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The Effects of the Shadow Economy on Economic Growth, Development Levels and Competitiveness

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"Siena's Pride," Piazza del Campo, Siena, Italy, August 6, 2010 | © Courtesy of Chris Ford/Flickr.

As recent studies indicate, the shadow economy can have both negative effects on country-level economic performance and positive effects, such as on international competitiveness.

A Blog Article by Pablo Markin.


As Friedrich Schneider and Andreas Buehn (2018) in their article on shadow economy indicate, no single widely accepted definition of the shadow economy exists.1 This could be due to the multiplicity of its possible causal variables; such as burdensome taxation and social security payments, low-quality institutions leading to corruption, high levels of regulatory costs, limited public sector services, low levels of taxation compliance, insufficient deterrents and economic underdevelopment (Schneider and Buehn, 2018: 4-5).

Likewise, Rufi Osmani (2015: 7) in his article on the shadow economy in Southeast European countries has associated this phenomenon with the quality of national institutions, the effectiveness of legal systems, the rates of tax evasion and the levels of corruption.2 Moreover, Osmani (2015: 9) indicates that previous studies, among others by Schneider and Buehn, have shifted the scholarly discourse from a focus on the illegal economy to the notion of the shadow economy that comprises the production of goods and services not reported to public authorities. Osmani’s (2015: 20) findings show that in countries, such as Albania, the shadow economy sector has demonstrated continued growth the period between 2002 and 2012, despite macroeconomic stabilization.

Similarly, in their study on the interrelations between the shadow economy, corruption and economic growth in the European Union, Sorin Nicolae Borlea, Monica Violeta Achim and Monica Gabriela A. Miron (2017: 19) have found that in the period 2005-2014 a significant positive interrelationship between corruption levels and the shadow economy.3 Based on correlation and regression analyses, these authors have also found that both the levels of corruption and the size of the shadow economy have a significant negative impact on economic growth (Borlea, Achim and Miron, 2017: 19, 28-29). This largely corresponds to the paper by Schneider and Buehn (2018). Additionally, as Borlea, Achim and Miron (2017: 30) argue, in the European Union, the shadow economy can be expected to constitute as much as 20% of its gross domestic product with higher levels in Southern and Eastern European states and lower levels in Northern and Western European countries.

However, as Hugo Zagoršek, Marko Jaklič and Aljaž Hribernik (2009: 37) have shown in their paper, the presence of the shadow economy can also have beneficial effects on country-level competitiveness on the international market, such as in Slovenia, as it can stem wage level rise and reduce input prices.4 As Maria Sabrina De Gobbi (2012: 1, 7-8) has suggested, especially in developing countries, the informal economy can serve as an important resource for sustainable economic development.5 By contrast, the entrenchment of the shadow economy can pose an obstacle for innovativeness, entrepreneurship and economic development in the long term (Zagoršek, Jaklič and Hribernik, 2009: 37).

In correspondence to the argument of Schneider and Buehn (2018), these negative effects of the shadow economy, especially among small and medium-sized enterprises as engines of economic growth, derive from their exposure to regulation-related costs such as taxes and salaries that shadow entrepreneurs can evade (Zagoršek, Jaklič and Hribernik, 2009: 46).

By Pablo Markin


Featured Image Credits: “Siena’s Pride,” Piazza del Campo, Siena, Italy, August 6, 2010 | © Courtesy of Chris Ford/Flickr.

Footnotes

  1. Schneider, Friedrich, and Andreas Buehn. “Shadow economy: estimation methods, problems, results and open questions.” Open Economics 1.1 (2018): 1-29.
  2. Osmani, Rufi. “The level of the shadow economy, tax evasion and corruption: The empirical evidence for SEE countries.” Seeu Review 11.2 (2015): 6-22.
  3. Borlea, Sorin Nicolae, Monica Violeta Achim, and Monica Gabriela A. Miron. “Corruption, shadow economy and economic growth: An empirical survey across the European union countries.” Studia Universitatis „Vasile Goldis” Arad–Economics Series 27.2 (2017): 19-32.
  4. Zagoršek, Hugo, Marko Jaklič, and Aljaž Hribernik. “The Shadow Economy and Its Impact on National Competitiveness: The Case of Slovenia.” South East European Journal of Economics and Business 4.1 (2009): 37-50.
  5. Gobbi, Maria Sabrina De. “Towards sustainable enterprises: Improving social and environmental practices starting from the informal economy.” Field Actions Science Reports. The journal of field actions Special Issue 6 (2012). [Online], Special Issue 6 | 2012, Online since 31 May 2012, connection on 21 March 2019. URL : http://journals.openedition.org/factsreports/1680.
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