Inclusive Growth, Institutions, and the Underground Economy
14 Pages Posted: 28 Feb 2012
Date Written: February 2012
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: Suggested Citation