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Silvia Ricci

Naples, Italy

Member since September 28, 2013

  • Subscription Newsletter Corliss Group Financial Magazine: Spain's underground economy is booming

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    Spain's economic crisis, the government's response to it, and pervasive corruption have inspired a flowering of the black market economy.

    FORTUNE -- Outside the front door of an IKEA in the Barcelona suburb of L'Hospitalet de Llobregat, a group of men -- mostly immigrants from Ecuador -- offer shoppers informal delivery services. In Spain's crisis economy, it's a competitive business -- to cut down on conflict, the drivers pick numbered balls to set a queue -- and with some negotiating, a shopper can get immediate delivery for less than what IKEA's official drivers charge.

    It's also a sign of the huge boom in Spain's underground economy. According to a recent report by Spain's Ministry of Finance, at the end of 2012 the underground economy accounted for 24.6% of GDP, up from 17.8% at the time the crisis began in 2008. That's about double the rate in the U.K., France, and Germany.

    "If we compare ourselves to Zimbabwe or Bolivia or countries like that, we're very good. If we compare ourselves to Greece, Italy, we're similar. If we compare ourselves to France, Germany, the U.K., Denmark, Sweden, we look very bad," says Jordi Sardà, the economics professor at the Universitat Rovira i Virgili in Tarragona who led the study.

    Spain's economic crisis, the government's reaction to it, and pervasive political and business corruption have inspired a black market boom, says Sardà.

    The crisis sent unemployment soaring from a pre-crisis low of 8% to 26% today, creating a pool of workers eager for any job. (More than 1 million construction workers lost their jobs, according to a recent A.T. Kearney report.) And those who have jobs are working for less, as the percentage of unpaid extra hours they put in soared 28.6% in 2013.

    At the same time, to cut its budget deficit, the government raised taxes to the point that Spain -- one of Europe's poorer countries -- now has among the highest personal income tax rates on the continent, providing more motivation to work off the books.

    And then there is what Sardà calls Spain's "grave morality problem."

    "To hire a woman to clean your house and not file official papers is still not seen badly," he says.

    According to Sardà, this morality problem can be partly attributed to a system that condones political and economic corruption. A recent European Commission report found that 95% of Spaniards thought corruption was widespread in their country, outdone only by Italy (97%) and Greece (99%). By contrast, the percentage of people who felt similarly in Denmark was 20%.

    "And by coincidence -- or not, really, because they are very related -- these are the three countries with the biggest underground economies," Sardà says. "While at the highest levels, politicians or whomever, there exists the perception of a lot of corruption, and while there is not penalization for this, it's very hard to tell people to pay their taxes."

    Similarly, corporate tax loopholes and recent news reports that seven giant technology companies -- Google (GOOG), Apple (AAPL), Amazon (AMZN), Facebook (FB), Yahoo (YHOO), eBay (EBAY), and Microsoft (MSFT) -- together only paid 1.25 million euros in taxes to Spain in 2012, do little to inspire others to clean up their books.

    "Big companies are making millions, and they are paying 3.5%, when we're paying 30% on our paycheck. Wow! Why am I going to pay the VAT [value added tax] on my car repair if they don't pay?" says Sardá. "Altogether, these issues create a petri dish in which the underground economy grows in Spain."

    Leo, a 38-year-old who moved from Guayaquil, Ecuador to Barcelona in 2000, is among the many who have moved into the underground economy in recent years. After arriving in Spain during the boom years, he quickly found a restaurateur to sponsor his residency, and began earning about 1,400 euros ($1,900 today) per month.

    In 2003, he took a logistics job at the city's central food market because it offered more regular hours.

    "At that time, if you didn't like a job, you got another," says Leo, who requested his last name not be used for tax reasons.

    As the crisis hit, all of that changed. He could only find a part-time job at the market and split that with restaurant work. When he finally found a full-time logistics job at the city's airport, it had rotating shifts and paid 15% less than his original restaurant job.

    "That money doesn't cover everything, now that I have a girlfriend and a daughter," he says. "My girlfriend wants to work, but she can't find a job."

    So, last September, he began to deliver furniture outside IKEA, where he makes around 200 euros a week.

    "We've had increases in taxes, utilities. How are we going to make it?" he asks. "I'll keep the airport job, but in addition I'd rather have something under the table so as not to pay all those taxes."

    Spain's economy will take years to recover. In the meantime, Jordi Sardà has several suggestions to cut the underground part. The first is a revamp of the tax system. This should come soon, as the government of Mariano Rajoy is planning an overhaul that will lower rates while removing loopholes.

    "We have to have a just system. The key is that the whole world pays, not just some," Sardà says.

    The second involves a hard struggle against corruption at all levels, both via crackdowns on political corruption and through the kind of public campaigns that have made littering, smoking, and drunken driving socially unacceptable in the U.S.

    And, finally, Sardà advocates for an increase in the number of people who enforce the country's tax codes. In Spain, there is one tax agency worker for every 1,928 citizens, compared to 729 in Germany and 860 in France.

    A little vigilance couldn't hurt, either.

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