Economic Freedom, Globalization, and the Shadow Economy in the European Union Transition Economies: a Panel Cointegration Analysis

Yılmaz Bayar,ÖMer Faruk ÖZtüRk

doi:10.15388/omee.2019.10.19

Yılmaz Bayar, ÖMer Faruk ÖZtüRk

Open Access

https://doi.org/10.15388/omee.2019.10.19

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Abstract

The presence of the shadow economy differs considerably among the countries. Therefore, determination of factors behind the differences in the size of cross-country shadow economy becomes more of an issue for designing and implementing the right policies to combat the shadow economy. This study investigates the influence of economic freedom and globalization on the size of the shadow economy in the European Union transition economies employing panel data analysis for the period of 2000–2015. The empirical analysis indicates that economic freedom reduces the size of the shadow economy in the long term in the overall panel, but globalization also has a relatively smaller detractive effsect on the shadow economy in some countries.

Highlights

The shadow economy includes the economic units of households and firms operating outside formal economy, and the decision to go underground mainly depends on cost-benefit analysis between working in formal and informal economies
The panel co-integration coefficients revealed that economic freedom decreased the shadow economy size considerably because the probability value was found to be less than 5%, but globalization process had no significant effects on the size of the shadow economy in overall panel because the probability values were higher than 10% significance level
The shadow economy is an extensive problem for all the nations to a varying degree and has many adverse social and economic implications for the nations

Summary

Introduction

The shadow economy includes the economic units of households and firms operating outside formal economy, and the decision to go underground mainly depends on cost-benefit analysis between working in formal and informal economies. The shadow economy is a widespread problem of a varying dagree in all the countries. On average, the shadow economy amounted to 31.9% of GDP in 158 countries during the 1991–2015 period (Medina & Schneider, 2018). The dimension of the shadow economy varies considerably among the countries depending on social, cultural, institutional, and economic development levels of the countries. The size of the shadow economy in 2015 was 6.94% in Switzerland, and 7.0% in the United States, while the shadow economy was 67% in Zimbabwe and 56.38% in Haiti (Medina & Schneider, 2018)

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