In spite of the recommendations by the European Commission to put more emphasis
on measures fostering voluntary compliance, policymakers across the EU and beyond
continue to perceive deterrence and prevention as the most effective strategies to
combat unregistered economic activities. However, considerable amount of evidence
gathered during the last several years has revealed limited effectiveness of coercion,
particularly in countries with pronounced asymmetry between formal and informal
institutions. This paper adds to the debate on appropriate policy responses towards
unregistered practices by examining the case of FYR Macedonia, an EU-candidate
country whose government has repeatedly declared its strong resolve to reduce the
size of undeclared work. However, in spite of significant improvement in repression
during the past few years and notable efforts to prevent the occurrence of
unregistered work from the onset, the share of the undeclared economy in the country
remains substantial at nearly 35% of official GDP. The paper discusses reasons
behind such limited success of the existing policy strategies to tackle the
phenomenon in FYR Macedonia in the light of the country ís economic and sociocultural
peculiarities. As we demonstrate, the poor economic situation accompanied
with weak enforcement apparatus, prevalent distrust in state institutions and low level
of social cohesion have undermined the authorities í efforts to reduce the size of the
undeclared economy. Given this, the paper calls for shift from coercion towards more
refined strategies, i.e. those focused on the improvement of the psychological
contract between the state and the taxpayers. Unless such an indirect approach is
pursued, it is hard to expect further advancement in tackling unregistered work in this
post-socialist country. Given the number of similarities with other transition
economies, the arguments presented in the paper can easily be extended beyond the
case of FYR Macedonia.