Production process inevitably collides with hidden production. Shadow economy does not account for all of the hidden production. Namely, it covers the (otherwise legal) production that is hidden due to tax evasion, non-compliance with regulations and standards, or social-benefit fraud. As a consequence of shadow economy the government collects fewer taxes, productions have to cope with unloyal competition, and the consumers lack of warranty. On the other hand the shadow economy brings about employment, income generation, higher degree of flexibility, and can be an incubator to daring entrepreneurial projects. Due to both sides the policy to tackled shadow economy is not recommended to be a simple race-to-the-bottom. Rather, I recommend shifting the shadow economy production into official economy. According to my estimates, the shadow economy in Slovenia amounts 15-20 per cent of GDP. Combined with the current economic crisis, tools of tackling the shadow economy have to be chosen with a great deal of caution.
