Size Of Shadow Economy Research Articles

The interplay of bank competition and institutional quality: Implications for shadow economy

This study investigates the impact of institutional quality and banking competition on shadow economy for 127 economies for the period of 2005–2017. It further explores if institutional quality/competition shapes the relationship differently between banking competition/institutional quality and shadow economy. This paper uses the system GMM estimator to tackle potential omitted variable bias, endogeneity, and simultaneity issues. The findings suggest that overall, greater competition among banks and stricter institutions in the country reduce the size of shadow economy. Furthermore, impact of competition on shadow economy is even stronger in countries with weak institutions and the impact of institutional quality is greater in lower competitive environment. Only severe competition matters for shadow economy in case of developed countries. To sum up the novel findings of this research, competition and institutions complement each other in reducing the size of shadow economy. These findings are robust to different econometric estimators. The findings carry vital policy implications for the governments and regulators to play their part in reducing the shadow economy.

Energy poverty and shadow economy: evidence from Africa

PurposeEnergy poverty is a global phenomenon, but its prevalence is enormous in most African countries, with a potential impact on quality of life. This study aims to investigate the impact of energy poverty on the shadow economy.Design/methodology/approachThe study uses panel data from 45 countries in Africa over a period of 1996–2018. Using panel cointegrating regression and panel vector auto-regression model in the generalized method of moments technique.FindingsThis study provides that energy poverty deepens the size of the shadow economy in Africa. It also documents that there is a bidirectional causality between shadow economy and energy poverty. Therefore, the two variables can predict each other.Practical implicationsThe study suggests that lack of access to clean and modern energy services contributes to the depth of the shadow economy in Africa. African authorities are advised to strengthen rural and urban electrification initiatives by providing adequate energy infrastructure so as to reduce the level of energy poverty in the region. To ensure energy sustainability delivery, the study proposes that the creation of national and local capacities would be the most effective manner to guarantee energy accessibility and affordability. Also, priorities should be given to the local capital mobilization and energy subsidies for the energy poor. Energy literacy may also contribute to the sustainability and the usage of modern energy sources in Africa.Originality/valuePrevious studies reveal that income inequality contributes to the large size of shadow economy in developing economies. However, none of these studies analyzed the role of energy poverty and its implications for underground economic operations. Inadequate access to modern energy sources is likely to deepen the prevalence of informality in developing nations. Based on this, this study provides fresh evidence on the implications of energy deprivation on the shadow economy in Africa using a heterogeneous panel econometric framework. The study contributes to the literature by advocating that the provision of affordable modern energy sources for rural and urban settlements, and the creation of good energy infrastructure for the firms in the formal economy would not only improve the quality of life but also important to discourage underground economic operations in developing economies.

Staying in the shadow or not? Remittances and the Shadow Economy

AbstractObjectiveThis study investigates the impact of remittances on the shadow economy and how domestic institutions, particularly property rights, moderate this relationship.MethodsWe employed a quantitative research method using panel data from developing countries from 1990 to 2018. We adopted both fixed‐effects and instrumental variable approaches to address possible endogeneity concerns between remittances and the shadow economy.ResultsThe results demonstrate that remittances are positively associated with the shadow economy's size. However, this positive effect is weaker in countries with strong property rights institutions. These findings remain robust across alternative measures of key variables and estimation techniques.ConclusionThe results suggest that foreign income in the form of remittances is an important determinant of the shadow economy in recipient countries. We believe that exploring the relationship between foreign sources of income and the decisions of economic actors to enter specific sectors warrants further investigation.

On the contributing factors to shadow economy in Africa: Do natural resources, ethnicity and religious diversity make any difference?

Many factors influencing shadow economy, including foreign direct investment, economic complexity, and financial development, have been well acknowledged in the literature. However, little attention has been given to the roles of natural resources, ethnicity, and religious diversity as the intense factors affecting the size of shadow economy in developing countries. Our study provides fresh empirical evidence that answers whether ethnicity and religious diversity affect the shadow economy in developing regions. It also examines the role of natural resources on shadow economy. Drawing on data from 31 African nations, the study addresses conditional distribution of shadow economy and the endogenous nature of the relationship between dependent and key independent variables. It documents that ethnic diversity and resource rents increase the size of shadow economy while religious diversity reduces it. This result is robust to alternative estimation techniques. Our result argues in favour of policies that promote religious diversity and reduce ethnic groups' marginalisation in a heterogeneous society like Africa. It also advances the many possible reasons for the result and suggests policy implications.

