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Measuring the Underground Economy and its Impact on the Economy of Pakistan

Author

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  • Bushra Yasmin

    ()

  • Hira Rauf

    ()

Abstract

This study focuses on the measurement of the underground economy (UGE) through tax evasion in Pakistan over the time period 1974-2002. The monetary approach is applied in order to estimate the underground economy. First, the currency demand equation is estimated and then an attempt is made to deduce the size of the underground economy and tax evasion. Finally, an Ordinary Least Square (OLS) Model is applied in order to estimate the impact of the underground economy on Gross Domestic Product of Pakistan for a selected time period. The results demonstrated that the underground economy has increased enormously from Rs. 12 billion in 1974 to Rs. 1085 billion in 2002. The findings suggest that the existence of such a large UGE can decrease tax revenues, depress GDP, and raise socio-economic problems. Frequent tax audits and heavier penalties for tax evasion may minimise the size of the underground economy with its ill effects.

Suggested Citation

  • Bushra Yasmin & Hira Rauf, 2004. "Measuring the Underground Economy and its Impact on the Economy of Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(2), pages 93-103, Jul-Dec.
  • Handle: RePEc:lje:journl:v:9:y:2004:i:2:p:93-103
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    File URL: http://121.52.153.179/JOURNAL/vol9-NoII/05%20Bushra%20Yasmin%20&%20Hira%20Rauf.pdf
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    References listed on IDEAS

    as
    1. Zafar Iqbal & Sarfraz Khan Qureshi & Riaz Mahmood, 1998. "The Underground Economy and Tax Evasion in Pakistan. A Fresh Assessment," PIDE-Working Papers 1998:158, Pakistan Institute of Development Economics.
    2. Mehnaz Ahmed & Qazi Masood Ahmed, 1995. "Estimation of the Black Economy of Pakistan through the Monetary Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 791-807.
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    Cited by:

    1. Kemal, M. Ali, 2007. "Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy," MPRA Paper 2226, University Library of Munich, Germany.
    2. Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
    3. Q M Ahmed & M Haider Hussain, 2008. "Estimating the Black Economy through a Monetary Approach: A Case Study of Pakistan," Economic Issues Journal Articles, Economic Issues, vol. 13(1), pages 45-60, March.
    4. Ahmed Gulzar & Novaira Junaid & Adnan Haider, 2010. "What is Hidden in the Hidden Economy of Pakistan? Size, Causes, Issues, and Implications," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 665-704.
    5. Rafat MAHMOOD & Eatzaz AHMAD, 2015. "Measurement Of Import Smuggling In Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 25(2), pages 135-159.
    6. Misbah Kiani & Adeel Ahmed & Khalid Zaman, 2015. "Combining qualitative and quantitative approaches for measuring underground economy of Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(1), pages 295-317, January.

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