Within the framework of Work-package 5 - Informal Economy and Organised Crime in Europe - a workshop on the topic ‘Informal Economy, Illegal Labour and Public Policy’ took place at the Faculty of Criminal Justice and Security, University of Maribor. It ran from 2 to 4 April 2008, as part of the international project CRIMPREV – Assessing Deviance, Crime & Prevention in Europe. Public policy and legislation in Europe affecting the informal economy was the prime focus in this thematic package.

THE CHANGING PROBLEMS OF THE INFORMAL ECONOMY

Bojan DoBovŝek

n°19 Bis24 April 2009

Assessing Deviance, Crime and Prevention in Europe. CRIMPREV Project. Coordination Action of the 6th PCRD, financed by the European Commission. Contract n° 028300.Starting date : 1st July 2006. Duration : 6 months. Project coordinating by CNRS – Centre National de la Recherche Scientifique. Website : www.crimprev.eu. E-mail : contact@crimprev.eu

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The purpose of the meeting was to discuss research results on the informal economy and illegal labour and, in connection with this, creation of policies to attempt to deal with these increasing problems. Furthermore, this meeting exposed the consequences of some of the ‘new’ policies and their influence on social problems in Europe. Another element was the extent to which economic crime is socially constructed, and the consequent insecurities in Europe and further afield. Different national views about the role of public policy in connection with economic crime, its consequences and social changes, were discussed. An overview and assessment of the studies undertaken on the issue of the informal economy and illegal labour was the main gist of the workshop: the evolution of economic crime in Europe, the links between economic crime and public policy, political influences, property crime and illicit art trade, corruption, the informal economy, the role of social changes, especially with regard to how prevention is presented and the role of (social) policy in maintaining (social) peace in Europe. The meeting was divided into five thematic parts. Nine different papers were presented to the 19 participants from seven countries (Germany, Great Britain, France, Belgium, Netherlands, Italy and Slovenia). The following overview illustrates the presentations and discussions.

I - Main problems, findings and suggestions

1 - The informal economy

The primary question is the problem of defining the concept of the ‘informal economy’. It became particularly visible at this meeting, because it differs from one country to another, although European Union members share common legislation in basic legal fields. The informal economy is a phenomenon that is found in all countries, economies and political systems throughout the world. It can be described as the hidden part of the economy, in which profit is not reported to the country’s officials and therefore taxes are not paid. UNESCO’s definition of informal economy is short and intelligible: The exchange of goods and services not accurately recorded in government figures and accounting. The informal economy, which is generally untaxed, commonly includes goods and services including day care, tutoring, or black market exchanges. (UNESCO, 2008). The reports of the Organisation of Economic Cooperation and Development (OECD) show that the illegal economy produces on average

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16.3% of GDP, and 42.8% of GDP in developing countries (OECD, 2008). The types of informal economy that exist are very varied. The most typical are illegal labour and the grey and black markets. Furthermore, the transition in some European countries has further influenced the forms which the informal economy takes and has spurred all kinds of public-administration reforms. As a result, new forms of economic crime have developed. Among these, internet selling is growing more and more. Parallel to this, new forms of corruption have also appeared.The field of the informal economy is very wide and diverse. For this reason and because of different criteria and the lack of a unified definition, the extent of the informal economy is difficult to measure precisely. Every country that wishes to have a so called ‘healthy market economy’, has to be vigilant and systematic in the way in which it observes the scale of the illegal economy and how it changes. As already mentioned, the illegal economy most often takes the form of illegal labour. Unfortunately, this is present throughout the whole European Union area, and according to a European Commission report (European Commission, 2008) numbers are rising every year. The highest levels of illegal labour were detected in construction, commerce, the catering industry and tourism, the textile industry, and transport and more recently also among the learned professions, such as the health service, private education, real estate transactions or business services.‘Who is involved in the informal economy?’. This is a primary question for researchers and others engaged in this problem. Shapland (2008) pointed out that surveys from Great Britain showed that the groups involved in the informal economy are migrants, the young and the socially excluded, and also young people without official papers, but with skills and qualifications (those without papers are often skilled and fit - contacts and ethnic/language links are vital.).Another concern regarding the informal economy was brought up at the meeting; a strong informal economy can make people see it as normal and this can affect social values. The participants agreed that the major problem concerning detection, counting and also involvement in the informal economy and illegal labour in the Union is the differences between the member countries. Countries have very different legislation, ranges of policies and means for solving the problem of the illegal economy. Furthermore, the measurement methods are different; therefore it is difficult to prepare reliable comparisons and surveys. Here one has to bear in

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mind that it is not possible to completely abolish unregistered labour, but it is possible to decrease its extent. At this point, the participants specifically referred to the strengthening of control mechanisms and sanctions, international cooperation, unification of legislation and raising the awareness of employers, employees and society.

