Underground Economic Activity Research Articles

The case for independence: Does central bank independence curb the spread of the underground economy?

AbstractThis paper considers an alternate dimension of government institutions associated with the separation of powers between government and its central bank. A more independent central bank is consistent with greater institutional quality and constraints on government. We propose that central bank independence influences the prevalence of the shadow, or underground, economy. Using cross‐country panel data for over 100 nations over the period 1991 to 2012, the results from instrumental variables techniques show that central bank independence curbs underground economic activity. Furthermore, considering different dimensions of independence, we find that independence related to central bank CEO, policy formation, and central bank lending are effective at checking the shadow sector. Overall, these findings are robust to a different measure of the underground economy, correcting for the potential influence of outliers, controlling for the impact of additional factors, accounting for heterogeneity related to the level of development, and considering the heterogeneity related to the prevalence of the shadow sector. The main implication of the results is that nations seeking to reduce the prevalence of the underground economy would benefit from policies that promote central bank independence.

The underground economic activity and the desire for corruption in the border region (study of Bengkayang District, West Kalimantan)

Underground economic activity is a situation that needs particular and ongoing attention. This tendency is detrimental to municipal income and is associated with corrupt behaviors and taxation. The purpose of this investigation is to identify and assess the practices of the underground economy, as well as the potential for corrupt conduct and tax evasion. The analytical tool was perhaps a qualitative method with a chosen strategy to identify knowledge sources (respondents) with subjects such as liquor producers, coffee shops, and street food vendors in the Bengkayang border area. The data collection method was carried out using a triangulation approach, namely an in-depth interview, observation, and recording/documentation. The data analysis approach was conducted using data reduction, data presentation, and verification. This study suggests that the presence of corrupt activity in collecting bribes and offering bribes is carried out in cash without going through an automated money processing mechanism such as giving false receipts. Increasing the level of corruption in society will contribute to an increase in the velocity of money. The need for massive surveillance of individuals and the introduction of Penta helix elements to shape synergies between actors and to start integrating and developing electronic/digital structures in any financial activity using the e-government system.

The portrait of the underground economy and tax evasion: Descriptive analysis from border region

Underground economic activity is a phenomenon that requires special and continuous treatment. This phenomenon is counterproductive to local revenues and is related to corrupt practices and tax evasion. The research was conducted in Bengkayang Regency, West Kalimantan Province, Indonesia. The qualitative phenomenological method was carried out by interviewing underground economic actors such as liquor producers, "pangku" coffee shops, and street vendors. The findings indicate that corruption activities in the form of collecting bribes and offering bribes are carried out in cash without going through a legal transaction mechanism. The underground economy practices tax evasion, does business without a permit, pays substandard wages, and does not protect workers with insurance. The underground economic activity will contribute to an increase in the circulation of money in society, but do not take into account the regional economy. Such situations call for massive supervision of individuals and the introduction of pentahelix elements to form synergies between actors and to begin to integrate and develop digital structures in every financial activity using e-government systems.JEL Classification D73; E26; O17

The role of financial development on the underground economy in regards to Europe’s 2020 strategy

This paper attempts to investigate the relationships between development in the financial sector and the size of the underground economy in European Union countries. Our aim is to investigate the role of financial sector development when it comes to the size of the underground economy, as well as how financial development aids in meeting the growth objectives of the ‘Europe 2020 Strategy’. Panel data analysis will be conducted for the period 2004–2017 in order to examine the effects of financial sector development on the size of the underground economy. The main findings of this paper suggest that financial development has a significantly reducing effect on the size of the underground economy. In conclusion, development within the financial sector significantly lessens underground economic activity in the European Union. With further development of the financial sector, underground economies will not be an obstacle for the fulfilment of the cohesion and growth objectives of the Europe 2020 strategy.

UNDERGROUND ECONOMY DALAM SEBUAH PERSPEKTIF

This article aims to describe the activities of underground economic actors. This article is a literature review of several empirical studies in Indonesia and the world in examining or resolving the impact of the existence of these economic activities. There are several terms used in each country from the underground economy, such as black economy, shadow economy and unofficial economy. Every country, both developed and developing countries, have experienced underground economic activity that continues to increase so that biased measurement often occurs, which is caused by indicators of underground economy that cannot be measured clearly and this economic activity can harm state revenues. The driving force of the underground economy is an increase in the tax burden (directly or indirectly), combined with labor market regulations and the quality of public goods and services, as well as properly measured economic conditions. The need for systematic oversight to reduce the number of corruption by providing convenience to the community through the E-Government program as a direction for the creation of Good Governance..

