Estimation and Comparison of Underground Economy in Croatia and European Union Countries: Fuzzy Logic Approach

Underground economy (UE) is one of the undesired facts in every country. The size of the underground economy is an important parameter in determining the effectiveness of fiscal and monetary policy, the rate of economic growth, and income distribution. From a scientific point of view analysis of the UE is faced with severe data problems because underground activities are not recorded and anyone engaged in it has an incentive to hide them. Therefore, economists have developed a variety of methods to estimate the size of the underground economy. The aim of this paper is to estimate and compare the size of the Croatian underground economy with the underground economy of European Union (EU) countries in the period of 2004 till 2012. The purpose of this paper is to address this issue in three ways. First, we review existing estimates of the size of the underground economy. Second, we apply a novel calculation method for estimation: fuzzy logic. Third, we calculated and compared underground economy index for 25 European Union countries and compared it, with special focus on Croatian underground economy index. Results indicated that Croatia has the thirteenth largest underground economy among measured members of the European Union. This study is the first of its kind with recent data to measure the size of underground economy in European Union countries by employing fuzzy logic approach.