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Elena Panariti is a Greek economist with extensive experience in the World Bank. She is specializing in institutional economics and on the role of institutions guaranteeing property rights for the economic prosperity of a nation in particular. Her book Prosperity Unbound published in the USA and Greece with a foreword by Francis Fukoyama examines the impact of the informal economy on the economic maturity of states. How to deal with illegal construction, why the Greeks hiding their income and do not pay taxes, why are laws more often suppressed in the Balkans than in Western Europe, is there a solution to illegal immigration – about all these issues Maria S. Topalova  talked with Elena Panariti.

Prosperity unbound. How could we secure it?

By being honest and look long-term and not short-termm. You see, politicians are very short-sighted. Short sighting is not taking to unbound prosperity. Long sightedness and the building of trust is the pentacle of getting to prosperity. And I will explain why. In economics, in mathematics we have something called game theory. And in game theory we have different sets of games. That means that we basically have agreements between individuals. And there is one type of a game, one type of an agreement between two players. And the agreement goes like this: “I am never going to see you ever again but just right now. So, I am going to take the opportunity to grab every single right I can. And because I am never going to see you ever again my reputation is not destroyed, you do not care, and I am going to grab everything I can.” This is usually what happens when you go into a taxi in a country that you do not know very well. And it is usually those Middle Eastern countries where you go in and they take you around the city. Taxi drivers never think they are going to see you ever again. Their personal reputation is not even touched because you do not even know them. You are going to say: “Well, the taxi drivers in this country are bad” but that’s it. You destroy the reputation of taxi drivers but they do not care. This is a fight of who is going to have more. That is very, very short-term thinking.

But then you want to move to other thing. You want to move to something which a little more involved which is continuous games. “I am going to see you tomorrow.” You would like to keep a good relationship. So, you would like to get into an agreement that will allow us to both of us have benefit, because if you have a benefit then I will have a benefit and if I have a benefit then you have a benefit. And if we continue working in those types of agreements we are going to have a better community, a better life. That is the difference between modern countries or developed democracies or developed markets and less developed democracies and less developed markets. That is the difference between politicians with vision and politicians that are grabbers. They are very, very short-sighted. So, that is how we would get to prosperity. We need to start building this concept of trust that will be engaging the people again, and again, and again.

Would you explain to us what does informality in economy mean and what is the difference between formal economy and informal economy?

Informality is behaviour among players in the market that does not get recorded, that does not get also recognized by the formal bureaucratic structures of the regulated market. It is not necessarily an illegal activity. In other words, people decide to be informal. On the other hand, it is an activity that occurs, and I will explain to you why and how it occurs. And then once you are in the informal world it becomes rather difficult to become part of the formal world. So, how does informality emerge? Informality emerges out of the willingness of individuals to trade, to engage in a market, to buy, to sell, to inherit people’s properties, to sell somebody’s property, to rent a piece of property. Informality emerges when the formal structure that regulates the market, when the formal structure that regulates an economy is very complicated and becomes every year even more complicated and it’s because either it gets overregulated, or it gets regulated on top of all regulations. In other words, all regulations don’t eliminate themselves and yet we have new ones coming. So, an individual who wishes to do, for example, a transfer of his or her home it takes more time to do the transfer in the formal sector than in the informal sector. And informality becomes even more a problem when the formal structure in a way becomes obsolete. By that I mean usually the reason why we want to exchange something in the formal environment is because the formal processes, the bureaucratic processes are the ones that provide the person with security of the final transaction. No one will doubt the transaction. However, when you have such huge level of unpredictability of processes, huge level of what we in economics call transaction costs, in other words, too many steps in the process, too many steps that you know from the beginning and many more that you don’t know but you find once you start the transaction, too many back and forth, too many payments, formal payments, that in the end of the day the formal transactions are very difficult to finalize. We noticed it in many countries.

In the end, people don’t manage to go all the way towards the final definition of the transaction and they stop in the middle or some place. So, they never really get a security. Even if they get at the final decision, the transaction, the next transaction will not look the same like the first one, because the processes have been changed. So, the security of the transfer in the formal environment is equally informal, equally insecure than within the informal environment. So, insecurity of transaction is permeating all behaviour. And individuals decide that they are not going to get engaged into such a energy, draining, costly, and unpredictable exercise. Instead, they will limit themselves into a knowingly insecure, but less expensive and quicker transaction. So, that is the informal market.

