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Is Unofficial Economy a Source of Corruption?


  • Michael Faulend

    (Croatian National Bank, Zagreb)

  • Vedran Sosic

    (Croatian National Bank, Zagreb)


This paper discusses the link between unofficial economy and overall economic efficiency. Special emphasis is put on tax evasion and corruption and their interaction with unofficial economy. First, we address the role of the state in the genesis of unofficial economy and corruption. Second part gives more insight into the multitude and ambiguity of definitions used to describe unofficial economy and the impact of the particular definition chosen on the final conclusions. Since we opt for the 'classical' definition of unofficial economy as unrecorded economic activity, we argue that unofficial economy in transition countries, according to this definition, does not hurt economic efficiency and growth. It is also important to make a distinction between unofficial economy and tax evasion as well as between unofficial economy and corruption. We give an argument in support of the view that those kind of activities are closer linked with official than unofficial economy, as the former uses them as a mechanism for protection from the competition. Unlike unofficial economy, these irregular activities pose more serious threat to general welfare, economic efficiency and growth. We conclude that both unofficial economy and irregular activities are caused by high degree of politicisation and reducing it gives positive impact in reducing both. In the final part we address the measures required and a policy design which could help preventing irregular activities. This would not completely eliminate unofficial economy, but would remove activities which impair economic efficiency and growth.

Suggested Citation

  • Michael Faulend & Vedran Sosic, 1999. "Is Unofficial Economy a Source of Corruption?," Occasional paper series 09, Institute of Public Finance.
  • Handle: RePEc:ipf:occasi:9

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    References listed on IDEAS

    1. Vito Tanzi & Parthasarathi Shome, 1993. "A Primer on Tax Evasion," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 807-828, December.
    2. Katarina Ott, 1998. "Tax Administration Reform in Transition: The Case of Croatia," Occasional paper series 05, Institute of Public Finance.
    3. Vito Tanzi, 1998. "Corruption Around the World; Causes, Consequences, Scope, and Cures," IMF Working Papers 98/63, International Monetary Fund.
    4. ., 1995. "Public finances and the cycle," Occasional Papers 4, The Public Enquiries Unit, HM Treasury.
    5. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
    6. Anthony J. Pellechio & Vito Tanzi, 1995. "The Reform of Tax Administration," IMF Working Papers 95/22, International Monetary Fund.
    7. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 559-594, December.
    8. Vito Tanzi & Parthasarathi Shome, 1993. "A Primeron Tax Evasion," IMF Working Papers 93/21, International Monetary Fund.
    9. repec:hrv:faseco:30728045 is not listed on IDEAS
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    More about this item


    efficiency; makroeconomics; microeconomics; corruption;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General


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