2 - Illegal labour and public policy

Political decisions and the manner in which policies are implemented at European (EU) and national level have an influence on so-called illegal labour, black-market labour or work contrary to legal rules. Public policies aimed at evaluating of the illegal-labour situation set out working strategies, which are the foundation for further acts by the relevant institutions in that society. Furthermore, they define what is illegal or unlawful. In the field of policy creation, the European Union’s employment rules, together with national norms, play an increasingly important role. Public policies have emphasised the repressive approach. The basis for such an approach is the definition and resulting perceptions of the phenomenon of illegal labour, and the implementation of restrictions on the employment of foreigners. Such public policies have an influence on the migration of workers internationally, although they do not solve social problems. Shapland (2008) pointed out that different social policies have different effects in ‘encouraging’ the informal economy and suggested particularly: policies which hinder desistance from criminality; policies which are creating underclasses; policies regarding tax levels and subcontracting (visibility); regulation policies, migration policies and policies which define dependence upon low paid workers:1. Policies which hinder desistance in the early and late 20s: lack of resettlement policies after being in care/a custodial sentence; the requirement of formal qualifications for low-skilled jobs; cartels restricting employment for certain social/ethnic groups;2. Policies creating underclasses: housing policies which ‘trap’ people in sink estates/housing, particularly if problem families are concentrated, and consequently social resources are low.3. Policies combining high taxation with subcontracting. 4. Policies that offer much regulation, but few controls/enforcement.5. Migration policies: Migration affects the supply of workers, not goods (although routes may carry both). Illegal migration causes problems for host countries and migrants, particularly

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if ‘becoming legal’ requires the commission of illegal acts or attracts organised crime.6. Policies that try to regulate the lack of native workers: a nation’s economy depends upon low-paid workers, but doesn’t have enough native workers.

II - What to research in the field of the informal economy and how to do it?

Different factors influence the informal economy. Among these are market demand and supply (primarily of labour and illegal goods (drugs, stolen goods/barter)), employment opportunities (supply of labour, social contacts and networks) and geographical opportunities (globalisation influence). Van de Bunt et al. (2002) showed that a stricter formal economy may result in a rise in the informal and illegal economy, as shown in Figure 1 below. A depiction of how to control it is provided in Figure 2 on the subsequent page. Figure 1 shows the three economies that can exist and the transformation of money from the illegal economy in order to use it in legal economy. It is not just hard to trace, but also (almost) impossible to prevent.

1 - Money-laundering

A constant theme running through the meetings forming part of this work-package, money laundering has been exposed as an increasingly frequent form of informal economy. Different trends, experiments and methods of countering and preventing money laundering have arisen since the late 1980s and the beginning of the 1990s, when this problem was highlighted in the US. As shown by the discussions on the prevention of drug crime, there is an increasing tendency to change illegally earned money into legal money; more and more institutions began to deal with the tracking of financial transactions. In doing so, more and more countries are prepared

Figure 1: Money laundering: the transformation of money from the illegal economy in order to use it in the legal economy (Verhage, 2008).

Illegaleconomy

Informaleconomy

Formaleconomy

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to offer assistance and help in the fight against crime associated with money laundering. A question that arises in this era of globalization is whether it is realistic to demand such a contribution from profit-driven, commercial corporations, as they are forced to act against their own commercial interests. Belgium is different from other European Union members, because it has a different approach to the fight against international money laundering. It has a unique and successful system, which is to some extent different from European strategies. Verhage (2008) said that the Belgian policy - as with all European policies based on the framework laid down by the European Union - concentrates on a preventive approach by forcing specific companies to implement a broad range of principles, checks and procedures related to client identification and the detection of suspicious individuals, corporations, or money flows. What is different from the general run of European Union policy, however, is the introduction of a specific profession responsible for the implementation of this extensive anti-money laundering (AML) task. Moreover, the compliance function is the only function in Belgian banks which has been legally specified and made mandatory.

