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SHADOW: An exploration of the nature of informal economies and shadow practices in the former USSR region

Periodic Reporting for period 1 - SHADOW (SHADOW: An exploration of the nature of informal economies and shadow practices in the former USSR region)

Reporting period: 2018-03-01 to 2020-02-29

Extending from Eastern Europe to Eastern Asia, from the Caucasus to Central Asia, the post-USSR region, occupying
almost one sixth of the world’s territory, has an immense potential for the EU as source of natural resources and potential
market for EU companies. In spite of this, the region is often seen as a highly hazardous one to deal with, given its
“uncertain business and investment climate with widespread opportunism and corruption, misuse and misappropriation of
state assets and conflicting information flow”
SHADOW is a research and training programme with the goal of producing strategic intelligence on the region and train a
generation of specialists on informality in post-Soviet spaces. Our goals are two-fold: 1) we intend to construct an index to
provide an accurate measurement of the level of shadow activities in our target countries; 2) we aim to conceptualise a
taxonomy of shadow practices in the post-USSR region in a cross-country and cross-regional perspective. Both goals are
intended to contribute to a much better understanding of the threats and opportunities that the former USSR region, of
fundamental importance for the EU, offers.
At this stage of the project, the first phase of the data collection has been completed. Drawing on a model employed in both Baltic countries (Putnis and Sauka 2015) and the former USSR region (Polese and Sauka 2019), we have relied on the partner based in each of the target countries to collect data locally, in the local language and in compliance with national scientific requirements (that may vary from country to country). The fact that each of the partners is a well established sociological company with over 15 years of data collection for major local and international clients has made it possible to complete the survey quickly and without facing any major issues. Companies have been identified through stratified random sampling method using, as a starting point, the Orbis database managed by Bureau Van Dijk containing information on more than 280 million companies worldwide. Quartiles have been created and in average 400 companies have been surveyed per country.

In line with previous research on shadow economies, interviewers have been instructed to use a “gradual approach” (Gerxhani, 2007; Kazemier and van Eck, 1992, Putnis and Sauka 2015); to increase the response rate and truthfulness of responses the questionnaire will begin with non-sensitive questions about satisfaction with government and tax policy, before moving to more sensitive questions about shadow activity and deliberate misreporting. Further, the survey will be framed as a study of satisfaction with government policy, rather than a study of tax evasion and misreporting (similar to Hanousek and Palda, 2004). The second phase of data collection was supposed to happen in 2020 and consisted of the creation of case studies based on qualitative interviews in the target countries. But due to COV19 emergencies, it will be delayed. Secondments so far have been also coordinated with the research objectives and most of them have been completed. However, also due to COV19, some of the secondments have not happened as expected. Some have been delayed, some cancelled. We will probably apply for an extension of the project but a clear picture will only be known once international travel has been resumed.

Notwithstanding the current sitution, the team has managed to progress in line with the initial plan. The results of the study have been presented at press conferences in all the target countries and, in some cases, government officers and international organisations have been involved in the presentation. For instance, at the presentation of the shadow economy index in Kyrgyzstan in December 2019, representatives of the fiscal authorities asked to remain in touch with the team so to work together on a strategy inviting companies out of the shadow in the country. Results have also been presented at international conferences both in area studies and disciplinary ones.
"Shadow economies in transitional regions have usually been calculated using MIMIC (Multiple Indicators, multiple causes). Inasmuch as useful as a starting point, MIMIC measurements are based on indirect data available and rely on national statistics. By force of this, they are at risk of 1) producing inaccurate accounts in the case the methodology used by national statistics committee is inaccurate (which is more likely in transitional regions); 2) including not only shadow but also criminal activities. Policymaking is moving towards empirical-based evidence and this is better produced when data concentrate on a single phenomenon at once. Bringing together illegal,illicit and shadow economies often results in the temptation to conceptualise a ""one size fits all"" approach, which is eventually unlikely to produce significant results.

In contrast, SHADOW is possibly the first attempt in the region to measure shadow economies using direct methods. These can be used as an alternative to Medina and Schneider (2018), or to complement them, given that have been calculated generically for the whole world whereas we are specific on the post-Soviet region with a much deeper approach. The use of our indicators have been welcomed and led to dialogues with authorities in Latvia, Russia, Kyrgyzstan and Georgia already. They have also resulted in presentation at scientific events and are currently leading to publication in top scientific journals."