Inclusive Growth, Institutions, and the Underground Economy

14 Pages Posted: 28 Feb 2012

See all articles by Sonali Jain-Chandra

Sonali Jain-Chandra

Columbia University - Graduate School of Arts and Sciences - Department of Economics

Adil Mohommad

International Monetary Fund (IMF)

Date Written: February 2012

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.

Keywords: Underground Economy, Shadow Economy, Institutions, Developing Countries, Economic Growth, Financial Sector, Fund Role, Governance, Taxation

JEL Classification: O40, H26

Suggested Citation

Jain-Chandra, Sonali and Mohommad, Adil, Inclusive Growth, Institutions, and the Underground Economy (February 2012). IMF Working Paper No. NO.12/47. Available at SSRN: https://ssrn.com/abstract=2012232

Sonali Jain-Chandra (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Adil Mohommad

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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