2 - Corruption

Next to money laundering, corruption and the use of connections and informal networks are the main problems of the grey economy in the countries of Eastern Europe, and especially the Balkans. Informal networks become a problem only when members of these networks decide to ignore society’s laws and rules, with the purpose of gaining certain benefits for themselves and/or their network colleagues. Dobovšek (2008) has coined a new definition, ‘criminal state capture’1, the processes of which are very puzzling for the researcher. Currently, the leading process is composed of three parts: the first part involves the takeover of the private or public sector; the second part involves infiltration, or rather a takeover of legal spheres and the state; and the third part inflicts losses and suffering on the general public. Some specific characteristics of

1 ‘State capture’ refers to the influence of the individuals, groups or parties (either in the private or public sector) on the formulation of the laws, regulations, decrees and other governmental policies (the basic rules of the game) for private purposes instead of the public interest (Dobovšek, 2008, 683-684). These processes are occurring with the help of illegal and non-transparent provisions, that are intended for government employees with the intention of gaining a certain benefit (Philip, 2001, 4). The term ‘state capture’ refers to three entities: (a) the «capturer»; (b) the ‘captured’ (the things that are ‘captured’ are always laws, decrees and regulations - in short, the state); (c) the public who are affected (although usually not directly).

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this phenomenon have been noticed in transitional (especially post-communist) countries. These characteristics show us how important a wider recognition of this ‘state capture’ concept is for uncovering less transparent activities in such countries.

Figure 2: Different ways of transferring cash, and the ‘line’ of control (AML task) (Verhage, 2008).

This especially applies to corruption, which is spreading throughout new European countries, which have a specific need for specific preventive measures against corruption. Among the most important preventive measures in curbing corruption are integrity plans, which have proven to be a very effective method in the fight against corruption. That is why every institution should prepare anti-corruption programmes, based on the recognition that its own activities are vulnerable and exposed to corruption. For this reason many experts recommend integrity plans as the best and most efficient method of tackling corruption.

3 - Migration and the informal economy

In his paper, ‘Via Anelli: a case study on segregation and the informal economy’ Alvise Sbraccia looked at institutional and interethnic relations in a specific area of Padua, one of the most important industrial cities of the north eastern regions of Italy. Since the beginning of the nineties, when Italy first became a desired destination for a massive number of immigrants from North Africa and Eastern European countries, the Via Anelli district has been characterised by increasing migrant settlement, linked to the well-known process of inhabitant substitution and property speculation. Approximately 1,300 people, mostly from the Maghreb area and Nigeria, live in small overcrowded apartments in Via Anelli, which were designed to accommodate only a couple of students. This urban process can be seen as anomalous in Italy, where the typology of settlement tends more towards the physical dispersion of

Illegaleconomy

Informaleconomy

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newcomers. This area of big buildings, which is situated next to Padua’s commercial district, is therefore represented in the media and in political discussions as an environment where ‘the enemy within’ is growing. This social alarm is mainly provoked by the presence of small drug dealers and prostitutes, and by the occurrence of noise at night and fights. With this case study, the author Sbraccia (2008), wanted to shatter this stereotyped image of the inhabitants, most of whom are in fact employed in the local informal economies, and to analyse institutional control practices, which are considered to be dramatically increasing residents’ level of criminalisation and hence their risk of expulsion from the country. On the other hand, other types of migration are present in this and other (European Union) countries. The informal economy is closely linked to them. An example of such a connection between migration and the informal economy is the case of the Roma people in Italian cities. The informal economy is the main source of income and social advancement in the town of Mazara del Vallo in Sicily. Research by Pietro Saitta has shown how a group of Roma people from Kosovo, living in this area since the seventies, try to survive by using different entrepreneurial methods, such as making music, improvised crafts and small deals in the drug trade as means for making a living. Their current situation can be largely attributed to poor relations with the state and local authorities. Nevertheless, these individuals have been able to exploit the ambivalence of the law, and the informality of local relations, to settle. Although a very conformist perspective would suggest that they are merely reproducing poverty from generation to generation, in-depth analysis of this research shows that the informal economy represents a paradoxical means for social advancement.

4 - Suggestions for future research and improvement

In the final discussion, participants agreed that some areas require the immediate attention of experts and public policies.First of all, it is necessary to protect the formal economy, particularly if the state is weak. This could be done with:

An increase in alertness and expertise within private ₋organisations;An increase in criminal proceedings for informal crime ₋(the effect of criminal investigation is not clear; there is only a small number of convictions);

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AML policy and restricting access to the formal economy ₋and its institutions.