WHY SHADOW ECONOMY AND INFORMALITY SHOULD BE SEPARATED AS CONCEPTS: RESULTS AND IMPLICATIONS OF THE SHADOW ECONOMY SURVEY IN THE POST-SOVIET REGION

The current article is intended to bring two contributions to the study of informality. Empirically, it shares the result of the shadow economy survey for the 2017 and 2018 fiscal years for Kyrgyzstan, Russia, and Ukraine. These results are used to calculate the shadow economy index estimated as a percentage of the GDP. Already established as an annual exercise for Latvia and the Baltics since 2010, the survey has been applied to Moldova and Romania (since 2016), Poland (2015-2016), and Kosovo (in 2018). In the frame of the project “SHADOW: An Exploration of the Nature of Informal Economies and Shadow Practices in the Former USSR Region,” the scope of the survey was expanded to Kyrgyzstan, Russia, and Ukraine, keeping the same methodology and used for direct measurement of underground activities.2 By doing this, we discuss the use of direct measurement approaches to suggest that, while quantitative approaches are useful to estimate the size of shadow economies, direct approaches can be used to integrate these data and look for deeper correlations between the persistence of shadow transactions and some societal tendencies that are not necessarily economic.

Exploring the nonlinear effect of shadow economies on sustainable development in Africa: does the level of financial market development matter?

PurposeThis study aims to examine the nonlinear threshold effect of shadow economy on sustainable development in Africa while providing additional evidence on how this nonlinear threshold effect play out in economies with high and low developed financial/credit markets.Design/methodology/approachThis study uses 37 African economies between 2009 and 2017 in a dynamic GMM panel model that controls for country, year and technological effects to ensure consistency and reliability of results and findings.FindingsThe results reveal that there is an inverted nonlinear U-shape nexus between the size of shadow economy and sustainable development in both short run and long run in Africa and across economies with high and low developed credit/financial market. Also, the threshold points beyond which the size of shadow economies dampens sustainable development is lower for economies with high financial/credit market development and higher in the long run.Practical implicationsThese results have policy implications and recommendations and suggest that shadow economies can be beneficial to sustainable development particularly when the size of shadow economies are restrained from increasing beyond certain thresholds/levels. Moreso, to restrict the adverse effect of shadow economies on sustainable development, policymakers can rely on developing their financial/credit markets to tame the destructive nature of shadow economies on sustainable development. These results are robust to technological, year/time and country effects.Originality/valueTo the best of the author’s knowledge, this study examines for the first in the context of Africa, the nonlinear effect of shadow economies on sustainable development under low and high developed financial markets.

Assessing Ukraine's Shadow Economy: Methods and Key Drivers

This study comprehensively assesses Ukraine's shadow economy, focusing on evaluation methodologies and identifying key determinants. It aims to provide insights into the intricacies of Ukraine's shadow economy, shedding light on its size, impact, and underlying drivers. The study critically reviews assessment approaches and conducts empirical testing within the Ukrainian context to refine estimations. By employing a comprehensive approach, it assesses the shadow economy's size and drivers, considering factors such as tax rates, unemployment, and GDP growth. The study emphasizes the importance of a context-specific approach and the need for regular updates to assessment methods to align with current economic conditions. The research offers valuable insights into Ukraine's shadow economy and its key drivers, laying the foundation for informed policy decisions. It sets the stage for future studies to explore the dynamics and potential solutions related to Ukraine's shadow economy.

Natural resources revenues, shadow economy and financial institutions depth: The way forward

This article aims at investigating the impact of natural resources revenues, the shadow economy on the financial institutions’ depth. Besides, it also examines the moderating role of institutional quality in the shadow economy and financial institutions' depth nexus. The study used data from the year 1991–2020 and employed the latest econometric techniques such as FADF, FGLS, Bayer and Hanck, DOLS, RALS-Fourier ADL, and cumulative Fourier Toda and Yamamoto Frequency to give realistic outcomes in the context of Pakistan. The results found the financial resource curse in the financial institutions' depth and a negative impact of the shadow economy on financial institutions' depth. The study highlighted that institutional quality plays a moderating role by mitigating the adverse effects of the shadow economy by promoting financial institutions' depth. The study suggested policy recommendations as strengthening financial institutions, redesigning the existing and offering new financial products could help in managing resources rent in Pakistan. Moreover, the government should ascertain such a strategy that provides incentives and attracts skills and investment from the informal market to the formal market to increase the tax base and promote financial institutions' debt. Additionally, by improving the quality of institutions, the government can control for misuse of natural resources revenues, reduce the shadow economy size and thus better financial institutions depth which can boost the economic growth of Pakistan.

