Within the framework of the National Programme of Fiscal Research implemented by the Ministry of Finance of the Republic of Croatia in 1995/1996, the Institute of Public Finance was entrusted with the task of conducting scientific research titled “Unofficial Economy in the Republic of Croatia”. The purpose of the project was to estimate the size of individual sections and the total size of the unofficial economy and to propose economic policy measures aimed at reducing unofficial economy.
According to opinions of many experts, the unofficial economy takes up a large section of the economy and its real size needs to be considered. The size of the unofficial economy largely affects how economic policy, especially fiscal policy, is run. Namely, tax and contribution evasion forces the Ministry to increase tax rates or to introduce budget deficit. Each of the solutions above have major consequences on overall economic trends, such as savings and investment, work supply and demand, interest rates and inflation trends, balance of payments deficit and public debt trends. For this reason, it is important to unveil the reasons for entering the grey zone, the scale of such trend, the structure of the unofficial economy, and its consequences on overall economic developments.
In addition, during the transition to market economy stage, an institutional vacuum of some sort emerges that largely enables illegal activities. An unstructured system of property rights protection, an unfinished privatization process and payment system reform, inefficient judiciary system and other examples point to the conclusion that institutional system fitted to the market economy has not been completely built yet. Under such conditions, the state finds it hard to control and restrain work in the unofficial economy. For this reason, the unofficial economy is a logical consequence of such transitional conditions and is not a Croatian novelty but is rather present in all countries making a transition toward market economy.
This project has unveiled that the unofficial economy makes up around 25% of Croatian GDP, which is a substantial number which cannot be ignored by economic policymakers. The project also proposed a set of useful economic policy measures that should be taken in order to reduce the extent of the unofficial economy. A large number of these measures is under the authority of the Ministry of Finance and will be quite useful in its future work.