Secondly, one must bear in mind that economic development affects crime. Grey and black markets are something ‘normal’ in underdeveloped countries and some countries in transition. Furthermore, one should not overlook so-called cross-border crime, which has a strong influence on the (in)formal economy. For this reason, it is necessary to strengthen cross-border cooperation at local and regional levels. Fourthly, concerning public policy and illegal labour, policies that try to regulate the lack of native workers have to be reconsidered and supplemented. More and more European Union countries are facing the problem that their national economies depend upon low-paid workers, but they do not have enough native workers. This (may) affect the overall economic health of business, because:

it affects the cost of welfare systems and the price of ₋goods/services (the more illegal the worker, the less the country has to pay in social benefits and families are less likely to be brought in); countries have adopted different ‘solutions’ at different ₋times: guest workers; encouraging waves of migration; moving the problem off-shore; tolerance of illegal workers doing legal work providing they are not very visible.

Fifthly, the problem of the legal and illegal economies should be rethought and reformulated not only merely in relation to weak or strong state control, but also as a complicated contest of power between and within state players, politicians, companies and local people.All of the approaches mentioned above can create problems. Frequently they may encourage organised crime, if the informal economy produces low-quality goods/services and if living conditions are very dire. But this is bound to occur only if the population regards it as normal and it leads to corruption. In the end the so called enchanted circle is closed. To be able to respond effectively to the informal economy and to the illegal labour that is associated with it (negative impacts and consequences), linked to the liberalization of trade, it is necessary to implement the four-fold interrelated strategies set out by Carr and Alter Chen (2001): direct action programmes; focused research and statistics; local and international organizing of informal workers; and relevant policy dialogue. Lastly, it is well known that the informal economy weakens

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the structures of society. For this specific reason, society as a whole should be made aware of the extent and impact of this phenomenon. Without proper knowledge it is extremely hard (almost impossible) to enforce the measures that are needed when tackling this social problem. The first and most important fact is that education is the most important cornerstone in the fight against the grey and black economies.

III – Conclusion

Measuring the extent and forms of the informal economy is of great importance in designing states’ future economic-policy measures in different areas, where the goal is to reduce the number of unregistered profitable activities and moonlighting. Special programmes intended to reduce the scale of the informal economy are very important. There are two basic methods if one is to succeed in this: to abolish its causes, and stricter supervisions and sanctions for the participants. In addition, flexible legislation is also important. Some of the experts who participated in this symposium believe that a lower tax rate, stricter and more efficient supervision, a more collective approach by all state institutions and tailored economic policies could bring the scale of the informal economy closer to those countries which have a low level of informal economy. A low level might be defined as less than 15% of GDP, which is mostly just a hope, but such a result is in sight for transitional countries, including Slovenia.At the end of the symposium it was stated that in this day and age we still need to reinstate a clear boundary between politics and the economy. In a modern society, the interests of those in government should not prevail under all circumstances. It is necessary to avoid, or rather suppress, having to gain employment through one’s connections, nepotism and clientelism, because such behaviour results in citizens mistrusting their own state. It is only possible to fight against the form of corruption that provides jobs via one’s connections with clearly defined priorities and interests at all levels of society, and with the establishment of appropriate policies. Additionally, appropriate policies and programmes, and their efficient implementation, are a formidable obstacle to moonlighting and the grey economy. Although each member state of the European Union has its unique characteristics regarding the informal economy, moonlighting, social policy and social disturbances, which originate in growing social insecurity and an increasing population living on the edge of

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poverty, efforts need to be made to establish a unified social policy for member states. Municipal, regional and national policies need to be altered in order to fall in line with the policies of the European Union. One must also not forget the importance of the judicial branch and its significant influence. Meško and Kos (2008) issued a warning about the importance of preventing economic crime, which is closely tied to the grey economy and preserving social peace.This symposium was clear about the need for good and reliable research results, which should lead to useful suggestions, and to solutions that will work. National research papers and studies should be adjusted and unified with the needs and demands of international studies, and they should also follow the goals of the European Union and CRIMPREV project. The formation of a working ‘network’ - a ‘CRIMPREV-network’ - should be one of the project’s priorities in the future. It would thus be possible to discuss such issues at pan-European level. Besides connections between regions, it is also important to establish a link with the policy-makers, both national and international, and to explain to them the importance of uniting and to include them in achieving this goal.At the same time, prevention is also important, especially the education of employees and young people, since their values are still evolving and forming. It is also important to think about accelerating education and training in modern fields of security provision, in order to expand the professionalization and qualifications of employees in state institutions, stressing the education of educators.

