The shadow economy

Advisory and support services

It is now commonly recognized that the kind of business advice and support required by those seeking to legitimise their business ventures differs from that required by start-up or growth businesses who wish to go through a formal business planning process (Caianello and Voltura, 2003; Copisarow, 2004; Copisarow and Barbour, 2004; ILO, 2002; Meldolesi and Ruvolo, 2003; Small Business Council, 2004; Williams, 2005). It is also acknowledged that support and advice is generally not widely available to them at present about how they might resolve their situation (Copisarow and Barbour, 2004; ILO, 2002; Small Business Council, 2004; Williams, 2005). The development of a ‘formalisation service’ is one way forward. The CUORE initiative (see box) was also set up to provide enterprises with help and advice on formalisation.

The CUORE initiative in Naples, Italy
CUORE (Centri Urbani Operativi per la Riqualificazione Economica), or Operative Urban Centre for Economic Upgrading, started in 1999 with an agreement between the municipality of Naples and the University Frederico II to research the local business environment. This research revealed that the principal local labour market problem in Naples was not unemployment but the hidden economy. Today, CUORE consists of a network of neighbourhood service centres for entrepreneurs and would-be entrepreneurs. Each local CUORE centre services a low-income neighbourhood and their target group is small and micro-sized hidden entrepreneurs with the potential for growth. Once these are identified, CUORE centres offer information and advice to aid formalisation (Baculo, 2001, 2002, 2005).
Following a request by an undeclared worker, CUORE operators devise custom-made regularisation and development paths.
The project workers closely monitor each step in the process to make sure that the enterprise follows the agreed path towards regularisation and that the path still suits the needs of the enterprise. Project workers tend to be familiar with the neighbourhood. In total, according to Baculo (2005), some 1,280 hidden enterprises have received counselling and 326 problems have been solved.
Besides providing advice and support, attempts have also been made to provide incentives for businesses to formalise. Business consortia have been established to provide promotional aid and training, arrange trade fairs, help protect the originality of labels and to provide aid with the internationalisation of markets. This provides additional positive reasons for legitimising a business and creates an environment in which businesses can compete on grounds other than labour cost so as to reduce the necessity for hidden practices to reduce labour costs (Comitato per I'emersione del lavoro no regolare, 2003).

Since the Naples experiment, this initiative has been replicated elsewhere in Italy.

Other initiatives, however, have been less successful. In the UK, a pilot ‘formalisation service’ implemented in 2005 in Harde-pool in the north-east of England was based on Her Majesty’s Revenue and Customs ‘offering’ to individuals engaged in the shadow economy a confidential and anonymous assessment of their existing liabilities. If the individuals concerned accepted and paid the assessment of their liabilities, their activities would be ‘legitimised’ and they would be reintegrated into the formal economy with no legal action taken against them. Only one individual came forward and undertook a review of their liabilities. The subsequent evaluation found a lack of knowledge of the scheme, low levels of trust between the target group and the authorities, the wording of the campaign unappealing and a failure to use an independent body for people to approach, such as the local Citizens Advice Bureau (Centre for Economic and Social Inclusion, 2006).
A further example of advisory and support services for legitimising the shadow economy is found in Australia. Many nations provide written advice, guidance and training on the records businesses need to keep for tax purposes. The Australian Tax Office, however, has gone one step farther by providing free record-keeping software, a record-keeping assessment computer tool to help small businesses understand the business records they need to keep and which evaluates how well the business is doing, and fact sheets for specific sectors on basic record-keeping requirements. The provision of this level of advice and support is replicable in many other nations.