Shadow economy in post-communist economies: what role do financial development, ICT infrastructure, and institutional quality play?

This study examines the impact of financial development, ICT diffusion, and institutional quality on the shadow economy in 13 post-communist transition countries from 2000 to 2020. Using panel quantile regression, the analysis accounts for heterogeneous dynamics across the sampled economies. The findings reveal that an enhancement in financial development significantly reduces the size of the shadow economy, particularly in countries with high levels of informality. Furthermore, improvements in institutional quality and the adoption of advanced ICT infrastructure are identified as fundamental factors in curbing informal economic activities. The positive relationship between per capita GDP growth and the shadow economy suggests that informality is deeply rooted in the fundamental economic structure. The study concludes that policies aimed at increasing financial development, improving governance, and promoting ICT diffusion are crucial for controlling the shadow economy.