Abstract
This edited volume on Entrepreneurship and the Shadow Economy represents a welcome addition to the portfolio of books on entrepreneurship that Edward Elgar has assembled. With respect to academic books, many publishers emphasise that names sell books and, in this particular case, all three co-editors are well known for their work on the shadow economy.
It is not difficult to list the potentially negative effects of shadow activity, but, at the same time, there are many contexts where informal shadow economy activity is a lifesaver with regard to the alleviation of poverty. The entrepreneurial activity, and what some call arbitrage, has been a regular feature of the transition economies for many years. Poorer areas in particular often rely heavily on activity in the shadow economy because of the absence of many further options. It is all very well to argue that policy makers should be striving to reduce the shadow economy. If that is to be achieved without serious social consequences in some areas, then there needs to be compensating policies alongside those that are designed to reduce, or even remove, the shadow economy.
One of the specific foci of the book is the measurement of shadow economy activity. Arnis Sauka, in particular, has been working for a number of years trying to improve the measurement of shadow activity and that is clearly one of his main contributions to the book. Colin Williams is well known throughout the Western countries for his work on the informal sector and shadow activity, and Friedrich Schneider for his work on measurement issues. In terms of measurement models, Sauka claims that his approach requires fewer assumptions than the existing methods. The approach described is based on an estimation of the participation of self-employed people in the shadow economy.
One of the specific aims of the book is to gather evidence in order to shed some light on determinants of the shadow economy. In general, it is not widely recognised that there can be a variety of conditions that can contribute to the growth and, in some countries, the sustainability of shadow activity. In a country like Mexico, for example, it is the rather inappropriate labour laws that drive many into informal activities simply to survive.
One of the themes emerging in the book is the idea that there is an inverse relationship between institutional development and the size and growth of the shadow economy. Significantly, the authors of the chapter ‘The bottom-up power of informal entrepreneurship’ recognise that even though the shadow economy may be predominantly negative, it has its advantages in terms of increasing labour flexibility.
The volume is divided into nine chapters. These chapters are divided into three main groups. The first is on measurement methods and the factors influencing the size and composition of the shadow economy; the second part deals with entrepreneurship and the shadow economy in a variety of contexts (including Russia, Ukraine, Finland, the Caucasus and Central Asia). The book concludes with a chapter by Williams, who presents his views on the policy issues with respect to decreasing the shadow economies.
In terms of the inverse relationship between the development of the shadow economy and institutional development, a particular issue identified by the authors is the key influence exerted by the extent of tax burdens and labour market regulations. The overall quality of government institutions is identified as a key factor.
In an excellent chapter following the introduction, Amorós and his co-authors argue strongly that much of what takes place in the shadow economy is very entrepreneurial. Linked to this is the notion that activity taking place in the shadow economy can make a positive contribution to economic development. This is explained in terms of informal sector activity (maybe mobilising resources) which otherwise would not be made available for economic development.
Not surprisingly, an important issue identified by these authors is the lack of availability of reliable data on the informal sector. By allowing individuals to engage in shadow economy activity, there is a potentially positive influence on economic development. The basic reason why reliable data on the shadow economy are rarely forthcoming is that those individuals engaged in such activities do not wish to be identified. However, the book contains three alternative ways of attempting to measure informal economy activity. The first is the approach of Schneider, who essentially attempts to build a model of informal sector activity, the strengths and weaknesses of which are dealt with in the book. The approach used by Schneider is essentially a quantitative one, which policy makers typically tend to favour.
One of the main conclusions from Schneider’s results is that, for all the countries investigated (a total of 162 covering the period 1999–2007), the shadow economy account for an average of about 17% of gross domestic product (GDP). People engage in shadow economy activity for a number of reasons but among the most important are government actions, particularly with respect to taxation and regulation. Another conclusion is that legal disparities at the level of informality exist in regional clusters. At the top level of informality, we find Sub-Saharan Africa, and at the lowest, we find Organisation for Economic Co-operation and Development (OECD) countries.
Considering these conclusions from Schneider’s analysis, one of the big challenges for any government is to undertake appropriate incentives in order to make sure work in the shadow economy is less attractive than work in the formal economy. Nevertheless, despite 20 years of research in this field, the scale, causes and consequences of the shadow economy are still under debate.
The focus on measurement and determinants of the shadow economy is based on an annual survey of entrepreneurs, which assumes that those most likely to know how much production or income goes unreported are the entrepreneurs themselves who engage in misreporting. More so than the other two chapters in this section of the book, Williams et al. pay attention to the theoretical implications of what they are observing.
The final chapter offers some policy perspectives and strategic views concerning how shadow economies should be treated by policy makers. The chapter begins by discussing a number of alternative hypothetical policy situations where shadow economy and entrepreneurship come together. These scenarios include (1) more legitimate entrepreneurship, (2) a scenario based on eradicating the shadow economy and (3) transforming shadow entrepreneurship into legitimate entrepreneurship, and offering some incentive for business owners and entrepreneurs in the shadow economy to move into more legitimate territory.