The results of the Shadow Economy Index in the Baltic States, produced by the Stockholm School of Economics in Riga (SSE Riga), show that the size of the shadow economy in Latvia in 2022 remained at almost the same level as in 2021: 26.5% of GDP, a decrease of only 0.1 percentage points.

By comparison, the shadow economy has decreased more significantly in Estonia, while an increase in the size of the shadow economy has been observed in Lithuania.

According to the calculations of the shadow economy index, which has been conducted in the Baltic States since 2009, the size of the shadow economy in Latvia has been on an upward trend since 2016, with a slight exception in 2019: 20.7% of GDP in 2016, 24.2% of GDP in 2018, and 25.5% of GDP in 2020. In 2021, the shadow economy in Latvia rose to 26.6% of GDP, but in 2022 it decreased very slightly, reaching 26.5% of GDP.

The volume of the shadow economy decreased more significantly in Estonia in 2022: by 1.0 percentage points compared to 2021, reaching 18.0% of GDP. Meanwhile, in Lithuania, the shadow economy grew by 2.7 percentage points in 2022 to reach 25.8% of GDP. This is the highest level of shadow economy in Lithuania since 2009, when the study on the shadow economy in the Baltic States was first launched. Overall, the latest study results indicate that the size of the shadow economy in Lithuania has approached the level of the shadow economy in Latvia, whereas in Estonia the shadow economy is significantly smaller.

As the author of the study, SSE Riga Professor Dr. Arnis Sauka, notes: “Having created the shadow economy index for the Baltic States for over a decade, we emphasise that it is important for the reduction of the shadow economy to be approached intelligently and comprehensively. For example, by ensuring coordination between different ministries and their subordinate institutions, data exchange and interoperability, as well as the ability to find newer, more modern solutions to combat the shadow economy. We have also emphasised that it is impossible to reduce the shadow economy solely through repressive methods. Specifically, although it is more complicated and may take more time, policymakers must invest much more effort in promoting the willingness of entrepreneurs to pay taxes voluntarily. For instance, by demonstrating more efficient use of tax revenue in the interests of entrepreneurs and the wider public, as well as more transparent operation of state and municipal institutions, for example, free from the shadow of corruption. Work should also continue on ensuring that corruption and other economic crimes are judged more fairly and more quickly in the eyes of the public, and work must also continue on a more entrepreneur-friendly and predictable business environment, including tax policy. Otherwise, I do not see any reasons why the shadow economy in Latvia could decrease in the coming years.”

The results of the study show that in Latvia and Estonia, the most significant component of the shadow economy in 2022 was envelope wages, which in Latvia account for 46.7% of the total shadow economy, and 44.5% in Estonia. Unreported income in Latvia in 2022 accounted for 29.0% of the total shadow economy, and the component of unreported employees for 24.3%. Unreported employees in Estonia in 2022 accounted for 28.0% of the total shadow economy, and unreported income for 27.5%. Meanwhile, in Lithuania, the most significant component of the shadow economy in 2022 was unreported income at 36.5% of the total shadow economy, followed by envelope wages at 34.0% and the component of unreported employees at 29.5%.

The share of average wages (%), which entrepreneurs hide from the state, i.e., envelope wages, increased in Latvia by 1.2 percentage points in 2022 compared to 2021, reaching 25.0%. This is the highest volume of envelope wages in Latvia since 2013. An even greater increase in envelope wages in 2022 was observed in Lithuania, where, compared to 2021, envelope wages increased by 3.8 percentage points, reaching 20.0%. In Estonia, however, envelope wages decreased slightly in 2022 – by 0.2 percentage points to reach 16.8%. Thus, the volume of envelope wages remains significantly higher in Latvia, which to a large extent also explains the differences in the overall shadow economy, especially between Latvia and Estonia.

In the area of non-reporting of income (profit), in 2022, compared to 2021, a decrease was observed in both Latvia and Estonia. Specifically, the average share of income (%), which entrepreneurs hide from the state, was 16.3% in Latvia in 2022 (a decrease of 2.3 percentage points compared to 2021), and 11.1% in Estonia (a decrease of 1.0 percentage points). In Lithuania, compared to 2021, non-reporting of income increased by 2.9 percentage points, reaching 19.7% in 2022. In Lithuania, 2022 also saw an increase in the volume of unreported employees (the average % of the total number of employees employed without a contract), specifically +5.5 percentage points compared to 2021, reaching 14.4%. Thus, for all three main components of the shadow economy, these are the highest indicators for Lithuania since the volume of the shadow economy began to be measured in the Baltic States. The volume of unreported employees in 2022, compared to 2021, also increased slightly in Latvia, reaching 11.1% (+0.4 percentage points), but decreased in Estonia to 9.5% (-1.0 percentage points).

In addition to measurements regarding the involvement of registered companies in the shadow economy, the authors of the study also calculate the proportion of unregistered business in the Baltic States. According to estimates, the volume of goods or services from the total volume provided by unregistered entrepreneurs in Latvia, Lithuania and Estonia in 2022 was 8.5%, 9.5% and 6.3% respectively.

According to the results of the study, the general level of bribery (the percentage of income that firms pay in unofficial payments to “get things done”) decreased in 2022 compared to 2021 in Lithuania (-1.9 percentage points) and Estonia (-0.6 percentage points), reaching 10.4% and 6.4% respectively. In Latvia, the general level of bribery reached 9.4% in 2022, which is an increase of 0.2 percentage points compared to 2021. The results of the study also show that in all Baltic States in 2022, compared to 2021, the average % of the contract amount to secure a public procurement order decreased slightly. Specifically, Latvia saw a decrease of 0.1 percentage points, reaching 7.9%, Lithuania saw a decrease of 1.1 percentage points, reaching 6.6%, while in Estonia there was a decrease of 1.9 percentage points, with this shadow economy component falling to 2.1%.
https://www.db.lv/zinas/enu-ekonomika-latvija-bez-butiskam-izmainam-joprojam-augsta-511869