calculations of the Ministry of Economy, informality in the country accounted for around 30% of GDP at the beginning of the past decade. Some empirical studies, on the other hand, show that informal economy in the Republic of North Macedonia in certain time periods in the past accounted for even 40% to 50% of GDP. Based on an IMF study, in 2016, the informal economy represented around 37.6% of GDP in North Macedonia. Recent study on country’s informal economy was made by the World Bank, which estimated that grey economy accounted for 33.4% in 2018. Some empirical evidence of the academicians show that informal economy in the country ranged from 21% to 28.9% of GDP in the period 2019 – 2021. The results vary depending on the assessment method used, but, in general, grey economy is very difficult to measure. Results of the qualitative research “Perception and Citizens’ Attitude to Grey Economy” conducted by UNDP in 2022 show that citizens perceive informal economy to range between 20% and 40% of GDP.

When talking about informal employment, as one of the main segments of informal economy, calculations of the Ministry of Finance on the basis of data from the State Statistical Office show that around 84,000 people worked informally in 2022, being a considerable drop compared to 2017 (134,285 workers), however, it is still high. Data show that informal employment accounted for around 14% of the total formal employment in North Macedonia in 2022. From 2018 onwards, share of informal in formal employment started to decline. When demographic statistics are analyzed, men account for two thirds of informally employed persons, with women accounting for one third. The highest informal employment is registered among workers aged 35 to 44, while significant share of informally employed persons are also in the age group 45 to 54. Informal employment is most prevalent in agriculture, accounting for almost half of the informal workers, as well as in construction.

Various experience and many examples demonstrate how countries cope with the grey economy or how they approach formalization of the informal economy. As I wrote in one of the columns published back in August 2022, for the fight against informal economy to be successful, it is crucial to establish a system going by the following economic maxim:

“Not worthwhile to be part of the informal economy”


According to the economic logic, if we are to reduce the informal economy, we should make it economically “unattractive”. In other words, by making the informal economy unviable, interest in operating in this zone will be reduced. In economic terms, opportunity cost of informal economy should be increased, i.e. to increase the potential benefits foregone, the advantage they would have if operating in the formal sector. This can be achieved by increasing the costs of the informal sector or the risk of operating in the informal sector on one hand, and increasing the benefits in the formal sector, on the other. Disadvantages for those in the informal economy outweigh the benefits.


Systemic Issue Requires Systemic Solution


Informal economy has a negative impact on both macroeconomic and microeconomic level. At macroeconomic level, the informal sector erodes the tax base, thus the affecting fiscal sustainability and the investment activity, as well as other macro-fiscal policies. On the other hand, at micro level, it creates inequality on the market, affecting the development capacity of companies, their vulnerability in certain situations (as was the case with the pandemic when a certain number of entities could not take advantage of the government support and incentives due to their informal activities), as well as the entrepreneurship.

Informal economy is a systemic issue, which should be overcome in a systemic manner. Defining and detecting the roots of the problem is principal for its overcoming, followed by determination of the general and separate goals that need to be accomplished, creation of a framework for monitoring the realization of the goals and finally development of a specific action plan. This approach was applied by our Government when designing a strategy and action plan aimed at eradicating the informal economy.

Analysis was made with UNDP support, providing for detection of tall potential reasons triggering the informal economy in the Republic of North Macedonia, as well as labor market features and needs, usage of cash in business transactions, poor tax morale and tax discipline, high level of tolerance of informality, boosted competition and globalization, high levels of corruption perception existing in the Western Balkans, potential administrative burden as regards formalization, lower living standard and poverty rate. As for majority of the branches, the failure to issue a fiscal receipt is not considered to be a harmful and unacceptable practice. With respect to service providers, a large number of customers do not ask for a fiscal receipt to be issued, which they consider as a favor made to the respective company, thus, in return, they expect to receive a product/service at a lower price. In terms of wage, the practice of some of the businesses includes paying a part of the wage in hand, usually as a bonus or compensation for extra work hours.

Accordingly, the first Strategy and the related Action Plan were prepared, coordinated by the Ministry of Labor and Social Policy, covering the 2018-2022 period, yielding appropriate results in terms of detecting the informal economy, strengthening PRO capacities through cooperation with international organizations and twining projects, reporting of irregularities, optimizing the para-fiscal charges, digitalizing the activities, incentivizing the formalization of informal activities (such as electronic registration of seasonal farmers), campaigns and events for promoting the activities aimed at managing the informal economy, VAT refund to individuals, boosting the tax morale, and reducing tolerance of informality, brochures – manuals for entrepreneurs to start a business independently, e-registration of a new legal entity, etc.

In addition to the Ministry of Labor and Social Policy’ Strategy, in 2021, Ministry of Finance prepared, on the basis thereof, a 3-year Action Plan on Eradication of Informal Economy, ending in 2022, comprising six priorities with precise measures and activities: improving the process of measurement, monitoring and detection of the informal economy; providing stimulating activities aimed at formalization of the informal economy; raising awareness of the informal economy and boosting the tax morale; improving the inspection services and the punishment system; strengthening the legislation; and implementing measures for combating the informal economy by the Customs Administration. Ministry of Finance, in cooperation with UNDP and GIZ, successfully carried out some of the activities under the Action Plan, whereby other activities and measures have also been foreseen under the new 2023-2027 Strategy on Formalization of the Informal Economy, prepared by the Ministry of Finance, as well as the related Action Plan.


