In addition, as long as the size of the bribe doesn't increase too much, some entrepreneurs in the unofficial economy will find it beneficial to shift to the official economy, because restricted access to public goods in the unofficial economy becomes more punitive with the increased size of the public good provision.
The local government's cost of bribery in this model is the flight of entrepreneurs to the unofficial economy. Therefore, since the local government's interest in local official output increases with its share of tax revenue, it has an incentive to reduce the size of the bribe and bring more entrepreneurs into the official sector.
Put differently, entrepreneurs facing an increase in the bribe that would have otherwise driven them to the unofficial economy are sufficiently compensated by the increase in their income from greater public good provision to stay in the official economy.
This is a particularly interesting result in that it allows for a possible simultaneous increase in corruption measured by the size of the bribe and an increase in public good provision, and the reduction in the relative size of unofficial economy.
"The Unofficial Economy
and the State in Transition".
Areas of the unofficial economy were recorded, to a greater or lesser extent, in almost all planned economies.
A recent estimate of the unofficial economy based on electricity consumption (29) suggests that the share of unofficial activity grew between 1989-95 from 18 to 22 percent in a sample of Central East European (GEE) countries and from 12 to 37 percent in a sample of the Confederation of Independent States (CIS) [World Bank, 1996].
Taking into account that at least 25 percent of Russia's reported GDP is Goskomstat's estimate of the untaxed unofficial economy, it represents a burden of over 40 percent on the registered economy, which is high by world standards.
TABLE 4 Share of Unofficial Economy * in GDP, 1989-95 1989 1990 1991 1992 1993 1994 1995 Azerbaijan 12.0 21.9 22.7 39.2 51.2 58.0 60.6 Belarus 12.0 15.4 16.6 13.2 11.0 18.9 19.3 Estonia 12.0 19.9 26.2 25.4 24.1 25.1 11.8 Georgia 12.0 24.9 36.0 52.3 61.0 63.5 62.6 Kazakhstan 12.0 17.0 19.7 24.9 27.2 34.1 34.3 Latvia 12.0 12.8 19.0 34.3 31.0 34.2 35.3 Lithuania 12.0 11.3 21.8 39.2 31.7 28.7 21.6 Moldova 12.0 18.1 27.1 37.3 34.0 39.7 35.7 Russia 12.0 14.7 23.5 32.8 36.7 40.3 41.6 Ukraine 12.0 16.3 25.6 33.6 38.0 45.7 48.9 Uzbekistan 12.0 11.4 7.8 11.7 10.1 9.5 6.5 * The share of the unofficial economy is defined over total GDP.
It is reasonable to assume some positive correlation between the relative magnitude of the unofficial economy and corruption in a country, considering the practical necessity of obtaining informal support from government officials for these unreported activities.
Third, the evidence presented below correlating the extent of privatization with the evolution of the unofficial economy suggests that those countries that privatized rapidly experienced less of an increase in their unofficial economies.
Table 3 suggests the existence of an empirical relationship between medium- and large-scale privatization (measured by the index for large-scale privatization progress constructed by EBRD for their transition report) and the evolution of the unofficial economy, using the estimates for sixteen countries.(49) Further, Table 4 suggests a similar trend when comparing overall privatization and private sector development (PSD) in a country (through an index of privatization and PSD constructed by the World Bank for their 1996 World Development Report) with the evolution of the unofficial economy.