Investigating the financial market development and shadow economy nexus in the presence of country risk in an emerging economy

This research study examined the influence of financial market development on the shadow economy and the moderating effect of country risk (political, economic, and financial) in this nexus in Pakistan. Using data from 1995 to 2018, the study applied the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, followed by the F-bounds test to investigate stationarity and cointegration in the series, respectively. The study utilized the Autoregressive Distributed Lag (ARDL) approach to estimate the long-run relationship, and to examine the possible causal relationship among the variables, the study employed Breitung and Candelon's (2006) spectral test. The study identified that financial market development is negative, and the country's risk determinants are positively associated with the shadow economy's size. Moreover, the study found that country risk positively moderates the influence of financial market development on the shadow economy. The results also highlighted a unidirectional relationship from economic and financial risk towards the shadow economy. Finally, based on the empirical findings, the study recommends some policy implications to the regulators of financial markets and the shadow economy.

Modelling the Non-Linear Dependencies between Government Expenditures and Shadow Economy Using Data-Driven Approaches

This article aims to model the relationship between the size of the shadow economy and the most important government expenditures respectively social protection, health, and education, using nonlinear approaches. We applied four different Machine Learning models, namely Support Vector Regression, Neural Networks, Random Forest, and XGBoost on a cross-sectional dataset of 28 EU states between 1995 and 2020. Our goal is to calibrate an algorithm that can explain the variance of shadow economy size better than a linear model. Moreover, the most performant model has been used to predict the shadow economy size for over 30,000 simulated combinations of expenses in order to outline some possible inflection points after which government expenditures become counterproductive. Our findings suggest that ML algorithms outperform linear regression in terms of R-squared and root mean squared error and that social protection spending is the most important determinant of shadow economy size. Further to our analysis for the 28 EU states, between 1995 and 2020, the results suggest that the lowest size of shadow economy occurs when social protection expenses are greater than 20% of GDP, health expenses are greater than 6% of GDP, and education expenses range between 6% and 8% of GDP. To the best of the authors' knowledge, this is the first paper that used ML to model shadow economy and its determinants (i.e., government expenditures). We propose an easy-to-replicate methodology that can be developed in future research.

INSTITUTIONAL QUALITY, FINANCIAL INCLUSION AND SHADOW ECONOMY IN NIGERIA (1991-2020): AN ARDL APPROACH

 The study examined the dynamic link between institutional quality, financial inclusion and the informal economy in Nigeria. These were with the view to examining the institutional influence of financial inclusion on the development of informal economy. Annual data covering the period 1991 to 2020 were used for the study. The study made use of Autoregressive Distributed Lag (ARDL) as the technique of estimation. The study found a long run association between the variables and also reveal that financial inclusion and institutional quality directly has a negative but significant effect on shadow economy in Nigeria. This reveals that the development of financial sector as well as quality institutions aids formal sector participation as against the informal sector thus a decrease in shadow economy size in Nigeria. The effect of the interaction of financial inclusion and quality of institution on shadow economy is also found to be positive and significant meaning that weak institution quality has its toll effect on financial inclusion and which result to growth in informal economy in Nigeria. The study concludes that quality of institution in Nigeria is weak and must be improved to favorably promote financial inclusion and successfully mitigate the effect of shadow economy in Nigeria.           Therefore, reforms and policies that are required to improve transparency and accountability at all levels of governance as well as improvement in financial system are hereby recommended for policy makers.

DISAGGREGATED TRADE OPENNESS ON SHADOW ECONOMY IN NIGERIA: DOES INSTITUTIONAL QUALITY MATTER?

