Impacts of Political Stability on Shadow Economy: Evidence from Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation Countries

Abstract

The issue of political stability and the shadow economy is the most vital concern for sustainable development. However, the relationship between them is yet to be explored. Particularly, in the context of Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation Countries (BIMSTEC) countries, there are no studies that have examined the influence of political stability on shadow economy. This study fills these gaps. Using panel data from 1998 to 2015, this study empirically investigated whether and how political stability affects shadow economy. Findings indicate that political stability has significant negative effects on the size of shadow economy. We also observed that regulation freedom, fiscal freedom, business freedom, trade freedom, government integrity, government spending and gross domestic product (GDP) growth have significant negative effects, while unemployment has significant positive effects on the shadow economy. Findings of this study imply that governments and policymakers should make efforts to ensure greater political stability in their countries, which will lessen the size of shadow economy that, in turn, will accelerate economic growth. The present study adds to empirical literature of the analogous issue by confirming (or else) the findings of past studies carried out across the world. The findings indicate that there exists a positive association between the extent of political stability and the shadow economy for BIMSTEC countries.