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Inclusive Growth, Institutions, and the Underground Economy

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  • Adil Mohommad
  • Anoop Singh
  • Sonali Jain-Chandra
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    Abstract

    Worldwide protests against the perceived lack of economic opportunity and failure of governance have refocused attention on the need for inclusive growth and strong institutions. In developing countries, large informal economies limit state capacity to deliver governance and strong institutions, which in turn discourages participation in and expansion of the formal economy. This paper analyzes the determinants of the underground economy, with particular emphasis on the role of institutions and the rule of law. We find that when businesses are faced with onerous regulation, inconsistent enforcement and corruption, they have an incentive to hide their activities in the underground economy. Empirical analysis suggests that institutions are a more important determinant of the size of the underground economy than tax rates.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/47.

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    Length: 14
    Date of creation: 01 Feb 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/47

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    Related research

    Keywords: Shadow economy; Developing countries; Economic growth; Financial sector; Fund role; Governance; Taxation; law; property rights; regulatory burden; institutional development; income tax rate; tax rate; business licenses; productive capital; tax policy; interest rate ceilings; tax regime; prudential regulation; registration procedures; tax system; regulatory requirements;

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    1. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 443-461.
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