The specifics of shadow economic activity in Russia

Subject. The article addresses the specifics of shadow economic activities in reformed Russia in the context of systemic transformations. Objectives. We focus on determining the role of shadow economy in the reproductive process, identifying and understanding the specifics of underground economic activity of the Russian economy. Methods. The study rests on general scientific methods (scientific abstraction, unity of historical and logical, analysis and synthesis, induction and deduction, comparison and analogy) and special methods of cognition (monetary methods). We employ the systems and integrated approach. The official statistics, regulations, works of leading researchers on shadow economy expansion, resources of reference and legal systems like Garant and ConsultantPlus serve as the study's information base. Results. We present a retrospective rapid analysis of the extent of shadow economic activity in the domestic economy, establishing the relationships with the processes that take place at different stages of the country's development. We also reveal the specifics of shadow economy relations in Russia, factors that play a key role in expansion for a particular period, a shift to another form of shadow economy. The study characterizes the current period of development, assesses the impact of external shocks on shadow economy expansion. Conclusions. The current period is characterized by the digitization of shadow relations, the shift of corruption to the upper echelons of power, the continued outflow of capital abroad, and increased penalties for underground activities.

Dimensions of Ethnic Diversity and Underground Economic Activity: Cross-country Evidence

Cultural and ethnic factors crucially affect economic agents’ propensities toward law-abiding behavior and operating in the underground economy is an important, widely prevalent, aspect. However, there are many dimensions of ethnic diversity, and the relative influences of each on underground behavior are not well articulated. This article uniquely considers the effects of five dimensions of ethnic/cultural diversity, including ethnic income inequality, ethnic–linguistic fragmentation, cultural fragmentation, ethnolinguistic polarization, and ethnic–linguistic segregation, on the international shadow economy. Placing the empirical analysis in the context of the empirical determinants of the shadow economy, results show income inequality across ethnic groups increases underground activity across different modeling variations, while the effects of the other dimensions are statistically insignificant. This unique finding underscores the notion that not all dimensions of ethnic diversity are alike when it comes to their influences on the informal sector.

UNDERGROUND ECONOMY IN INDONESIA

This paper estimates the size of underground economic activity in Indonesia. Underground economy covers market production of goods and services, legal and illegal, which are sold or purchased illegally. Using monetary approach, this paper concludes the average size of the underground economy in Indonesia during 2001-2013 was 8.33 percent of GDP. Consequently, the average size of potential tax loss was Rp. 11,172.86 billion or about one percent of GDP.

The Shadow Economy and Bankss Lending Technology

Is there a relationship between bank monitoring models and the level of shadow economy? This paper develops a model of optimal lending technology to study the relationship between local underground economic activity and banks’ lending choices. In turn, as the aggregate level of informality and tax evasion increase, it becomes more profitable for banks to screen and supervise borrowers using more costly in-depth monitoring technologies. A large dataset of regional Italian data confirms these conjectures.

Shadow economy: Does it matter for money velocity?

The standard approach adopted in the literature exploits data on money demand to extrapolate the dynamics of the unobserved economic activity. In this paper, we explore instead the long-run effects of shadow economy measures—obtained independently from money demand functions—on the velocity of circulation of money. Empirical evidence from a panel covering 43 countries over the period 1981–2005 shows that variations in the relative size of the unrecorded sector have a negative and significant effect on the velocity of circulation of money. This is because, ceteris paribus, the higher the share of the shadow economy, the higher the demand for currency and therefore the lower the velocity of circulation of money. The negative relation between underground economic activity and velocity of circulation of money is robust to the use of different shadow economy estimates, to a sub-sample analysis and to the inclusion of a time trend.

US shadow economies: a state-level study

Recent studies of shadow economies focus primarily on cross-country comparisons. Few have examined regional or state-level variations in underground economic activity. This paper presents estimates of the shadow economy for 50 US states over the period 1997–2008. Results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. Among the states, Delaware, on average, maintains the smallest shadow economy at 7.28 % of GDP; Oregon, on average, has the second smallest shadow economy at 7.41 % of GDP; followed by Colorado, averaging 7.52 % of GDP, rounding out the three smallest shadow economies in the US West Virginia and Mississippi, on average, have the largest shadow economies in the US as a percent of GDP (9.32 and 9.54 %, respectively).

The Underground Economy and Tax Base Erosion

The tax evasion behaviors of above-ground and underground economic activities differ. Above-ground economy tax evasion refers to people engaging in government sanctioned production and consumer activities and circumventing the payment of taxes mandated by law. The underground economy refers to people engaging in economic activities that are not sanctioned by the government, which is also known as the “grey economy.” The main objective of engaging in underground economic activity is to avoid taxation by tax agencies. To explore the relationship between taxpayers’ underground economic income reporting and tax compliance rates, this study established a utility function that included both the above-ground and underground economies, and divided public goods based on their above-ground and underground economic weight. This study analyzed taxpayers’ underground economic income by adopting the probability of penalization and identifying the optimal participation rate. This study also found that taxpayers’ corresponding risk aversion attitudes after becoming wealthy, or experiencing increased income, was a key factor of whether increases in the tax rate generated increases in the ratio of the underground economy labor force.

