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Comparative Analysis of the Relationship Between Poverty and Underground economy in the Highly developed, Transition and Developing Countries

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  • Elijah, Obayelu Abiodun
  • Uffort, Larry
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    Abstract

    Abstract This study was undertaken with the goal of analyzing the relationship between poverty rates and size of underground economy in the developed and developing countries and exploring whether there is a link between them. There are technical problems in linking them in that getting information from those who have undertaken underground activities are difficult. Secondary data were used to established hypothetical relationship and primary data for the empirical analysis. The results of the descriptive analysis revealed that underground economy and poverty have no geographical boundary. Although the incidence, and the size differs from one country to another. The incidences of poverty and shadow economy are larger in the poor (developing and transition) countries when compared with the highly developed countries. There is also a causal link between poverty and underground economy especially in the developing and transition countries with common factors such as high unemployment and corruption rates affecting both poverty and underground economy. High social security system and tax burden were found to account for the high rates of underground economies in the highly developed countries even with people’s awareness of its implications when caught. In developing countries like Nigeria, most people embark on unlicensed (and hence illegal) micro-enterprises / activities like production and sale of pure water, yoghurts, cutting down of economic trees, illegal running of private schools, drug trafficking, prostitution, black-market currency exchange, fake disclosure of actual business profit, in order to increase their levels of income by tax evasion or avoidance in the name of surviving. Government can reduce this menace to certain extent by engaging itself in sustainable poverty reduction activities, tax policy changes, embarking anti-corruption campaign and increase in job opportunities within the formal economy. Key words: Poverty, underground economy, developed, transition and developing countries

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2054.

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    Date of creation: 06 Mar 2007
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    Handle: RePEc:pra:mprapa:2054

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    Keywords: Poverty; underground economy; developed; transition and developing countries;

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    References

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    1. Deepa Narayan & Patti Petesch, 2002. "Voices of the Poor : From Many Lands," World Bank Publications, The World Bank, number 14053.
    2. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages F338-47, June.
    3. Frey, Bruno S & Pommerehne, Werner W, 1984. "The Hidden Economy: State and Prospects for Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(1), pages 1-23, March.
    4. Dominik Enste & Friedrich Schneider, 2002. "Hiding in the Shadows," IMF Economic Issues 30, International Monetary Fund.
    5. Bruno Frey & Friedrich Schneider, 2000. "Informal and underground economy," Economics working papers 2000-04, Department of Economics, Johannes Kepler University Linz, Austria.
    6. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
    7. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, octubre-d.
    8. Thomas, Jim, 1999. "Quantifying the Black Economy: 'Measurement without Theory' Yet Again?," Economic Journal, Royal Economic Society, vol. 109(456), pages F381-89, June.
    9. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
    10. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
    11. Kaufmann, Daniel & Kaliberda, Aleksander, 1996. "Integrating the unofficial economy into the dynamics of post-socialist economies : a framework of analysis and evidence," Policy Research Working Paper Series 1691, The World Bank.
    12. Sen, Amartya K, 1976. "Poverty: An Ordinal Approach to Measurement," Econometrica, Econometric Society, vol. 44(2), pages 219-31, March.
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    Cited by:
    1. Gustavo Adolfo Caballero Orozco, 2010. "Risk Preferences Under Extreme Poverty: A Field Experiment," DOCUMENTOS CEDE 007717, UNIVERSIDAD DE LOS ANDES-CEDE.

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