The article estimates the size of shadow economy for 111 countries for the years 1984–2006 based on the currency demand approach. An important innovation is our use of dynamic panel data methods, which allows us to make several important contributions. First, we estimate the shadow economy for a range of heterogeneous countries that previously could not be included in the same regression. Second, we include variables that measure institutional quality in countries, including a variable that measures enforcement efforts. Third, we account for the persistence of currency demand as it evolves over time. Our results indicate a substantial shadow economy across countries, ranging from 10 to 86 percent of gross domestic product (GDP), with some tendency to grow over time. We also find that the shadow economy varies significantly by country income group. The mean shadow economy is 17 percent of GDP for Organisation for Economic Co-operation and Development (OECD) countries, 24 percent for non-OECD high-income countries, 33 percent for upper-middle-income countries, 37 percent for lower-middle-income countries, and 38 percent for low-income countries.
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... This study is in line with recent studies that have uncovered evidence of widespread informality in Uganda (Esaku, 2021a;Mugoda et al., 2020) and across the world (Medina and Schneider, 2019). A large informal sector has been shown to create a number of challenges to the growth of the formal sector and the economy as a whole (Esaku, 2021b) on account that this sector (informal) undermines governments' fiscal policy targets (Alm and Embaye, 2013;Esaku, 2021i). ...
... The pattern shows that a substantial level of production of goods and services occurs in both the formal and informal sectors of the economy across the world (Medina and Schneider, 2019). In both the developed and developing economies, the size of the shadow economy is relatively large and in many cases its activities go unnoticed because they are quite hidden and difficult to trace (Alm and Embaye, 2013;Buehn and Schneider, 2012a;Esaku, 2021i). Recent estimates of the size of the shadow economy by Medina and Schneider (2019) show that in many countries across the world, informality is still a substantial part of the economy which drives the production and distribution of goods and services. ...
... First, these results seem to suggest that improvement in the state of democracy is important for extending social and economic services to the citizens leading to improvement in their welfare (Teobaldelli and Schneider, 2013). Improvement in welfare reduces the incentive of individuals to operate in the informal economy since the formal sector provides the necessary support needed to operate legally (Alm and Embaye, 2013). This then reduces the size of the shadow economy. ...
This paper investigates the relationship between institutionalized democracy and the shadow economy in both the long- and short-run. Using time series data from Uganda that cover the period from 1991 to 2015, this paper applies autoregressive distributed lag method to investigate this relationship. How democracy affects the shadow economy in less developed countries like Uganda is not well understood. This paper aims to fill the above knowledge gap. The findings show that the shadow economy and institutionalized democracy are negatively correlated in both the short- and long-run. This implies that improvement in institutionalized democracy significantly hinders the rise of shadow activities. This indicates that institutions regulate the conduct of economic agents and determine how entrepreneurs engage in economic activities. Moreover, institutions are crucial in resource allocation which in turn leads to welfare improvement. Improvement in welfare of citizens reduces their incentive to engage in informal sector activities since the formal sector provides the necessary support needed to operate legally. These findings are robust to alternative econometric methods. Two practical implications of these findings stand out. First, these findings indicate that reforming the governance system to facilitate efficient resource allocation could be one way of addressing widespread informality in developing economies. Second, these results also indicate that minimizing informality in the economy should gradually move away from emphasis on tackling proximate causes of informality to democratic reforms that change the authority patterns. In this case institutionalized democracy is another important channel of mitigating the rise of the shadow economy.
... Nevertheless, empirical studies report that the pollution may rise again despite the continuous increase in income (Allard et al. 2018;Álvarez-Herránz et al. 2017;Koc and Bulus 2020;Caravaggio 2020;Sinha et al. 2017) or there is even no turning point in such a relationship (Jalil and Mahmud 2009;Ghosh 2010;Massagony and Budiono 2022). One of the reasons for the failure of the EKC hypothesis may be because it ignores the presence of the shadow economy, which encompasses either illegal activities or unreported income from the production of legal goods and services (Alm and Embaye, 2013). ...
... The shadow economy could affect the extent to which production activities release pollutants to the environment through its scale of production, also called "the scale effect" Öztunali 2014a, 2014b). Specifically, since the underground economy encompasses either illegal activities or unreported income from the production of legal goods and services (Alm and Embaye 2013), it deliberately maintains the small-scale operation to make it easier to hide from the government. Moreover, the less secure business environment also discourages informal firms to invest in a larger production scale (Mead and Morrisson 1996). ...
This study examines the heterogenous impact of shadow economy on the ecological footprint. We apply the panel quantile regression to a panel dataset of 32 OECD countries from 1990 to 2015. The estimation results indicate that the shadow economy-ecological footprint nexus follows an inverted U-shaped pattern. Initially, the higher size of the informal economy leads to more ecosystem degradation. When the shadow economy increases to certain thresholds, its environmental impact reverts to benefit. Such threshold changes with the evolution of the ecological footprint. Specifically, it first rises then decreases along with the degradation of the ecosystem. Moreover, the heterogeneous panel causality test reports the one-way directional running from the shadow economy to the ecological footprint in OECD countries. Likewise, environmental effects of other control variables, including trade openness, energy intensity, renewable energy, and income, are also not homogeneous across various levels of the ecological footprint. The significant and heterogeneous relationships between ecological footprint and its determining factors provide insightful implications for governments in tailoring environmental regulations upon different ecological conditions.
