Shadow banking versus the shadow economy in Poland
3. Shadow economy in Poland
Known under a broad variety of different names as “grey and black,”
“unrecorded,” “illegal” or “underground,” the hidden economy has as many facets and meanings as it does names. One commonly used working definition of the shadow economy is one of all currently un-registered economic activities that contribute to the observed Gross National Product [Schneider, 2010].
This shadow economy is spreading to almost everywhere in the world. For example, Poland’s shadow economy (25% of its GDP) is slightly higher than the European average part of the informal econ-omy in the GDP (at around 19%). This development is worsened by the global economic crisis and in particular affects some vulnerable groups, such as women or the young. In the Polish economy, women are often engaged in low-wage jobs in Small and Medium Enterprises.
For some, during this global crisis, the shadow markets are to their advantage adding jobs and improving the lives of millions of people.
Engaging in the informal economy is not always an economical choice but rather a financial necessity. On the other hand, the current rise of the shadow economy in Poland is a crucial issue because it shows that our market does not function properly.
The shadow economy can be divided into two parts. Friedrich Schneider estimates that about two-thirds is undeclared work, where workers and businesses do not declare their wages to the government to avoid taxes or documentation. The other third comes from underre-porting. Underreporting occurs most often in cash-based businesses [Schneider, 2009].
There seems to be two hypotheses underlying the observed occur-rence of the, in-the-shadow employment. First, there is a market seg-mentation hypothesis, which suggests that for some workers, the ac-cess to the official labour market is limited, forcing them to accept the unofficial work relationship with their employers. Secondly, informal employment may indeed be preferred by the employees in accordance with the tax evasion hypothesis. In with this view, undeclared or un-der-declared work is motivated by the benefits of evading taxation and/or social security contributions. It seems, that in Poland, unregis-tered employees are active in the shadow economy not because it is an optimal solution in their individual strategy, but because they are
forced to do so, due to the limited access to formal employment [Cichocki, 2010].
The size of the shadow economy is very strongly correlated with the amount of cash used in busses activity.
Table 3. Structure of payment instruments used by polish enterprises in Poland in 2012. In percent
Item Cash Payment Source: J. Górka (2012), Badanie akceptacji gotówki i kart patniczych wród polskich
przedsibiorców, NBP, Warsaw.
Recent development in the demand for cash can be relatively well explained by some economic and institutional factors as follows:
– the recent regime of very low interest rates has made cash an at-tractive instrument for saving (money hoarding),
– the banking crisis has caused a loss of confidence in financial institutions by the general public. It could be that bank accounts are no longer considered more secure than money balance (ma-dras money),
– some consumers do not have a free choice between using cash and credit cards. In the current bad times more consumers are forced to use cash as the only payment instrument,
– if cash usage is reduced then the related tax revenue from seign-iorage is reduced as well.
According to Central Statistical Office the sectors most involved in the shadow economy in 2011 were as followed:
– building industry (38.2%),
– wholesale trade and retail trade, car and motorcycles repairs, basic consumer goods and household goods (23.9%),
– production (22.9%),
– agriculture, hunting, forestry (14.3%), – households employing people (14.3%), – hotels and restaurants (13.4%).
4. Discussion
There are two kinds of definitions of shadow banking and the shadow economy. Firstly, it is a descriptive definition of what it is. Secondly, it is a functional definition of what it may be. Using the functional definition of shadow banking and economy we compare their roles in our life.
Table 4. Comparative analysis of the role of shadow banking and the shadow economy in our life
Item Shadow banking Shadow economy
Real economy Uncertainty increasing External cost absorption Regulatory economy External cost absorption Uncertainty increasing Source: Own.
Shadow banking and the economy may play two different roles.
