Corruption control, shadow economy and income inequality: Evidence from Asia

Abstract

Developing countries often suffer from high corruption, high income inequality and poor institutional arrangements that give rise to large shadow economies. Earlier evidence shows that shadow economies moderate the negative effects of corruption on income inequality in highly unequal South American countries. For Asia, we show that the persistence of shadow economies raises inequality even if corruption control is strong. Supported by static and dynamic panel data analyses of 21 countries in Asia between 1995 and 2015, we show that in order to combat rising inequality, corruption control must be complemented by the ability to translate secondary and tertiary school enrolment into industrial and, more importantly, service sector jobs. Countries with low corruption but high inequality can reduce inequality by committing to higher public consumption expenditures. Further, combining greater trade openness with low corruption lowers inequality, except for countries in South Asia.