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Abstract

Objective: Multi-dimensional shadow economic activities have negatively affected public revenues and welfare. Valid statistics regarding the magnitude and trend of the covert economy are crucial for making effective and efficient conclusions towards resource allocations. This paper presents estimates of this phenomenon in developing countries. The study aims to understand what factors lead to a shadow economy and what the outcomes of these indicators are.
Research Gap: This study contributes novel insights into the estimation of the shadow economy in developing nations by employing a Multi-Indicators Multi-Causes (MIMIC) model across developing nations from 1999 to 2022. Unlike prior research that provides fragmented or regional estimates, this study offers a comprehensive, time-series analysis that captures the evolutionary trends of the underground economy over a broad geographic and temporal scope.
Design/Methodology/Approach: This study has applied the MIMIC model. It is a complex system with two distinct parts. The first part, the Structural Model, is like a puzzle, revealing the determinants of latent variable, the Underground Economy. But, as these causes can't fully explain the underground economy, the error term steps in as the missing piece. The second part, the measurement model, can be seen as a bridge. It connects the latent variable and its indicators, much like a bridge connects two separate entities. The following model will be used to evaluate the shadow economy.
The Main Findings: Empirical findings demonstrate that the size of government expenditures, fiscal easiness, rate of unemployment and GDP are critical variables of the unregistered economy in developing countries. The developed index is instrumental in ranking the countries based on the scale of the underground economy.
Theoretical / Practical Implications of the Findings: The outcomes of this study provide valuable theoretical advancements and actionable policy recommendations for addressing the shadow economy in developing countries. By implementing structural reforms, reducing regulatory burdens, and leveraging technological advancements, policymakers can gradually integrate informal economic activities into the formal sector, fostering sustainable economic growth and financial stability.
Originality/Value: The study’s originality and value stem from its novel methodological approach, broad empirical coverage, and strong policy relevance. By integrating cutting-edge econometric techniques, innovative data sources, and actionable policy insights, this research serves as a valuable resource for academics, policymakers, and economists working on economic formalization and financial inclusion in developing nations.