The determinants of informal economy in Eastern European countries

This article addresses the problem of informal economy in 11 countries from Eastern Europe. The aim of the research is to identify macroeconomic and social determinants of high levels of informality in the region and to quantify their influence on the respective phenomenon. For this purpose we carried out an econometric analysispooled regression, fixed effects and random effects models in R software. The models include the informal output as dependent variable calculated with the method Multiple Indicators Multiple Causes model-based by International Labor Organization, and expressed as % of official GDP. As explanatory variables we included in the models employment in agriculture, personal remittances, GDP growth per capita, rural population and the opinion regarding cheating behavior on taxes. We used secondary data from World Bank and World Values Survey for the period 2000-2020. From the three models performed we chose the model with fixed effects applying the F-test for individual effects and Hausman test. The fixed effects model succeeds to explain 40% of the variation in the informal output determining a positive influence of the variables employment in agriculture, personal remittances and the opinion towards cheating behavior on taxes, the results being consistent with other studies on this topic. The strongest influence is that of the social variable – the opinion regarding cheating on taxes, with a coefficient of 1.89. The results of the analysis have theoretical as well as practical implications for policymakers offering valuable insights for tailoring the policies aimed at lowering the level of informality in these countries.