Best measures? Tough question.

The main reasons for the informal economy are the fiscal pressure and bureaucracy. Fiscal pressure may seem easy seen with British eyes, as the overall tax rate is lower, but, combined with low income and high prices relative to wages, it generates a demand for extra income thus informal economy.

Bureaucracy required to do things legally is way to complicated, time consuming and does not provide any benefits. Some people just skip-it and save money and time.

Informal economy and corruption work together. In order to pay bribes businesses need informal income. Informal income breeds corruption. So, measures should target the need for informal income and the corruption and especially the connection between them.

To give you an example, a small food-shop is fined by fiscal authority. It's financial status was bad anyway, so that measure pushes the owner towards a choice, either to close the business, and loose it's livelihood, or, obtain some extra-income (i have seen many of those cases). The extra-income, done by means of tax-fraud, allows him to survive and bribe the fiscal officer on the next visit. The fiscal officer has an income that does not cover the costs of a normal life. So he is almost forced to accept the bribe, because otherwise he will never be able to pay bills, bank, food, clothing, gasoline, and other essentials. So, basic human needs force both business and officials to give up ethics and laws. If you multiply this and spread all over a country you have a epidemic process spreading corruption and tax-fraud. Any epidemic is targeted by means of targeting the transmission means with prevention measures, however, this epidemic is unlike a virus, it is generated by the lack of a decent income. It is comparable with dehydration on a mass scale. You can punish people for stealing the water, but the need is so strong that it breaks all social barriers.

So, how can you "hydrate" all those people?

- increase the available income

- decrease the consumption prices for the basic needs of life.

Basically the only effective measure is increasing the GDP, and improving the distribution of wealth towards the levels that generate informal economy because of need not greed.

That would be stage one, stage two is more tough as it has to do with greed, and that's really a tough nut to crack in a materialistic society.

In SE Europe, the prices of gasoline, electricity, and natural gas are to high compared to income. They are all monopoly or quasi-monopoly using the low elasticity of the market to keep the prices above the means of population. This means that consumption of other goods involving human work and generating jobs it is lowered, in some cases below sustainable levels. Governments also tax excessively the same goods based on the same low elasticity, as they do with tobacco alcohol and any product that has a low elasticity. So, reducing the prices by reducing the taxation will decrease government income, but it will reduce the pressure on citizens, and increase the consumption of goods that create jobs.

Anyway, good luck, have fun, and find some locals to cooperate with. Things look really different on the ground compared to where policies are designed. I would suggest to spend some time there, outside the ivory towers.

Dear Bradut

What an interesting answer and one that is grounded in empirical realities. I have just written a paper attached that shows how undeclared work is strongly correlated with GDP per capita, the level of inequality within a society, the effectiveness of social transfers, poverty rates, etc. This reinforces everything you say in your answer.

Nice article. Good overall view, relevant statistics, coherent literature choices, i like-it.

You seem to have a comprehensive big picture of the issue.

Now you are entering a new realm, policy efficiency measurement. That's a tricky thing to do.

Personally i attempted to push forward a new methodology approach called "economic epidemiology". It means using epidemiology (medicine) methods of researching risk/protection factors in business abnormalities outbreaks.

This could be used to determine based on empirical data the best measures that can contain such occurrences, and design targeted methods to tackle them. It can also help us group them and create a taxonomy. I have done quite some research, but without funding i got to a dead end and i stopped. It seems futile researching without proper funding, and completely unsustainable.

Now i am researching Islamic Finance, in Oman.

However, i am willing to help you, if you want and need my help.

Do you have any papers you have written on using this economic epidemiology approach to explore risk/protection factors in business abnormality outbreaks?

At Sheffield, we are currently exploring how to measure the effectiveness of a range of policy measures and also how to assess whether measures are transferable from one nation to another. We are struggling to understand the criteria which we might used to compare the effectiveness of different policy measures at tackling the informal economy, and would love to know whether there are policy literatures which we could draw upon regarding the development of common criteria for evaluating policy measures and their transferability.

https://www.researchgate.net/publication/220044757_Approaching_Economic_Issues_through_EpidemiologyAn_Introduction_to_Business_Epidemiology?ev=prf_pub

This is the main published work.

You can also use this:

http://www.sciencedirect.com/science/article/pii/S2212567112002481

Article Approaching Economic Issues through Epidemiology–An Introduc...

However, most of my work is unpublished, and will remain so until i get proper funding for empiric research. And i needed funding to get the data for proving my theory.