... Most scholars agree that the shadow economy is inevitable because various economic activities cannot be counted in official accounts [29,30]. In line with this perspective , consider that the shadow economy includes all unregistered economic activities that would have added to the national GDP if these activities had been reported. ...
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.
... Según Alm y Embaye , la economía sombra o economía no registrada incluye a todos bienes y servicios de mercado (legales o ilegales) que escapan a la inclusión en cuentas oficiales. La economía no registrada se considera un buen medio para el lavado de dinero, con la conversión de ingresos criminales a formas que le permiten al infractor gastos e inversiones sin restricciones, habiendo sido una preocupación constante para el estado desde al menos los primeros días de la mafia estadounidense. ...
Se estima la magnitud de parte de la economía no registrada o sombra en Bolivia que está relacionada con el cultivo de
hojas de Coca. El análisis se basa en datos de demanda eléctrica, PIB y producción de hoja de coca extraídos de
UNODC , BID  y EIA, respectivamente. El modelo se basa en la existencia de una relación directa entre la
actividad económica y la demanda eléctrica. La actividad económica tiene dos variables, una la economía formal que se
cuantifica por el PIB de un país y la economía no registrada o sombra que no es cuantificable directamente. Así este
trabajo cuantifica parte de la economía no registrada que se relaciona con el nivel de producción de hoja de coca.
Considering the development of the shadow economy of 36 European and OECD countries over the period from 2003 to 2022 and the effect of the Coronavirus pandemic from 2020 onwards, the average size of the shadow economy of 36 European and OECD countries decreased from 16.48% of GDP in 2020 to 16.07% in 2021 (a decline of 0.41 percentage points). Due to a continued (forecasted) economic recovery in 2022, the average shadow economy of these 36 countries will slightly increase to 15.96% of GDP (average of all 36 countries): a very modest reduction of 0.11 percentage points.
In this paper, we present an agent‐based model in which taxpayers ‘live’ in a network and care about their social reputation. Individuals decide whether to pay or to evade taxes considering the expected economic net benefit and the reputational cost from tax evasion. Individuals differ in income and in the weight they attach to social reputation, which is updated by assessing the opinions shared in their reference group. The reference group contains individuals irrespective of their income (integrated society) or it is made up of peers belonging to the same income group (segregated society). We simulate the model in the two alternative settings to find the frequency distribution of taxpayers in a dataset of random networks. The results indicate that, in an integrated society, network conformity is reached and all individuals either evade or pay their taxes. Conversely, a segregated society might generate obstacles to the diffusion of opinions and, as a result, tax evasion and tax compliance might coexist. Lastly, we consider the effects of a social media campaign starring a celebrity financed by a fiscal authority to increase overall tax compliance by exploiting the diffusion dynamics in the network. We show that such a policy is more effective if the diffusion of opinions is not hindered by social segregation. In an integrated society, especially if income inequality is low, a celebrity's endorsement of tax compliance might nudge widespread socially responsible tax behaviour.
Alors que l’intégration économique régionale semble faire fi des crises politique, sanitaire et écologique mondiales, l’Indonésie anticipe un flux toujours croissant d’IDE dans le secteur manufacturier. Cet apport est sensé accélérer le développement des régions secondaires, parmi lesquelles le littoral nord de Java-Centre. Ces perspectives s’inscrivent dans la continuité d’un processus à l’œuvre depuis le milieu des années 1980, objet de recherche pertinent pour analyser comment ces territoires ont réagi à une industrialisation rapide.La fabrication de meubles en bois est une activité mondialisée et intensive en main d’œuvre clef à Java-Centre, où elle revêt des formes diverses. Des usines implantées dans les zones industrielles de la capitale provinciale Semarang jouxtent des « usines de poche » disséminées dans sa grande périphérie, mais aussi une impressionnante concentration d’artisans dans la petite ville de Jepara, à 100 Km de là. Chacune s’est développée de manière singulière en interagissant avec le territoire et les structures sociales locales, générant des systèmes productifs contrastés qui se concurrencent, collaborent et coexistent. Seule une approche systémique peut dévoiler les dynamiques à l’œuvre. Elle révèle des vertus dont les modèles économiques dominants peinent à rendre compte, autour des notions de territorialité des retombées, de durabilité du développement et d’adaptabilité aux chocs et aux opportunités. Le concept de « loi de la mesure » (Kodrat Alam) pose la question d’alternatives sobres pour les territoires subalternes de la mondialisation à des formes d’industrialisation et d’urbanisation coûteuses sur le plan social et environnemental.