In the informal market it is not black and white. About 70% of the world’s population, about more than four billion people in the world live and work in the informal market. And informality means that you may not have full security of your home or of your apartment. And you can identify that when it is not possible for you, for example, to sell it very quickly, to rent it. The processes are very complicated. If you leave your house, let’s say, your house with your agricultural land and go to another country to find a better job and you come back and your neighbour has actually trespassed and taken part of your property it takes you forever to actually defend your ownership through a very complicated system of judicial enforcement and so on. This is part of informality. All of that is not illegal. It is just living a life in a very complicated, not structured well institutional system.

The “black” market on the other hand is something rather different. The “black” market is a willingness to engage in “black”, corrupted activity, so that you can extract rent, extract higher profits. It is done with a purpose from the very beginning of the behaviour, from the very beginning of the agreement. Both parties are knowledgeable of the fact that they are engaging in a “black” activity. An example of that activity is that I will be knowingly building a house in a place where I know it does not belong to me. I will knowingly trespass and take the land of another person. I will actually let go and do a contracts and hire a notary or a lawyer who will pay money and then everybody is engaged in this “black” activity. Another “black” activity is when the people get paid under the table extra money for specific non-eligible jobs or transactions. These are very close to “black” activities, very close to corruption. Another “black” activity is when people choose not to pay taxes. Now, is informal activity equal to “black” activity? No. Is, however, informal activity a precursor of “black” activity? It could be because a “black” activity is more dominant in countries where the formal structure is very weak, and it is very difficult to enforce law. It is very difficult to enforce formal rules, and it is very difficult to actually apply them. And in this way you have an environment that incubates a lot of uncertainty or it becomes a bit of the Far West. Those who have the money, those who have the power, those who are able to actually engage and transact faster, these are the people that are going to prevail. An example I can give you in the world – South East Asia, Latin America in the 1980s, India. These are countries where informality exists and there is not much “black” activity. There is but it is not rampant. Yet, you go to countries like parts of Eastern Europe, or in the Middle East, and you notice that there is a lot of “black” activity. There is a lot of corruption. And that is as a result of the fact that it continues to grow, because it is very difficult to eradicate it. Even it becomes the way of doing business.

How harmful is the informality to the economy of the society, because from what you said it turned out that informality solves problems that exist. If it resolves problems why should we fight it?

It is a very good question, because a lot of policymakers make the mistake to believe that informality, because it is basically the humans’ brain to go around a very difficult, converse, complicated beaurocratic system, solves the problem. So, a lot of policymakers, a lot of ministers of finance of many countries say because we have a lot of informal activity we have a cushion. So, it solves issues. It is the biggest mistake somebody could actually make because it is exactly that informality that allows people to survive. It is basically surviving. It keeps them in survival mode and never allows the markets to grow and become revised and developed, and become competitive internationally. If we keep informality and allow it to grow in a country that is when we have decided that the country will never develop from the survival mode. It will constantly remain an emerging country, a developing country, a small country, a backward country. And I do not think anyone would like to have such type of a country or such type of a market. So, looking very, very short-term and saying “Oh, well, because people are really bright and smart and we come from a country that everybody is being entrepreneurial and they figure out ways to go around the stuff” to keep this is the worst mistake you could ever do.

Let’s go to the informality in the Greek economy. Could we see it in here?

We see it a lot here, because our country is full of bureaucratic issues. It is full of overlapping processes, it is full of rules. It is a typical example of the reasons why we have informality. So, rules are conflicting with each other, they are overlapping with each other, it is rather hard to do enforcement of law, there are always new ways to come up with a new rule or a new regulation. People are confused. People do not really know exactly which way they should go about. However, there is an interesting concept. Greece is a country that has a very high level of education and a very, very good set of people. People are working. The reasons why things get to be so complicated, so cumbersome, so difficult is because a lot of times the rules have been generated from the top to the bottom, historically. And the only way to resolve informality is to go and understand exactly how and when the first break took place. Why did we have this first break between the people that decided to work in informal ways and the actual state of governments that lived in an island? So, in Greece we do have informality. It comes from the fact that in the 1800 we adopted legal structures that did not come from us although they originated from the ancient Greece. In the 1830s we received the Civil Code of the German tradition and the Commercial Code of the French tradition which were developed for different societies. Similarly, the same occurred in other Eastern European countries and then there was a clash. And the clash is between distinct rules that do not meet the needs of the people. And then people underneath begin to operate in regular every day informal ways that are mainly based on reputation. That is why to be informal it requires high level of trust and high level of reputation. You can not be corrupt and be informal, because then the people that work with you, in your community, in your society will not be able to continue working with you. So, in Greece we do have a level of informality in many aspects. For example, it is very difficult to issue licenses to operate a business. There are too many licenses. You see a lot of business that have a few of the licenses in the beginning to open the business but they do not have the full license. And there is an understanding from the state that this happens because of bureaucratic problems. So, the reason that allows for the business to open although not the full set of permits is out there and in a way it invalidates the reason of having a permit.

