Informal Economy in Bosnia and Herzegovina – An Empirical Investigation

Abstract This paper explores the size of the informal economy in Bosnia and Herzegovina (BiH) over the period 1998- 2016, based on an indirect method of measurement known as the MIMIC approach (Multiple Input Multiple Causes). As the underlying determinants of the informal economy in BiH we include tax burden, the level of unemployment, the size of the agricultural sector and the level of government subsidies. We estimate that the average size of the informal economy for the observed period was 34% of GDP, with the largest percentage in 1998 (43%) and the smallest in 2009 and 2016 (30%). There is a modest decreasing trend in the size of the informal economy over time. Our model identifies two structural brakes over the observed period. The first is positive and is linked to the introduction of the value added tax in 2006 (a decrease in 2007-2009 follows). The second captures a short-run negative effect of the latest global economic crisis in 2009 (an increase between 2010-2011). To further asses these results and check their consistency with available primary data, we investigate the size of the undeclared work, assess tax morality and the additional income of families coming from informal sector. These indicators provide consistent results with those of the MIMIC approach.