Corruption and shadow economy in transition economies of European Union countries: a panel cointegration and causality analysis

Yilmaz Bayar,Hakki Odabas,Mahmut Unsal Sasmaz,Omer Faruk Ozturk

doi:10.1080/1331677x.2018.1498010

Yilmaz Bayar, Hakki Odabas + Show 2 more

Open Access

https://doi.org/10.1080/1331677x.2018.1498010

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Abstract

Corruption and shadow economy are two critical problems which feed each other and pose an obstacle against the economic development of countries, especially those with weak fundamentals. Central and Eastern European countries have experienced an absolute political and economic transformation after the downfall of the Berlin Wall. This study researches the effect of corruption and rule of law on shadow economy in 11 transition economies of Central and Eastern Europe over the 2003–2015 term with panel cointegration and causality tests considering heterogeneity and cross-sectional dependence. The cointegration coefficients revealed a complementary interplay between size of shadow economy and corruption. Furthermore, the causality analysis indicated that there was a bilateral causality between control of corruption and shadow economy in all the cross-section units. However, there was a two-way causality between rule of law and shadow economy only in Bulgaria, Czech Republic, Poland and Romania. Furthermore, there was one-way causality from rule of law to shadow economy in Croatia, Estonia, Hungary, Slovakia and Slovenia.

Highlights

Both corruption and shadow economy are common problems which all countries face in several dimensions, and they have social, economic and political implications
The estimated cointegration coefficients indicated that improvements in both corruption and rule of law decreased the shadow economy in the long run
The findings of the panel causality test revealed a two-way causality between control of corruption and shadow economy in all cross-section units

Summary

Introduction

Both corruption and shadow economy are common problems which all countries face in several dimensions, and they have social, economic and political implications. The shadow economy is expressed as the unrecorded economic activities which make contribution to the gross. ECONOMIC RESEARCH-EKONOMSKA ISTRAZIVANJA domestic product due to avoidance of taxation or regulations (Schneider & Enste, 2000). The shadow economy makes economic and social policy planning difficult because of incomplete and unreliable statistics. Decreases in the tax revenues and the size of the shadow economy may increase if the government raises tax rates to meet decreasing tax incomes. Increases in the size of the shadow economy can direct the economic units to go underground (Schneider & Enste, 2000; Singh, Jain-Chandra, & Mohommad, 2012)

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