2023-2027 Strategy: Reduction of Informal Economy by 4 p.p.


Preparation process as regards the new 2023-2027 Strategy on Formalization of the Informal Economy, as well as the related Action Plan, was inclusive, covering a number of discussions with the key stakeholders, as representatives from the business sector, accounting associations and bureaus, audit houses, NGOs and other relevant actors.

As I indicated above, the informal economy percentage, as per the latest estimates resulting from the sophisticated World Bank models, points to 33.4% of GDP in 2018 (according to the Multiple Indicators – Multiple Causes (MIMIC) Model). Effective implementation of measures and activities under the 2023-2027 Strategy on Formalization of the Informal Economy and the related Action Plan is expected to provide for reducing the informal economy to 26% of GDP by the end of 2027.

Strategy rests upon two main areas: the system and the citizens. Its purpose is building a strong system that will help combatting the informal economy, while also boosting the tax morale among citizens and raising their awareness that by eradicating the informal economy, they invest in their own, as well as their children’s future.

Within the first area, the initial goal is increasing the efficiency of public institutions and improving the business environment in support of both reduced informal economy and intensified formalization process. This purpose incorporates measures for building an institutional infrastructure for detecting, monitoring and providing instructions for addressing informal activities, inter-institutional cooperation, providing statistical data and informal economy indicators that will be used for regular monitoring of the informal economy, as well as process digitization. In addition, intensive actions are taken for the purpose of improving the regulatory framework, particularly as regards ​​labor relations (the Law on Labor Relations was adopted as well as by-laws, followed by the adoption of modifications and amendments to the Law on Prohibition and Prevention of Performance of Unregistered Activities, the Law on Postal Services and the Law on Electronic Commerce, an analysis was made for licensing certain activities, by-laws for simplified employment of seasonal, periodical and temporary workers in the field of agriculture, tourism, hospitality industry and service activities, introduction of ID cards in construction, implementation of “e -invoice” project). One of the foreseen measures focused on strengthening the institutions’ capacities is also including the local government in the informal economy formalization.

National Council for Coordinating the Activities and Monitoring the Implementation of the Action Plan related to the Strategy for Formalization of the Informal Economy, was established. This inter-sectoral, inter-institutional body comprises 20 members, highest-level representatives from the institutions in charge of the activities geared towards reducing the informal economy, i.e. Deputy Prime Minister in charge of Economic Affairs, Coordination of Economic Sectors and Investments, Deputy Prime Minister in charge of Good Governance Policies, Ministers of Economy, Information Society and Administration, Labor and Social Policy, Agriculture, Forestry and Water Economy, Environment and Physical Planning, Transport and Communications, high officials of the Public Revenue Office, the Customs Administration, the Public Procurement Bureau, the Financial Police Office, the Financial Intelligence Office, the State Market Inspectorate, the State Labor Inspectorate, the Central Registry of the Republic of North Macedonia, the Inspection Council and the State Statistical Office State and the Governor of the National Bank, while Minister of Finance chairs and coordinates this body.

For the purpose of streamlining administrative procedures in support of the formal sector, as well as reducing the costs for founding micro and small-sized companies, one of the measures is the establishment of offices/centers for legal and economic counseling for registering micro and small-sized companies and starting business activities in the formal sector. Proposal was also made, in view of stimulating workers providing services for households (personal services and household services), as well as other economic entities to register their business activities.

Further actions will be taken for increasing the effectiveness and efficiency of inspection services in detecting and preventing informal business actions, via functioning e-inspector platform for recording inspections, by including all inspection services, as well as further strengthening of the capacities through trainings and regular controls.

Second area to be intensively worked on is “raising awareness of the informal economy, boosting the tax morale and the confidence in the institutions”. Some of these activities are already carried out through the existing platform Activities are also undertaken in support of educating the general public, via diverse tools, about the detrimental impact of the informal economy. In order to boost the confidence of citizens and companies in the institutions, the transparency and accountability of the institutions will be further strengthened, along with the predictability when preparing the legal solutions, which is of particular significance for the business community.

“Adding Color” to the Future of Our Country


By putting joint efforts and raising our awareness, we as citizens, will all together, be able to pursue this genuinely ambitious agenda, i.e. “add color” to the informal economy, thus also improving the country’s future and prosperity. Upon repeatedly elaborating on the informal economy, I will hereby mention the famous quote of the American President Kennedy – “ask not what your country can do for you but what you can do for your country”. With the actions we are taking nowadays in combatting the informal economy, thus making our lives better, we also create a bright future and better living conditions for our children and grandchildren. Building a functioning system is like building a house, if the pillars are firm, the walls do not have holes and the roof does not leak, we will not face any difficulties neither during summer nor winter season. We are now wrapping up the house, which will provide for better living conditions of the future generations. By joining our efforts, we will make this happen!


Оваа вест е достапна и на: Macedonian Albanian

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