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The gray economy and the privatization process in Croatia

The purpose of this paper is to show if and to what extent the privatisation process of the former social sector in Croatia boosted the activities of the unofficial economy. If we apply Fiege's broad definition (Feige, 1990), which includes all hidden, irregular, non-transparent, unethical activities, as well as those discriminatory towards other economic entities which are part of the process, little doubt remains that privatisation of socially-owned enterprises also contributes to expansion of the unofficial (gray) economy in Croatia. This can be illustrated by a number of cases. Some definitions of the unofficial economy in the narrow sense would only partially support this statement. For example, a definition where the unofficial economy covers only economic activities of entities which make an income but do not officially register it in social accounts and with appropriate tax authorities and do not pay the required taxes (Thomas, 1992 ; Tanzi, 1983) most probably would not include the privatisation process because the participants here in fact are part of the official economy. Privatised companies are properly incorporated in Registers of Companies and statements of their business activities are available to the official statistics. In spite of the legality of the entities themselves, however, their interconnection with the gray economy cannot be completely ruled out (Portes, 1994). The way in which they became privatised or their post-privatisation activities can easily fall within the irregular or even the criminal sector (if legal rules are not respected). This very fact would place them in the gray economy, even according to a narrow definition. As the text documents by quantiative and qualitative data such examples in Croatia have been numerous. The text concludes with number of recommendations for policy makers that could help to limit the extent of the gray economy in privatization.

gray economy, privatization, Croatia, economic and social effects

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