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Inclusive Growth, Institutions, and the Underground Economy

Author

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  • Adil Mohommad
  • Anoop Singh
  • Sonali Jain-Chandra

Abstract

Worldwide protests against the perceived lack of economic opportunity and failure of governance have refocused attention on the need for inclusive growth and strong institutions. In developing countries, large informal economies limit state capacity to deliver governance and strong institutions, which in turn discourages participation in and expansion of the formal economy. This paper analyzes the determinants of the underground economy, with particular emphasis on the role of institutions and the rule of law. We find that when businesses are faced with onerous regulation, inconsistent enforcement and corruption, they have an incentive to hide their activities in the underground economy. Empirical analysis suggests that institutions are a more important determinant of the size of the underground economy than tax rates.

Suggested Citation

  • Adil Mohommad & Anoop Singh & Sonali Jain-Chandra, 2012. "Inclusive Growth, Institutions, and the Underground Economy," IMF Working Papers 12/47, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/47
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=25721
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    References listed on IDEAS

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    1. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 443-461.
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