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A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?

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  • Nedra Baklouti

    (University of Sfax)

  • Younes Boujelbene

    (University of Sfax)

Abstract

The shadow economy is a complex phenomenon present, to a large extent, in the developing, and the developed countries. This study builds a dynamic simultaneous equation model that establishes an inter-connection between economic growth and the shadow economy for 17 developing and 33 developed countries over the 2005–2015 period. Using the data of the shadow economy size from Medina and Schneider (2018), we found that the relationship between economic growth and the underground economy is unidirectional in the MENA countries, but it is bidirectional in the OECD countries. The results also suggested that institutional quality interacts strongly with the relationship between economic growth and the underground economy. More specifically, we found that a higher GDP per capita is associated with a smaller shadow economy in countries with a good institutional quality. However, in countries where institutional quality is low, the increase of GDP per capita does not influence the size of the underground economy.

Suggested Citation

  • Nedra Baklouti & Younes Boujelbene, 2020. "A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?," Economic Change and Restructuring, Springer, vol. 53(1), pages 151-170, February.
  • Handle: RePEc:kap:ecopln:v:53:y:2020:i:1:d:10.1007_s10644-018-9235-8
    DOI: 10.1007/s10644-018-9235-8
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    More about this item

    Keywords

    Shadow economy; Economic growth; OECD countries; MENA countries;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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