This report presents estimates of the size of the shadow economy in Moldova and Romania during the years 2015-2016. The estimates are based on surveys of entrepreneurs in both countries, following the method of Putniņš and Sauka (2015). The components of the shadow economy captured by this approach include misreported business income, unregistered or hidden employees, and ‘envelope’ wages. Our estimates indicate that the size of the shadow economy in Moldova and Romania was approximately 29.7% and 33.3% of GDP in 2016, respectively. In both countries, the estimated size of the shadow economy decreased in 2016 compared to 2015: in Moldova only slightly (0.1%) and in Romania by 2.3%. The contraction is mainly driven by a small decrease in underreporting of business income, which is the largest component of the shadow economy in both economies.

According to our data, unreported salaries (“envelope wages”) in both countries are about one-quarter of total salaries (24.8% in Moldova in 2016 and 23.4% in Romania in 2016). Approximately one-fifth of employees in the two countries are unreported or working unofficially (18.5% in Moldova in 2016 and 20.3% in Romania in 2016). Approximately one-quarter to one-third of business income is deliberately concealed (underreported) from authorities (31.5% in Romania in 2016 and 25% in Moldova in 2016).

Our findings suggest that both Moldova and Romania exhibit high levels of bribery. For example, we find that the percentage of revenue spent ‘to get things done’ (which can be interpreted as bribery) by companies is approximately 14.5% in Moldova and 12.5% in Romania. When doing business with the government, companies typically pay around one-tenth of the contract value (13.0% in Romania and 8.2% in Moldova) to secure the contract. Unregistered companies make up 14.3% and 15.5% of all enterprises in Romania and Moldova, respectively.

The highest levels of shadow activity in Moldova are found in Calarasi, Hincesti, and Ocnita, while in Romania, the South-East, West, and North-West regions exhibit high levels of shadow economy. The construction sector has the highest level of shadow activity in Moldova, while in Romania the highest proportion of shadow activity is found in the wholesale sector. Small companies tend to operate “in the shadows” more than large companies. The perceived probability of being caught for underreporting salaries (paying envelope wages) is considerably higher in Moldova than in Romania. The expected penalties for deliberate misreporting (tax evasion), however, are similar across the two countries—corporate managers expect the penalty to be a serious fine that would impact competitiveness.

Companies in Romania and Moldova are relatively satisfied with the State Revenue Service and relatively dissatisfied with the government’s tax policy and support for entrepreneurs. The overall satisfaction with the government’s tax policy and with the quality of business legislation is somewhat higher in Moldova than in Romania. Political instability is perceived to be a very severe obstacle to doing business in Moldova, while in Romania the main business concern is corruption.

Overall, our findings highlight the need for continued reforms and actions that combat the shadow economy in both Moldova and Romania, and we suggest a number of approaches and policies to that effect.

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