From Shadows to Spotlight in Current Era: An Insight into the Informal Economy's Influence on Growth Under Governmental Oversight in Global South Fatf Grey List States

In the context of increasing connections between economic agents both domestically and internationally, the dimensions of the shadow economy have grown, fuelled by corruption and increasingly complex money laundering activities. The article focused on the impact of shadow economy and governance on economic growth for 18 FATF grey list countries. This paper aims to analyze the impact of the shadow economy and corruption on economic growth for 18 economies, for the period 2002–2022 based on the data of FATF. Using the rate of change of real GDP (as proxy for Economic growth), as the dependent variable and Capital investment as percent of GDP, Inflation, Unemployment rate, Foreign Direct Investment, Remittances, Tax revenue, percent of GDP, Rule of law index, Control of corruption, Voice and accountability index and Shadow economy as percent of GDP, as independent variables, the authors intend to demonstrate that the shadow economic acts as ‘a greasing agent for illegal money flow’ for the selected countries. Methods used are Panel fixed & random effect and panel OLS along with panel quantile regression as robust model. The estimated results reveal that shadow economy negatively impacts economic growth whereas; tax revenue appears to be the driver of economic growth. Furthermore; results also indicate that rule of law is an important determent of economic growth. The authors underline the need of promoting responsible behavior on the part of companies that, by adopting the Global Compact Principles, can make a major contribution to reducing corruption and implicitly to the dimensions of the underground economy.