Impacts of Political Stability on Shadow Economy: Evidence from Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation Countries

Abstract

The issue of political stability and the shadow economy is the most vital concern for sustainable development. However, the relationship between them is yet to be explored. Particularly, in the context of Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation Countries (BIMSTEC) countries, there are no studies that have examined the influence of political stability on shadow economy. This study fills these gaps. Using panel data from 1998 to 2015, this study empirically investigated whether and how political stability affects shadow economy. Findings indicate that political stability has significant negative effects on the size of shadow economy. We also observed that regulation freedom, fiscal freedom, business freedom, trade freedom, government integrity, government spending and gross domestic product (GDP) growth have significant negative effects, while unemployment has significant positive effects on the shadow economy. Findings of this study imply that governments and policymakers should make efforts to ensure greater political stability in their countries, which will lessen the size of shadow economy that, in turn, will accelerate economic growth. The present study adds to empirical literature of the analogous issue by confirming (or else) the findings of past studies carried out across the world. The findings indicate that there exists a positive association between the extent of political stability and the shadow economy for BIMSTEC countries.

Government expenditure–shadow economy nexus: the role of fiscal deficit

“…Furthermore, using the datasets for seven countries of the Bay of Bengal Initiative, including five from South Asia (Bangladesh, Bhutan, India, Nepal, and Sri Lanka) and two from Southeast Asia (Myanmar and Thailand). From 1998 to 2015, Siddik et al (2021) confirm that public spending decreases the size of the shadow economy. Therefore, in line with the above arguments, the first hypothesis is postulated:…”

“…, 2018; Esaku, 2021). On the other hand, other researchers argue that the impact of government expenditure on the shadow economy is negative or insignificant (Siddik et al. , 2021; Baklouti and Boujelben, 2019; Farzanegan et al.…”

“…The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/1746-8809.htm (Berdiev and Saunoris, 2018;Xu et al, 2018;Esaku, 2021). On the other hand, other researchers argue that the impact of government expenditure on the shadow economy is negative or insignificant (Siddik et al, 2021;Baklouti and Boujelben, 2019;Farzanegan et al, 2020). The absence of consensus among researchers on the impact of government expenditure on the shadow economy can be attributed to different econometric methods, data, periods, and samples used in these empirical studies.…”

Does public debt moderate government spending – informal economy nexus? Evidence from the Asian countries

“…Therefore, an increase in government spending is associated with a smaller informal economy (Berdiev and Saunoris, 2018; Khan and Rehman, 2022). Nevertheless, government spending is insignificant in the informal economy (Siddik et al ., 2021). The differences in the results from these studies could be due to the choice of variables, empirical methodology, countries and research periods.…”