Academic journal article International Journal of Economic Development

Beyond Proxy Indicators: From Indirect to Direct Measures of the Underground Sector in East-Central Europe

Academic journal article International Journal of Economic Development

Beyond Proxy Indicators: From Indirect to Direct Measures of the Underground Sector in East-Central Europe

Article excerpt

Abstract

To evaluate the size of the underground sector, numerous measurement methods have been employed ranging from indirect to direct survey approaches. Evaluating critically the range of techniques available, this paper firstly highlights the growing appreciation that direct rather than indirect measurement methods are more appropriate, reliable and accurate. Following this, attention turns towards the results of a study that has employed such direct survey methods to analyze the underground sector in East-Central Europe, namely the New Democracies Barometer (NDB) Survey. Examining eleven countries in the years 1992, 1994, 1996 and 1998, this reveals not only that underground work is either the most important or second most important contributor to living standards for around a quarter of all households but also that this sphere became more rather than less important to households in the decade after the collapse of the socialist bloc. Moreover, and contrary to the narrative that underground work is a survival practice for those excluded from the formal sphere, it is here shown that households relying on underground work for their livelihoods cope just as well, if not better, measured in terms of their ability to acquire consumer goods, as those reliant on the formal economy in East-Central Europe.

Introduction

The aim of this paper is to evaluate critically the use of indirect proxy indicators to evaluate the underground sector and to display how a consensus has begun to emerge that direct survey methods are more reliable, accurate and appropriate. Given that most of the direct surveys so far conducted have been small-scale qualitative studies, and that this has prevented cross-national comparisons being made, this paper reports the results of one of the only direct surveys to have produced comparative cross-national data on underground work.

Firstly, therefore, this paper will evaluate critically the various measurement methods that have been employed to analyze the underground sector. Revealing that the emerging consensus is that direct survey methods are more reliable and appropriate than indirect methods, attention then turns to reporting the results of one of the few cross-national direct surveys so far undertaken, namely the New Democracies Barometer (NDB) Survey, that compares the importance of the underground sector to living standards in eleven countries in East-Central Europe. The outcome will be to provide not only a baseline assessment of the importance of the underground sector to the post-socialist societies of East-Central Europe but also to raise some important issues about its resultant impact on household living standards that indirect survey methods have so far failed to identify.

Before commencing, it is important to define the underground sector. Similar to most other papers in this symposium, the underground sector is here defined in the now widely accepted manner as involving the paid production and sale of goods and services that are unregistered by, or hidden from the state for tax and/or welfare purposes but which are legal in all other respects (Feige, 1999; Portes, 1994; Thomas, 1992; Williams and Windebank, 1998). As such, only paid work that is illegal because of its non-declaration to the state for tax and/or social security purposes is included under the umbrella of the underground sector. Monetised exchanges where the goods and/or services are illegal (e.g., drug trafficking) are excluded, as are non-monetised exchanges.

Measurement methods: a critical evaluation

Given that the underground sector is by its very nature hidden from, or unregistered by, the state, estimating its size is a perplexing and difficult task. The methods so far used range from techniques that employ direct survey methods to those that attempt to indirectly measure its size by seeking statistical traces of the underground sector in data collected for other purposes (see Bajada, 2002; Thomas, 1992; OECD, 2002; Renooy et al, 2004; Williams, 2004a; Williams and Windebank, 1998). …

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