Introduction: It is likely that enterprises and entrepreneurs will be encouraged to engage in the formal sector as economies integrate more fully into the global economy. Thus, we begin our investigation by looking at the relationship between Nigeria's shadow economy and disaggregated trade openness. Based on Nigeria's inadequate institutional quality, our second purpose is to conduct further research on the role institutional quality plays in moderating the relationship between its shadow economy and disaggregated trade openness between 1991 and 2018. Methods: The fully modified ordinary least squares (FMOLS) and Granger causality methods are used in this paper to investigate the nexus and causal effect in time-series analysis. Results: The coefficients of institutional quality, import-to-GDP ratio, government expenditure, and financial development all have an adverse impact on Nigeria's shadow economy. The inflation proxy with the consumer price index, economic growth, and the export-to-GDP ratio all improve Nigeria's shadow economy. The findings of interaction between the import-export ratio and the quality of institutions positively affect the Nigerian shadow economy. The pairwise Granger causality exercise comes after the regression analysis. Conclusion and suggestion: The study concludes that the size of Nigeria's shadow economy is influenced by institutional quality, import trade, government expenditures, and financial development. Similarly, we find no causal relationship between disaggregated trade openness in Nigeria and institutional quality. As a result, policymakers and the country's government must act quickly and decisively to reduce the impact of informal activities on the country's economy.

Influence of Inheritance Tax on the Size of Shadow Economy and the Volume of Tax Evasion

Abstract The objective of the paper is to investigate the influence of the inheritance tax on the amount of tax evasion in different countries. The inheritance tax is among the most unpopular taxes. It is assumed, that unpopular taxes, such as the inheritance tax, have a measurable influence on the amount of tax evasion. Countries that levy inheritance taxes and countries which don’t levy inheritance taxes are compared in their success in fighting the shadow economy over a longer period (1991 – 2017). For that, data from Medina and Schneider from 2019 about the development of the shadow economy and from the OECD about the inheritance tax revenue is used. The approach is, to find dependencies between the inheritance tax revenue and the size of the shadow economy. The results show, that countries which abolished the inheritance tax, are not anymore that successful in fighting tax evasion than they were before. There is also evidence, that countries with a relatively high inheritance tax revenue are not able to fight tax evasion to the same extent, as countries that levy relatively low inheritance taxes. Therefore, in terms of reducing tax evasion, it is not recommended to abolish already introduced inheritance taxes, but rather to continue levying a moderate inheritance tax.

Digitalization and the Shadow Economy: Impact Assessment and Policy Implications for EU Countries

ABSTRACT This paper examines whether the digital transformation, proxied, by large-scale adoption and use of digital technologies, as well as ongoing improvements in the quality of ICT technologies, is leads into lowering the size of the informal economy. Our contribution to the literature is both empirical and practical, by considering a broad and novel range of indicators that are related to three components of the Digital Compass. Using a panel regression framework, findings indicate that the impact of digital technologies on the size of shadow economy is transmitted through both the usage and quality channels.

On the nonlinear relationships between shadow economy and the three pillars of sustainable development: new evidence from panel threshold analysis

Abstract Most previous studies that examined the relationship between the size of shadow economy and the pillars of sustainable development maintained that this relationship is linear. This paper provides an empirical contribution to the literature by arguing that this relationship is likely to be nonlinear, and it might be subject to threshold effects. For this purpose, in addition to the static threshold panel model of Hansen (1999. “Threshold Effects in Non-dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93 (2): 345–68), the dynamic panel threshold model suggested by Seo and Shin (2016. “Dynamic Panels with Threshold Effect and Endogeneity.” Journal of Econometrics 195 (2): 169–86) has been applied to a larger panel-data set covering 83 developed and developing countries over the 1996–2017 period. Empirical results from both models yield evidence advocating the existence of threshold effects of the shadow economy on the economic, social, and environmental dimensions of sustainable development for the global sample as well as the sub-samples of developed and developing countries. Moreover, for the global sample and developing countries, our findings show that shadow economy would spoil the three sustainable development pillars only when its size exceeds a certain threshold critical size. While, the impact for developed countries was found negative even for low levels of underground activities. These finding are shown to be robust to alternative proxies for the size of the shadow economy and have important policy implications, especially for developing countries. In these countries, a moderate size of the shadow economy might have positive spillovers on long-term growth and sustainable development. Our research also suggests that, for developing and developed countries to achieve sustainable goal 8.3, the extent of the shadow activities should be taken into account.

