The volume of grey economy in Latvia increased 1.1% last year, reaching 26.6% of the country’s GDP, according to results of Stockholm School of Economics in Riga (SSE Riga) Grey Economy Index in Baltic States.
Money-wise, the total losses for tax revenue from grey economy in Latvia exceed EUR 2.7 billion. During Covid-19 pandemic the grey economy volume increased in Lithuania and Estonia as well.
According to estimates of the Grey Economy Index, which is performed in Baltic States since 2009, the level of grey economy in Latvia showed a tendency to reduce in 2015 and 2016, when it was 21.3% and 20.7% of the country’s GDP respectively. In later years, however, grey economy either increased or remained mostly unchanged: in 2017 it was 22.0% of Latvia’s GDP, in 2018 it was 24.2%, in 2019 it was 23.9%, in 2020 it was 25.5% and in 2021 it was 26.6%.
Grey economy also increased in Lithuania and Estonia in 2021.
Compared to 2020, Estonia’s grey economy in 2021 increased by 2.5%, reaching 19.0% of GDP. For Estonia this is the highest grey economy index since 2012, when it was 19.2% of GDP. In Lithuania grey economy in 2021 increased by 2.7%, reaching 23.1% of GDP. For Lithuania this is the highest grey economy index since 2009. This means that thanks to Covid-19 pandemic the grey economy increased in all three Baltic States last year. Although the difference between grey economy volumes in Latvia and Lithuania is smaller than it was in previous years, it remains the highest in Latvia.
According to the author of the study, SSE Riga Prof. Dr. Arnis Sauka: «On the one hand, it cannot be denied that the grey economy in Latvia, as well as other Baltic States, was negatively affected by Covid-19 pandemic. However, unfortunately, results of our study show that policy-makers, especially in Latvia, have not had much success in reducing grey economy in years of growth, before the pandemic. This year, on top of Covid-19 pandemic, uncertainty surfaced, specifically economic uncertainty caused by Russia’s war in Ukraine. Under these very complicated conditions, we cannot forget about reduction of grey economy in the future. To reduce it, we have to find new, modern solutions. The grey economy still hides enormous resources that would be useful to both enhance state security, healthcare, education and science, social protection and other sectors.»
Results indicate that in Latvia, Estonia and Lithuania envelope wages accounted for the biggest portion of grey economy in Latvia, Estonia and Lithuania in 2021. In Latvia envelope wages composed 46.2% of grey economy, 42.7% in Estonia and 38.8% in Lithuania.
Undeclared income in Latvia accounted for 30% of grey economy in 2021. The undeclared employees component accounted for 23.8%. In Estonia these two factors account for 30.0% and 23.5% of grey economy respectively and in Lithuania – 27.2% and 37.7% respectively.
According to results of the study, when compared to 2020, last year the percentage of average wage that employers hide from the state, otherwise known as envelope wages, increased in all three Baltic States. For Latvia this increase was relatively small – only 0.3%. In 2021 envelope wages increased to 23.8%. In Estonia the volume of envelope wages in 2021 increased 3.8%, reaching 17.0%, whereas in Lithuania it increased 0.9%, reaching 16.2%. Prof. Sauka says: «This means the volume of envelope wages remains the highest in Latvia, which can be explained with differences in grey economy among Baltic States.»
An increase in all three Baltic States is also observed for non-declaration of income, because in Latvia the average portion of income entrepreneurs hide from the state had increased 0.6% in 2021, reaching 18.6%, 0.5% in Estonia (12.1%), and 1.0% in Lithuania (16.8%). As for non-declaration of employees, compared to 2020, it has slightly decreased in Latvia and Lithuania in 2021 (by 0.2% to 10.7% and by 0.4% to 8.9% respectively). In Estonia non-declaration of employees has increased 1.5%, reaching 10.5%, which is the highest index since the start of grey economy measurements in the country.
Results indicate the general bribery level has also increased in all Baltic States since 2020. The biggest increase is observed in Lithuania, where this index has increased 3.9%, reaching 12.3%. In Estonia bribery has increased 0.6%, reaching 7.0% in 2021. In Latvia it has increased 0.9%, reaching 9.2%. Latvia has not had such a high level since 2014, Lithuania – since 2015. In Estonia this is the highest index since the start of the study. Results also indicate that the average percentage paid to secure a place in state procurements has increased in all three Baltic States. In Latvia the increase is 1.1%, reaching 8.0%; in Lithuania the increase is 2.1%, reaching 7.7%, and in Estonia – 0.1%, reaching 4% of the grey economy.
In Latvia grey economy level is the highest in Riga region, Kurzeme and Zemgale. Across different sectors of the economy, grey economy has the biggest foothold in the construction sector in Latvia. Prof. Sauka also points to negative trends: «While since 2015, the grey economy in construction sector had shown signs of dropping (40% in 2015, 38.5% in 2016, 35.2% in 2017, 34.1% in 2018, 30.7% in 2019 and 28.7% in 2020), last year grey economy had reached 29.8% in retail trade, 27.5% in service sector, 25.0% in production, and 24.4% in wholesale trade in 2021.»
As for the attitude toward corruption, enterprises in Baltic States remain relatively satisfied with the work done by the State Revenue Service (VID).
On a scale of 1-5, where 5 indicates high satisfaction, the level of satisfaction with VID was 3.60 in Latvia and 3.56 in Lithuania. This means that for the first time since the start of regular measurements of this factor affecting grey economy (2010), the satisfaction with VID in Latvia is higher than it is in Lithuania. Satisfaction with VID remains high in Estonia as well (3.74), although it is a drop when compared to 2019 (3.80) and 2020 (3.76).
Results also indicate that when compared to 2020, the level of satisfaction with the state tax policy had increased among entrepreneurs in Latvia in 2021 – from 2.63 to 2.70. In Lithuania and Estonia the level of satisfaction with tax policy has reduced (from 3.08 to 2.81 and from 3.41 to 3.02 respectively). The level of satisfaction among entrepreneurs in Latvia has increased also in relation to the quality of legislation (from 2.96 in 2020 to 2.98 in 2021). A decline is observed in Lithuania and Estonia (from 3.03 to 2.89 and from 3.35 to 3.25 respectively). The satisfaction with state aid for entrepreneurs in 2021 had increased to 2.89 in Latvia, but had declined in both other Baltic States: to 2.91 in Lithuania and to 2.51 in Estonia.
Result also indicate that although younger and smaller entrepreneurs are involved in shady activities more often than larger and older enterprises, the general contribution to grey economy comes from larger enterprises (with more than 50 employees and annual turnover exceeding EUR 500 000). This trend is directly linked to the fact that larger enterprises, though they get involved in grey economy less, they contribute much larger amounts of money.
Looking at the latest grey economy data, Prof. Sauka admits: «Although the trends are generally negative, considering the context, the increase of grey economy in Latvia, Estonia and Lithuania may have been even bigger in 2021. Grey economy may continue increasing in the next two to three years, especially if adequate resources are not allocated to battle it. In this regard Latvia will need to continue strengthening cooperation among different institutions to reduce grey economy, especially on an operational level. I would invite policy-makers to not only concentrate resources towards reducing grey economy in the most problematic sectors, but also approach grey economy reduction in a complex manner – by adopting multiple mutually linked activities. Grey economy is a complex phenomenon, which cannot be reduced using a single measure. We cannot afford to forget about the raising the government’s reputation in the eyes of entrepreneurs and residents, as well as fairly dealing with corruption-related and other crimes.»