Participants

The scholars who contributed to this workshop either as authors of paper or discussants were: Antoinette Verhage (Ghent University, Belgium), Hartmut Aden (Leibniz University, Hannover, Germany), Gašper Tompa (Institute of Criminology at the Faculty of Law Ljubljana, Slovenia), Noah Charney (Association for Research into Crimes against Art, Italy), Joanna Shapland (University of Sheffield, UK), Alvise Sbraccia (University of Padua, Italy), Pietro Saitta (University of Messina, Italy), René Lévy (CNRS - Directeur du GERN, France), Vincenzo Ruggiero (Middlesex University, UK), Paul Ponsaers (Ghent University, Belgium),

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Gudrun Vande Walle (Ghent University, Belgium), Laurence Massy (University of Liège, Belgium), Matthew Bacon (University of Sheffield, UK), Henk van de Bunt (Erasmus University Rotterdam, The Netherlands), Gorazd Meško (University of Maribor, Slovenia), Bojan Dobovšek (University of Maribor, Slovenia), Urša Kos (University of Maribor, Slovenia), Katja Eman (University of Maribor, Slovenia),Andrej J. Pirnat (University of Maribor, Slovenia).

References

Carr M., Alter Chen M., Globalization and the Informal Economy: How Global Trade and Investment Impact on the Working Poor, WIEGO, 2001.

Dobovšek B., Public Policy on Curbing Corruption, CRIMPREV - ‘Informal Economy, Illegal Labour and Public Policy’, Ljubljana, Faculty of Criminal Justice University of Maribor, 2008.

Dobovšek B., Economic organized crime networks in emerging democracies, International Journal of Social Economics, 2008, 35, 9, 679-690.

European Commission, Illegal Labour: 5% of European Wage Earners are paid Illegally, Survey shows, European Report, 2008.

Kleemans E.R., Brienen M.E.I., van de Bunt H.G., Kouwenberg R.F., Paulides G., Barensen J., Organized crime in the Netherlands; second report of the WODC-organized crime monitor, The Hague, BJu/WODC, 2002.

Meško G., Kos U., Prevention of Economic Crime, Responses to Gray Economy and Maintenance of Social Peace - Slovenian Crime Control Policy Perspectives, CRIMPREV - ‘Informal Economy, Illegal Labour and Public Policy’, Ljubljana, Faculty of Criminal Justice University of Maribor, 2008.

OECD, GDP in the OECD area rose by 0.2% in the second quarter of 2008, OECD Quarterly National Accounts Paris, 20 August 2008.

Philip M., Corruption and State Capture: An Analytical Framework,

Legal information: Director : René LEVY – Legal deposit : in process - ISBN N° 978 2 917565 31 5 - Dissemination : this text may be reproduced under condition of mentioning its original reference and sending a copy to the publisher - Design : CampingDesign.

Translated by Bojan Dobovŝek

Crimprev info n° 19Bis - 24 april 2009

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Department of Politics and International Relations, University of Oxford, 2001.

Sbraccia A., A case study on segregation and informal economy, CRIMPREV - ‘Informal Economy, Illegal Labour and Public Policy’, Ljubljana, Faculty of Criminal Justice University of Maribor, 2008.

Shapland J., How might countries’ social policies encourage the informal economy?, CRIMPREV - ‘Informal Economy, Illegal Labour and Public Policy’, Ljubljana, Faculty of Criminal Justice University of Maribor, 2008.

UNESCO, Informal Economy, Education, 2008.

Verhage A., Impact, scope and practice of anti-money laundering policy, CRIMPREV - ‘Informal Economy, Illegal Labour and Public Policy’, Ljubljana, Faculty of Criminal Justice University of Maribor, 2008.

Bojan Dobovšek - Faculté de la Justice Pénale et de la Sécurité Université de Maribor - Slovénie - Tel: +386 (0)1 300 83 00 Fax: +386 (0)1 230 26 87 bojan.dobovsek@fvv.uni-mb.si