Is tax evasion informality?

Tax evasion is a problem of its own. As I said to you answering your previous question, if you have informality you remain in survival mode. Survival mode means I want to take care of my family, my immediate family, and maybe one or two of my people in the expanded family. That is I do not really have the energy to worry about the neighbour’s family or the family of somebody in another community. That is, unfortunately, the reason why the concept of paying taxes is not very well elevated. People think that “Why should I pay taxes for the rest of the country when in reality I still have to have a private health insurance, still have to pay my own doctor, and every time I drive the roads the roads are really bad. I still have to go to private schools.” So, they feel there is a proceeding of the taxation in so many ways that they do not have the incentive to pay taxes. On the other hand, however, the problem in this country is mainly the fact that a lot of people do not declare at all the fact that they work here. So, it is not an issue of tax evasion. It is more an issue of informality than an issue of tax evasion. The system, the formal system is not fully capable of generating a trust to the individuals that is needed for the benefit of the common to be able to pay. So, who really pays in this country? The salary earners of the public sector, the salary earners of a regular company but not really individual entrepreneurs, like film makers or others. There are plenty of people that have a lot of money but they do not care to be even registered in the tax authorities. They make money abroad and keep it abroad. So, that is really a challenge that we have to change. The challenge is to manage to establish a trusted behaviour for the better of the common.

Informality and illegal buildings in Greece – how do these two things relate with each other?

This is where informality and illegality meet, they get together. All countries in the world have these issues and are fighting with informality, because the state is running so far behind in devising the usage of land, the zoning of land and the planning specifications of land. Humans do it before that. So, they build and decide that this is no longer going to be forest land. This is going to be urban or commercial area. And then they request from the state to legalize them. And if they create enough pressure, in other words, when they are many, many more than just one person, than that pressure is becoming difficult for a state to handle and legalizes that. But this is nothing else but a continuation of a problem. That is why I was telling earlier that to pretend in a straight face that informality is a good thing and to do nothing about resolving it is really disrespectful. And I would say intellectually lazy. The issue of illegal buildings is very much related to the fact that people in this country don’t have very clear property rights. I mean that they do not have clear definitions of usage and zoning of land. And a property right is not just a title. It is not just a contract. A contract between two people is an informal property right. What makes it a formal property right and a completely secure right is the moment that the people, the owners, are able to declare ownership around the world of their little piece of land. And that happens only if they register their ownership in a public registry. So, if it takes more than an hour to register your property in a public registry than there is a problem in the system. And in Greece we have eight different entities one person has to go to transfer a piece of property. That one person has to also go and do a lot of research and even at the time he registers it – remember I told you at the very beginning that when your formal road is so complicated it becomes also insecure. So, in the case of Greece, you may go through the eight different organizations, you pay a lot of money, you waste a lot of time, you go back and forth, and then something happens, something changes, things are not the same any more and many people decide that the best way is to cheat. So, this is really a result of the informality. The illegal house is cheating, it is corruption and it is a result of illegal housing and of informality.

Is the legalization of all illegal buildings a solution to the problem?

No. It is refining of the system the solution to the problem. It is to really go to the roots and fix it once and for all. It is to create property rights system. It is to create productive and very predictable processes that are there and they do not change. That is the resolution to the system. You told me that it is super important to have legalization. People do it for different purposes. They legalize such properties, governments do it to get money. But that does not mean that there are not going to be illegal entities. So, a responsible policy maker should actually be engaged in reforming the whole system so that it does not happen again.

What about informality and illegal immigration?

Illegal immigration is very much a political issue. It is interesting why does it happen more in one country than in another? And a lot of people say that it also happens in America. Well, America is also rather informal. The United States and especially the areas where illegal immigration happens there is a lot of laxation of rules.

So, in Greece we have a set of informal structures that do not even give very good services to the actual citizens of Greece let alone the illegals. This inability, this weak government is what allows for illegal immigration to take place. Now, we could have said that we have illegal immigration when people come through our borders but then we can take them back. And the second reason is that we can not take them back very easily. It is not as simple as say some. The illegal immigrants themselves they are not stupid. They know very well how to come in. They burn their papers so we do not have a way to return them back. And it is very hard for us to enforce a very radical change and at the same time keep the balance of a modern Western European country. And at the same time handle a country that has very many government issues, very complicated and very serious issues. And I think it is going to become even more serious together with the economic crisis.