This paper analyzes the hard-to-tax, asking the basic question: Why should the HTT matter to policy makers? In particular, we identify several areas in which we believe that the existence of the HTT may have significant economic effects, and we attempt to provide various informed, if only suggestive, estimates of the size of these impacts; that is, we focus on 'sizing' the problem of the HIT We find that the HTT can have a significant impact on tax revenues, especially for developing countries. We also find that a larger HTT sector leads to a greater reliance in tax structures on indirect taxation. The hard-to-tax seem to be associated with an array of welfare losses driven by the induced misallocation of resources, and these excess burdens can be quite large. The role of the HTT on long run economic development appears to be quite diverse; a larger size of the HTT tends to slow down economic growth in developing countries but it accelerates it in industrialized countries. Finally, we find that the impact of the hard-to-tax on equity is complicated by the final incidence of the forms of tax evasion represented by the hard-to-tax. Nevertheless, even though it may often be the case that HTT groups do not benefit directly from evasion because of the final incidence of this form of tax evasion, it seems uncontroversial that having the hard-to-tax pay their fair share of taxes will improve the overall equity of the tax system.
In the last decade, there are strong indications of an expansion in shadow economic activities in the Netherlands Antilles, which is caused by the high tax burden and high unemployment. This paper attempts to measure the size of the shadow economy of the Netherlands Antilles using two distinct estimation methods: the direct and indirect approach. Both methods produced similar results, showing the size of the shadow economy of the Netherlands Antilles to be approximately 11% of GDP.
Various methods to estimate the size of the shadow economy are discussed and the results of the shadow economy of 21 OECD countries are presented. Then the specific case of Italy is investigated and the aim of this section is to produce an estimate of the Italian shadow economy with the MIMIC (Multiple Indicators and Multiple Causes) method. The procedure to obtain the underground economy as a share of official GDP is presented. The paper ends with some general conclusions about the reliability of the model approach and the efficacy of economic policies to reduce the shadow economy.
The “difference” and “system” generalized method of moments (GMM) estimators for dynamic panel models are growing steadily in popularity. The estimators are designed for panels with short time dimensions (T), and by default they generate instruments sets whose number grows quadratically in T. The dangers associated with having many instruments relative to observations are documented in the applied literature. The instruments can overfit endogenous variables, failing to expunge their endogenous components and biasing coefficient estimates. Meanwhile they can vitiate the Hansen J test for joint validity of those instruments, as well as the difference-in-Sargan/Hansen test for subsets of instruments. The weakness of these specification tests is a particular concern for system GMM, whose distinctive instruments are only valid under a non-trivial assumption. Judging by current practice, many researchers do not fully appreciate that popular implementations of these estimators can by default generate results that simultaneously are invalid yet appear valid. The potential for type I errors—false positives—is therefore substantial, especially after amplification by publication bias. This paper explains the risks and illustrates them with reference to two early applications of the estimators to economic growth, Forbes (2000) on income inequality and Levine, Loayza, and Beck (LLB, 2000) on financial sector development. Endogenous causation proves hard to rule out in both papers. Going forward, for results from these GMM estimators to be credible, researchers must report the instrument count and aggressively test estimates and specification test results for robustness to reductions in that count.
The paper analyses the increasing relevance that the underground economy has taken on in the United States and in the political debate of the country. It then proceeds to estimate the size of the U.S. underground economy by estimating the demand for currency for underground transactions. To do so, the author employs a modified version of Cagan’s model, estimating the demand for such “illegal currency” from 1929 to 1976, the longest period for which data are available for the U.S at this time.
This paper presents estimates of the size of the informal economy in the United States and examines the motives individuals have for dealing in the informal economy.
The research reported used survey research techniques to measure the value of goods and services purchased from informal vendors over a one-year period. Respondents were also asked about their motives for purchasing from informal vendors and a limited amount about their own role as an informal vendor.
It is generally agreed that the published GDP (or GNP) series are subject to measurement errors. It is well known that the presence of these measurement errors has important consequences in empirical studies where GNP or national income appears as an explanatory variable. This will make any policies and plans derived from recorded GDP or national income ineffective. In this paper we suggest a method of estimating the omitted part of the GDP (or GNP) that is reflected by the currency in circulation to the public. Our approach is broadly similar to some of the earlier studies on the estimation of "tax-evaded income' through a currency demand equation, but the detailed treatment and modelling strategy is different, our method deviates from the existing literature by using observed variables for extracting information. The estimates obtained using our method have the advantage of testing theories of tax evasion without being conditioned by the variables under test. In Section I we present our general methodology and the interrelationship between the currency demand and the "hidden economy'. Section II is devoted to the description of the procedure of estimating the "hidden economy' by means of modified RESET proxies. The empirical implementation and the results, along with the diagnostic tests are presented in Section III. In Section IV, the estimated series is tested against a "Tax Evasion Theory' as a confirmatory test. In the concluding section we discuss briefly the generality of our method and its other possible uses. -from Author
In the past six years there has been a revolutionary development in economics. Six years ago, the subterranean economy — that broad area of productive economic activity which wholly escapes the ministrations of the tax collector and largely that of the statistician — simply did not exist, in the official view, in the perception of the public and among economists.