Government expenditure–shadow economy nexus: the role of fiscal deficit

PurposeThe effects of government expenditure on the shadow economy have been investigated. However, the effect from a moderating factor that affects this relationship has been largely ignored in the existing literature. This paper investigates how fiscal deficit moderates the effects of government expenditure on the shadow economy for 32 Asian countries for the past two decades since 2000.Design/methodology/approachThe authors use various techniques, which allow cross-sectional dependence and slope homogeneity in panel data analysis, to examine this relationship in both the long run and short run. The analysis also considers the marginal effects of government expenditure on the shadow economy at different degrees of fiscal deficits.FindingsEmpirical findings from this paper indicate that an increase in government expenditure and fiscal deficit will increase the shadow economy size. Interestingly, the effects of government expenditure on the shadow economy will intensify with a greater degree of the budget deficit. The authors also find that enhancing economic growth to improve income per capita and extending international trade appears to reduce the shadow economy in the Asian countries.Practical implicationsThe authors consider that policies targeting reducing shadow economy should follow conventional economic policies on economic growth, unemployment and inflation.Originality/valueTo the best of the authors’ knowledge, this is the first empirical study conducted to examine the moderating role of fiscal deficit in the government expenditure–shadow economy nexus in Asian countries.

Does national intellectual capital matter for shadow economy in the Southeast Asian countries?

Understanding the determinants of the shadow economy plays a vital role in formulating policies for economic growth and development, particularly for the Southeast Asian countries–a new economic force for a global economy. The key drivers of a shadow economy, such as institutional quality, taxation, government expenditure, are widely examined. However, the effect of national intellectual capital, which affects macroeconomic indicators, on the shadow economy has largely been ignored in the existing literature. Our paper examines this critical link and its causality relationship for eight Southeast Asian countries from 2000 to 2017. This paper uses the dynamic ordinary least squares (DOLS) and fully modified ordinary least squares (FMOLS), which allow cross-sectional dependence and slope homogeneity in panel data analysis. Empirical findings from this paper indicate that national intellectual capital impacts negatively and significantly the shadow economy size. This finding implies that enhancing national intellectual capital reduces the shadow economy size. These two forces lead to enhanced economic growth. Our Granger causality tests confirm a bi-directional relationship between national intellectual capital and the shadow economy. As a result, policies targeted to reduce the shadow economy size can now include the accumulation of national intellectual capital, particularly for Southeast Asian Countries.

PENGARUH INKLUSI KEUANGAN TERHADAP RASIO PAJAK DI NEGARA BERPENDAPATAN RENDAH DAN MENENGAH

This study aims to analyze the influence of financial inclusion towards tax ratio in the low and middle income countries. A financially included society could be a determinant factor for a higher level of tax ratio through a higher capability to pay tax and lower size of shadow economy. The sample used in this study was 54 low and middle income countries for dataset in 2011, 2014, and 2017. The method of hypothesis testing is done by multiple regression analysis. The results in this study show that financial inclusion has significant and positive influence on tax ratio in the low and middle income countries.

Global value chains and shadow economy: A multi-dimensional analysis

This article investigates the impacts of global value chain (GVC) participation on the shadow economy size (SES). GVC participation is classified by the source of the value-added in exports, looking both backward and forward from the perspective of a reference country. First, by using a global sample of 33 developed and 23 developing countries during the 2005–2015 period, the empirical results demonstrate that GVC participation has a negative impact on SES. Second, our findings confirm the presence of a non-linear bell-shaped association between backward GVC and SES while forward GVC has a significant increasingly negative influence on the SES. Third, the positive effects of backward GVC on SES are greater for developing countries, while the forward GVC plays a more critical role in reducing SES in developed countries. Finally, in the short term, both backward and forward GVC participation reduce SES, but the effects follow a U-shaped curve. In the long-term, there is evidence on the bell-shaped non-linear relationship between backward GVC and SES in developing countries, and between forward GVC and SES in developed countries. Backward GVC is an effective tool to control the SES of developing countries, while forward GVC is more important for developed countries.

Shadow economy: A comprehensive concept and the interpretation of its size

AbstractThere is lack of standard understanding or definition of the shadow economy. The aim of this mainly theoretical paper is twofold. First it brings together the concepts of the available academic research and official statistics. Second it discusses in what sense the calculated shadow economy measures indicate an exceeding amount over the official Gross Domestic Product (GDP). Indicators usually express shadow economy size as a proportion of GDP, so it is of most importance to elucidate the true meaning of these numbers. Official GDP already includes certain part of the shadow activities. Empirical calculations illustrate the weight of overlap.