How did you get involved with the project in Bulgaria and why did you decide to put it in the city of Dupnitsa?

Institutions are the key, the pentacle of economic growth that is sustainable. And the institutions mean agreements, they mean contracts. And the basic agreement is the agreement of the security one has over his property, whether this is movable property, whether this is my glass of water, or whether this is immovable property – my house. It is more important for immovable property and that is why we started working on immovable property. We started working in developing registries and systems, data bases that provide security over the right of ownership.

We have worked in many countries. We have worked with the World Bank. We have worked a lot in Latin America and in South East Asia. And I also worked a lot in the Middle East with that foundation. We worked in other countries and we chose to do first an assessment and we tried to understand the level of informality in each country and then, the level of willingness of the country to change, because as I said, 70% of the population of the world lives in an informal environment. The willingness and the appetite to change and reform – it is a very different story. So, we had to make that assessment – what is the difference, what is the commitment of the country to change? And the third one was the level of difficulty.

So, we chose to start with Bulgaria because it has all three aspects. It has, of course, informality. But it is a new country where after transformation, after the resolution of the communist party there was this transitional structure that brought the country into a market economy. That is a benefit and an advantage because that meant that the level of difficulty of handling the problems in Bulgaria is not going to be as high as handling problems, let’s say, in Lebanon or in Egypt, because these countries have been working in the market economy for far, far more time. So, to unlock and destruct these problems would take longer time.

The second element was that there was a very serious commitment from the government to do the reforms. It is not necessarily the specific government I am talking about as much as the civil servants, the consistency of the governance. It is a serious country and it seems that they are very eager, they have the appetite of wanting to become better, stronger, robust, serious players. And that is very important, because there is no way one person, or even a very important one person, or a very important one company to finally do a reform which is so deep-rooted in the core element of the individual if that individual and that society is not elevated and is not evolved enough to want to have it. And that was a key element.

We made a tour of municipalities and wanted to also find that same spark of change in these municipalities. Of course, the resources are limited, so we started with one municipality. We had to find an important city but not important historically, or an important city geographically. So, we decided to work with Dupnitsa because to me, after my experience, after having worked in 30 countries, the commitment of the people was tremendous. They work faster than we do, they run faster than we do and there is nothing more beautiful than to work in an environment with your partner which is far more engaged than you have ever thought. I know there are controversies about this city. It does not bother me to the least because I always learn myself and my team that who we always serve are the people of whatever municipality or country we work for. The leaders come and go. They are important to set the terms but we serve the people. These are their private properties we are securing. It is not the properties of somebody else. So, they are going to be better off. They are already better off, because we have already started working and I would be delighted to come back and have a meeting with you in ten months or so and see it before and after. As a matter of fact, we are just starting to do an econometrics study and we will be able to quantify the social benefit of the reform before and after and the economic benefit of each individual owner before and after.

What does the reality check analysis say about the informality in Dupnitsa?

It is very similar to what happens in Greece. Bulgaria is a country that really initiated its modern democracy a little later than Greece. But it is also important that it imported it like the Greeks did. They imported it together with the legal tradition of the German Republic but it has minorities, before that it was the Ottoman Empire, before that there were influences from the Byzantine Empire, before that there were the Slavs. So, reality check analysis has to go all the way back to the beginning and to see why did this happen to that population and it decided to go this way versus continue to develop with the formal structure. It is an extremely interesting case, because it had these legal traditions it became rather reject and a little bureaucratic in terms of transferring property but not as bureaucratic as other countries. So, it is easier to resolve it here. Why not as bureaucratic? It is because the communist period was actually not a very negative period in that regard. What do I mean by that? There were not very many transactions for seventy years. So, right now it is easier to clean this. The problem starts from the day of restitutions. So, the day you started having restitutions that is when you start having “black” markets operating. Because of the informality people are designing their properties in whichever way and forms they felt it is easier for them.

We are basically working with the framework of the reforms that have already been established since 1994 and later on ratified in 2003 or 2004. And we just basically apply those by putting them down to the people. But the way we do it starts from the people and we try to get the people’s involvement. There is no other way to get back because it is super important to have confidence. And the database we built, the registry we are building is a database of the municipality. It is a public database and people will take care of it. They are already taking care of it and I would be delighted to see how it is going to work out. And I am very positive that it is going to work out rather nicely.