Shadow Economy and Poverty: What Causes What?

Despite a growing number of empirical works on the shadow economy and poverty, the bidirectional causality between these two phenomena has been a relatively neglected area or only treated in a case study of a specific country. So that, the important novelty of this paper is to explore the two-way linkage between poverty and the informal economy by using a panel dataset of around 100 developing countries over the period 1991–2017. Our empirical finding concludes such a complex causality between poverty and informality in the developing world. In addition, this relationship critically depends on a country’s level of economic development. Therefore, the policies, which help developing countries to get out of poverty as well as to regulate the informal activities, should be carefully considered.