Determinants of shadow economy in OIC and non-OIC countries: the role of financial development

Abstract

PurposeThe purpose of this paper is to empirically investigate the determinants and the impact of financial development on shadow economy in OIC countries and then compared with non-OIC countries.Design/methodology/approachThe study applies advanced panel GMM technique.FindingsThe study finds that macro-variables (unemployment, economic growth, money supply and foreign trade) and institutional variables reduce shadow economy both in OIC and non-OIC countries. The study also explores that financial development mitigates shadow economy; however, its impact is significantly less in case of OIC economies compared to the non-OIC countries.Research limitations/implicationsSince the focus of this study is OIC countries vs non-OIC countries, the research only includes discussion about shadow economy in 42 OIC member states and 99 non-OIC economies. The decision to restrict the study to 42 OIC economies and 99 non-OIC nations is due to the availability of data.Practical implicationsThe study suggests that free market and good business environment in the formal economy are the keys to have less shadow economy. Good institutional setup and ease in regulations can attract firms and businesses from informal sector to the official economy, while political instability is one of the main factors for having large size of shadow economy.Social implicationsThe OIC member countries should implement policies which improve accessibility to finance of every citizen of the country.Originality/valueDespite the growing importance of shadow economy, the literature investigating determinants and the role of financial development in shadow economy is scarce. To the best of the authors' knowledge, there is no literature that examined the shadow economy in the context of OIC member countries. Furthermore, this study has covered a large number of OIC and non-OIC economics over time and across different groups using largest data and advanced panel GMM techniques.

The role of budget imbalance in public spending–underground economy nexus: evidence from OECD countries

“…All these impacts stimulate individuals and firms to move into the shadow (Loayza, 2018; Gashi and Williams, 2021). This finding is in line with Esaku (2021), Khan et al. (2021) results.…”

“…All these impacts stimulate individuals and firms to move into the shadow (Loayza, 2018;Gashi and Williams, 2021). This finding is in line with Esaku (2021), Khan et al (2021) results. Second, similarly, our finding indicates that budget imbalance is found to have a significant and positive effect on the underground economy.…”

Exploring the nonlinear effect of shadow economies on sustainable development in Africa: does the level of financial market development matter?

“…Financial development is measured as credit to the private sector to gross domestic product. Following prior studies (Dada et al, 2022;Khan et al, 2021;Gharleghi and Jahanshahi, 2020;Canh and Thanh, 2020;Koirala and Pradhan, 2020), financial/credit development has a positive effect on sustainable development. However, if the credit advanced to the private is not efficiently used, it may lead to a reduction in sustainable development.…”

“…Interestingly, following prior studies on financial/credit market development within the shadow economies literature (Dada et al, 2022;Khan et al, 2021;Gharleghi and Jahanshahi, 2020;Canh and Thanh, 2020;Berdiev and Saunoris, 2016), it is clear that financial/credit market development lowers shadow economies through several ways (Berdiev and Saunoris, 2016;Capasso and Jappelli, 2013;Blackburn et al, 2012;Bose et al, 2012). First, the financial/credit sector/market, through its function of lending primarily/strictly lends to formal business entities, which raises that opportunity cost for informal entities operating in the shadow economy (Berdiev and Saunoris, 2016), and this pressurizes informal entities to formalize and obtain legitimacy to gain access to credit (Berdiev and Saunoris, 2016;Capasso and Jappelli, 2013;Blackburn et al, 2012).…”

Kayıtdışı Ekonomi ve Finansal Gelişme Arasındaki İlişki: Türkiye Örneği

“…Studies in the literature have found a negative relationship between the shadow economy and financial development, stating that increases in financial development decrease the shadow economy. When examining these studies, they are seen to generally use panel data analysis (Ajide, 2021;Bayar, & Özturk, 2016;Berdiev, & Saunoris, 2016;Bose, Capasso, & Wurm, 2012;Canh, & Thanh, 2020;Capasso, & Jappelli, 2013;Gharleghi, & Jahanshahi, 2020;Gobbi, & Zizza, 2007;Khan, Abdul Hamid, & Rehman, 2021;Njangang, Nembot, & Ngameni, 2020). This study presents the relationship between financial development and the shadow economy by considering the example of Turkey.…”