Transaction costs and related issues

What is transaction cost?

• In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market)

Types of transaction costs

• costs of searching, processing and storage of information;• costs of negotiating;• costs of certification and protection of property rights;• costs associated with the emission activity of the enterprise;• influence costs, etc.

Influence costs

1. The first is the MPC- mandatory pension contributions.

2. Next deductions is personal income tax ( PIT ).

10% 10%

Costs of coordination of construction projects

• Long- term coordination of the project of construction of any complexity;• Burocracy;• The high financial costs

• 10% of the construction costs - an average of the purchase of land;• 0.5-2% - for approval of the project;• In case of need to develop site design - 20-30 %;• Informal costs of coordination of the project may reach 20-50 % of the cost of developing and official approval.

Licensing

• In most cases , to obtain a license you need to provide a large number of documents , in addition to the main list of documents

• Bureaucracy;• Complex hierarchy;• No fiscal loosening

Underground economy

Underground economy – legal or illegal production of goods and services, as well as redistribution of incomes and assets which are not reflected in official statistics.

 

Three components of underground economy• Incomes and property are held away from taxification by major and

minor institutions of real sector. • Private household not recorded by the government• All types of illegal business (drug dealing, illegal trafficking,

prostitution, illegal production of alcohol and cigarettes and etc).

The main causes of the informal economy in Kazakhstan:

- Unrealistically high tax burden;- Imperfect labor legislation;- Problems with the registration of business;- Difficulties in obtaining the necessary official information;- The rigidity of the administration and enforcement of laws and

regulations.

Objective and subjective reasons of growth of the underground economy in countries with transition economy

Objective factors:• Rapid and cardinal way of economic and public reforms• incompleteness of legal base due to gap between legislation and

reforms temps• insufficient work experience of public authorities, as well as

entrepreneurs in conditions of transition economy• Rapid increase of number of enterprises and individual

entrepreneurs• Not reliable financial statement of enterprises, insufficient level of

book-keeping discipline

Subjective factors:• Significant level of corruptness of authorities• Ineffective measures against organized crime

Illegal economic activity includes :• Production, sale and distribution of goods and services prohibited

by law;• Production activity which is generally legal but in case of absence

of license

Hidden activity concealed from public authorities for various reasons:

• in order to avoid the payment of income tax, value added tax or other taxes;

• in order to avoid payment of social security contributions;• to conceal violations of certain legal standards such as

minimum wages, maximum duration of working hours, safety standards, health standards, etc.;

• avoid certain administrative procedures, such as completing statistical questionnaires or other forms of reporting.

Loses due to underground economy:

• reduction in tax revenues as a republican and local;• deformation of the structure of consumption.• activities in areas specifically prohibited by law.• as shadow economic activity is illegal , part of the revenue is

spent on bribery of public officials, which is one of the causes of corruption and an important factor in society.

The informal sector of the economy is:

• It is an informal proceeding taking place in the framework of

the household sector and the informal sector.• Units that produce goods and services primarily for the

purpose of providing jobs and income of the persons concerned (by ILO).

The share of the shadow economy in the countries of the Commonwealth of Independent States (CIS) and the Baltic

States in GDP,%

Грузия Азербайджан Молдавия Латвия Литва Казахстан Белоруссия0

10

20

30

40

50

60

70

Series1

The share of the non-observed economy in GDP in the Republic of Kazakhstan

2007 2008 2009 2010 2011The share of non-observed economy in GDP, total, including % : 23,9 22,6 21,6 20,7 20,2

informal14,2 12,8 11,6 9,3 8,7

hidden9,7 9,8 10 11,4 11,5

The share of non-observed economy of construction in GDP,% including: 1,8 1,8 2,3 2,4 2,2

informal1,2 0,9 0,6 0,4 0,4

hidden0,6 0,9 1,7 2 1,8

Proposals to suppress informal economic activities:

• Simplification , i.e. optimizing the functioning of legal institutions by eliminating duplicative and unnecessary laws;

• Decentralization , i.e. transfer of legislative and administrative responsibilities from central to regional governments , in order to bring power to the real and pressing problems of life ;

• Deregulation , i.e. increase accountability and opportunities for individuals and narrowing them to the state.

• Publication of law drafts for public discussion;• Analysis of the bills in terms of cost benefit, in order to exert a disciplining

effect on the government and reject the flawed bills before they are published ;