Firstly, it is one of increasing uncertainty in our everyday life. Sec-ondly, it is about the absorption of the external cost of functioning of shadow banking or a shadow economy. Most of all, this is inherent to creating trust. Trust plays a special role in shadow banking and in the shadow economy. First of all, trust can be a substitute for official con-tracts. As transactions in shadow banking are by definition not moni-tored or declared, agents who carry out shadow transactions cannot rely upon the formal legal system to enforce agreements or settle dis-putes. In this context, trust may appear as a substitute for formal con-tracts. On the other hand, if generalized trust extends to the state, it
may as well have the opposite effect of reducing the shadow economy.
Since the shadow economy constitutes a form of tax evasion, then one should expect its size to be negatively impacted by growing trust.
There is robust evidence that trust is negatively correlated with the size of the shadow economy. In other words, more trusting countries exhibit a smaller shadow sector [D’Hernoncourt, 2008]. Growth of shadow activity in everyday life is fuelled by distrust to the market and to the state. There are many factors causing distrust in our rela-tions with the others.
Table 5. Factors of distrust in everyday life
Factors Outcome Factors Outcome
Casino capitalism Short time decision making
Financialization Over-indebtedness
Dispersion of risk Loss of social responsibility by DM
Modeling risk Biflation Uncertainty in everyday activities Source: Own [Solarz, 2012 A, B].
Shadow banking and the shadow economy play its own role in is-suing “merit” or “demerit” goods. Negative and positive goods are moved from the real economy to the regulatory economy and vice versa. Traditional financial accounts and financial balance sheets have been presented in two-dimensional matrices; sectors in columns and categories of financial instruments in rows. Such presentations do not necessarily answer the question of who is financing whom in and what categories of financial instrument. In order to answer the question of what is the role of shadow banking and the shadow economy in our life we need financial accounts and financial balance sheets to be pre-sented in three-dimensional from-whom-to-whom matrices, covering real and regulatory sectors of the economy as well financial instru-ments, institution and markets [Statistical, 2013].
As a result of the crisis, two dramatic changes have occurred, which have refocused the demand for data in support of financial sta-bility analysis, as follows:
– the comprehensive (residency-based) statistics used for the two pillars of monetary policy assessment (i.e. economic and mone-tary analysis) have been scrutinized in much greater depth and detail. The timeliness of these statistics have also been of the utmost importance in serving policy needs at times when mar-ket rumors and anecdotal evidence may have led to imperfect information for decision-making;
– supervisory (country-based) data showing exposures and inter-connectedness have increased in prominence for the assessment and mitigation of risks and contagion effects. Aggregated data collections supporting both micro-and macro-prudential as-sessments and potential recommendations are, however, not yet timely and comparable [Israel, 2013, p. 8].
Hence, many more micro studies are needed to obtain a more de-tailed knowledge about people’s motivation in using shadow or regu-lated banking and to work either in the shadow economy and/or in the official one [Schneider, 2012].
5. Recommendations
The depth of the banking sector and its efficiency matter equally in reducing the size of a shadow economy. Shadow banking is highly pro-cyclical, which may have adverse real-sector consequences. Pro- -cyclicality is endemic to finance, but is especially high in shadow banking. There are various elements that lead to the pro-cyclicality of shadow banking, including mark-to-market rules, the evolution of margin requirements and lending standards relative to collateral value and the design of compensation packages. We must also note that dur-ing crises, shadow bankdur-ing may require public support, leaddur-ing to fiscal implications.
The informal sector is a powerful buffer, which expands at times of banking crises’ and absorbs a large portion of the fall in official out-put. About 60% of the official sector contraction is absorbed by the growth of the shadow sector [Colombo, 2013].
Properly understanding the role of shadow banking and the shadow economy in development quality of everyday life is essential for rec-ommendation. It should encompass:
– dealing with regulatory arbitrage,
– addressing systemic risk in the shadow banking system, which includes developing a regulatory approach to dealer banks, money market funds, the tri-party repurchase market and deal-ing with innovation and complexity,
– considering demand-side pressures, including the merits of ac-commodating a shortage of safe and liquid assets with publicly guaranteed short-term debt,
– better measuring and monitoring of the shadow banking system;
and
– studying the shadow economy macroeconomic effects and im-plications for life quality in everyday activities [Claessens, 2012].
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