THE SHADOW ECONOMY IN THE EASTERN PARTNERSHIP COUNTRIES: MODELLING AND ESTIMATING IN THE CONTEXT OF THE NEEDS TO DEVELOP ECONOMIC COOPERATION BETWEEN THE EUROPEAN UNION AND EASTERN PARTNERSHIP COUNTRIES

Abstract

The paper deals with a highly complicated problem related to the development of economic relations between the European Union and the so-called Eastern Partnership countries – Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. The essence of the problem is the extremely excessive level of the shadow economy in the Eastern Partnership countries: the shadow economy considerably affects the situation in the Eastern Partnership countries and it causes in addition a profound negative impact on the economic cooperation with the European Union. The assessment and monitoring of shifts in shadow economies in the Eastern Partnership countries is a crucial issue for the European Union, in particular to make responsible and reasoned policy decisions on the economic cooperation between the European Union and the Eastern Partnership countries. This fact leads to the needs to create and use adequate instruments for modelling and evaluating the shadow economy. The opportunities of using various tools for modelling and evaluating the shadow economy are discussed herein. The main focus of attention is directed to the new integrated approach to shadow economy modelling: this approach is distinguished by the fact that the shadow economy is analyzed and assessed in a holistic manner upon taking into account the different aspects of economic life and economic development processes. A new model applicable to the assessment of the shadow economy in the Eastern Partnership countries is described; this model is based on the idea of the so-called Tanzi model and was developed by covering the traditionally used independent variables such as taxes, wages and salaries, as well as the new modified indicators. The paper describes empirical research on modelling and estimating of the scope and dynamics of the shadow economy in the Eastern Partnership countries, as well as the principal results of the said research. It has been shown that the shadow economy in the Eastern Partnership countries is highly, extensively and even dangerously developed. The results of the research show an existence of a link between the size of the shadow economy and the control of corruption, but this link is very diverse in different countries. The methodological approach and research results presented in the paper can be used to create a decision support system for the development of the economic relations between the European Union and the Eastern Partnership countries.