U.S. Shadow Economies: A State-Level Study

Recent studies of shadow economies focus primarily on cross-country comparisons. Few have examined regional or state-level variations in underground economic activity. This paper presents estimates of the shadow economy for 50 U.S. states over the period 1997 to 2008. Results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. Among the states, Delaware, on average, maintains the smallest shadow economy at 7.28% of GDP; Oregon, on average, has the second smallest shadow economy at 7.41% of GDP; followed by Colorado, averaging 7.52% of GDP, rounding out the three smallest shadow economies in the U.S. West Virginia and Mississippi, on average, have the largest shadow economies in the U.S. as a percent of GDP (9.32% and 9.54%, respectively).

The underground economy in Poland and its control

Analyses the underground economy in Poland as containing both hidden and illegal production: the former refers to illegal drugs, for example, and is not measured by the Polish Central Statistical Office, while the latter includes legal activities undeclared to the tax, customs, social security and statistical authorities. Reports that false claims for VAT and smuggling are two of the main economic crimes, while money laundering control is the official priority. Describes the three main sources of criminal regulation of underground economic activity: the Penal Fiscal Code, the Act on Counteracting Property Values Derived from Illegal or Undisclosed Sources into Financial Circulation, and the Criminal Code. Explains why the efficiency of the fiscal authorities in controlling the underground economy is thought inadequate.

Search and Taxation in a Model of Underground Economic Activities

We develop a simple model of an economy with underground production and trade. Because of the furtive nature of underground activities, information about trading opportunities in the irregular sector is less than perfect—hence, agents devote some time to locate trading partners in the black economy and then bargain over the terms of trade. The model stresses how individual involvement in underground economic activities is related to earnings capacity. It also highlights how taxes and tax enforcement are natural policy complements. Both results are argued to be useful when interpreting micro‐ and aggregate‐level data on underground economic activities. (JEL H26, H21, D72, D83)

Labor market institutions, taxation and the underground economy

The paper aims at qualifying the links between labor market institutions, taxation, tax monitoring, and underground economic activity. The proposed model is a continuous time matching model with one commodity roduced either overground or underground. Underground economic activity arises because of partial compliance with regulations and tax contributions imposed by the government. Vacancies and workers search are directed at a specific labor market. Workers are heterogenous in the subjective cost they face when operating in the irregular sector. Analytical and numerical investigations suggest that interactions between regular and irregular activities can affect standard results of policy interventions. In that respect, the paper supports the view that policies aiming at increasing individuals benefits of participating in the regular sector are more desirable than a deterrence policy.

Approaches for Estimating Noncompliance: Examples from Federal Taxation in the United States

Crime and underground economic activity are a fact of life around the world. Most societies attempt to control these activities through the expenditure of resources on monitoring, prosecution, punishment, and educational programmes. Gathering statistics about who is engaging in illegal or underground activity, the frequencies with which various crimes or underground transactions are occurring, and the severity or magnitude of these acts, is crucial for making good decisions regarding our allocation of resources in this area. Unfortunately, in general it is very difficult to obtain accurate information about these issues. This is partly because the individuals engaged in such activities wish not to be identified and often take actions to avoid detection, and partly because by their very nature the activities tend not to generate economic, accounting, legal, demographic or other cultural records. The fact that it is difficult to obtain accurate information about the activities, however, does not in any way imply that we should not make a concerted effort to try to obtain the best information we can. I believe the cost associated with attempting to determine the extent and nature of these activities is in most circumstances well below the expected benefit, which includes the likelihood of improved decisionmaking by relevant government personnel and the general public. As a result, I also believe the debate about developing estimates of illegal or underground economic activity should primarily focus on practical issues related to how best to go about developing estimates that are as reliable as possible. In this short article I shall discuss the measurement of noncompliance with laws and regulations, my particular area of expertise, and shall not discuss the measurement of other kinds of 'hidden' economic behaviours, such as informal contracting, unmeasured home production, and 'grey-market' activities. In particular, I shall discuss three approaches for estimating the aggregate amount of noncompliance with respect to a specific law or regulation, (i) intensive data collection for a focused subsample of the population, (ii) detection controlled estimation, and (iii) the comparision of estimates generated by distinct datasets and models. For each, I shall describe in general terms what the approach is and how it is implemented, review limitations of the approach, and present an example of the application of the approach to the measurement of tax noncompliance in the United States. My discussion shall necessarily be short and I refer the interested reader to a variety of original research publications for more details, especially about the specific examples.

Currency Ratios and U.S. Underground Economic Activity

Currency Ratios and U.S. Underground Economic Activity

Currency Ratios and U.S. Underground Economic Activity

Cagan's classic currency ratio suggests that underground economic activity in the United States surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments -- retail sweep programs and overseas demand for U.S. currency -- did not surge and that movements in the adjusted ratio to result primarily from the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that it has must rely on other evidence.

Public finance solutions to the European unemployment problem?

Public finance solutions A tax shift away from low-paid labour may fight unemployment Unemployment in Europe is heavily concentrated among low‐skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low‐skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low‐paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non‐negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low‐productivity home production and with underground economic activity. — Peter Birch Sorensen