Shadow Economies and Corruption across the World

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No. 2007-9
July 24, 2007
Shadow Economies and Corruption All Over the World:
New Estimates for 145 Countries
Friedrich Schneider
Johannes Kepler University of Linz, Austria
Abstract:
Estimations of the shadow economies for 145 countries, including developing, transition and highly developed OECD economies over 1999 to 2005 are presented. The average size of the shadow economy (as a percent of "official" GDP) in 2004/05 in 96 developing countries is 36.7%, in 25 transition countries 38.8% and in 21 OECD countries 14.8%. An increased burden of taxation and social security contributions, combined with a labour market regulation are the driving forces of the shadow economy. Furthermore, the results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. Finally, the various estimation methods are discussed and critically evaluated.

JEL: O17, O5, D78, H2, H11, H26
Keywords: shadow economy of 145 countries, tax burden, tax moral, quality of state institutions, regulation, DYMIMIC and other estimation methods
Correspondence:
Professor of Economics, Dr.Dr.h.c. mult. Friedrich Schneider, Department of Economics, Johannes Kepler Johannes Kepler University of Linz, A-4040 Linz-Auhof, Austria. Phone: 0043-732-2468-8210, Fax: -8209. E-mail: friedrich.schneider@jku.at, http://www.econ.jku.at/Schneider. ..

www.economics-ejournal.org/economics/journalarticles
© Author(s) 2007. This work is licensed under a Creative Commons License - Attribution-NonCommercial 2.0 Germany 2
Contents
1 Introduction .......................................................................................................................3 2 Some Theoretical Considerations about the Shadow Economy....................................4 2.1 Defining the Shadow Economy .................................................................................................4 2.2 The Main Causes of the Shadow Economy ...............................................................................5 2.2.1 Tax and Social Security Contribution Burdens ............................................................................... 5 2.2.2 Intensity of Regulations .................................................................................................................. 6 2.2.3 Public Sector Services..................................................................................................................... 7 3 The Size of the Shadow Economy for 145 Countries .....................................................7 3.1 Econometric Results .................................................................................................................7 3.2 The Size of the Shadow Economies for 145 Countries for 1999/2000 to 2004/2005..............14 3.2.1 Developing Countries.................................................................................................................... 14 3.2.2 Transition Countries...................................................................................................................... 18 3.2.3 Highly developed OECD-Countries.............................................................................................. 19 3.2.4 South West Pacific Islands............................................................................................................ 20 3.2.5 Communist Countries.................................................................................................................... 21 4 Corruption and the Shadow Economy: Substitutes or Compliments?)......................22 5 Summary and Conclusions .............................................................................................26 6 Appendix 1: Methods to Estimate the Size of the Shadow Economy: The DYMIMIC and Currency Demand Approach ........................................................................................28 6.1 The Currency Demand Approach...
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