The impact of corruption on the shadow economy: Research in developing Asian countries
Main Article Content
Abstract
The article studies the impact of corruption on the size of shadow economy in 24 developing countries in Asia in the period 2005 - 2021. Although both corruption and the shadow economy are very difficult to measure and there isn’t the index that can measure it accurately, but the use of CPI as an assessment of citizens’ perceptions of corruption in the public sector and the shadow economy index developed by Schneider, Buehn and Montenegro (2010) according to the MIMIC method is seen as a combination of suitable for the research context. With theoretical analysis, this paper applies FEM and systematic GMM to exam the impact of corruption on shadow economy. The empirical results show that corruption plays a supporting role in the scale of the shadow economy in developing Asian countries. This shows that corruption increases the size of the shadow economy because then the costs of official economic activities are large. This result also strongly supports the “greasing the wheel” because bribery facilitates the establishment of covert operations in developing countries. Therefore, developing countries that want to reduce the size of shadow economic activities need to eliminate corruption through forms such as building e-government and building a strict institutional system.
Article Details
Keywords
Corruption, Developing countries, Shadow economy
References
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Buehn, A., & Schneider, F. (2009). Corruption and the shadow economy: a structural equation model approach. https://doi.org/10.2139/ssrn.1409286
Canh, P. N., Schinckus, C., & Dinh Thanh, S. (2021). What are the drivers of shadow economy? A further evidence of economic integration and institutional quality. The Journal of International Trade & Economic Development, 30(1), 47-67. https://doi.org/10.1080/09638199.2020.1799428
Coolidge, J., & Rose-Ackerman, S. (1997). High-level rent-seeking and corruption in African regimes: theory and cases (No. 1780). The World Bank.
Choi, J. P., & Thum, M. (2005). Corruption and the shadow economy. International Economic Review, 46(3), 817-836. https://doi.org/10.1111/j.1468-2354.2005.00347.x
Đặng Văn Cường (2016). Tác động của tự do kinh tế và dân chủ đến tham nhũng tại các quốc gia đang phát triển. Tạp chí Kinh tế và Ngân hàng Châu Á, (118 -119). https://ajeb.hub.edu.vn/vi/article/tac-dong-cua-tu-do-kinh-te-va-dan-chu-den-tham-nhung-tai-cac-quoc-gia-dang-phat-trien
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Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics, 38(10), 1091-1110. https://doi.org/10.1080/00036840500392078
Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: An empirical analysis. Public Choice, 144, 215-238. https://doi.org/10.1007/s11127-009-9513-0
Ergene, S. (2015). Growth, inflation, interest rate and informality: Panel VAR evidence from OECD economies. Economics Bulletin, 35(1), 750-763. http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I1-P79.pdf
Esaku, S. (2021). The long-and short-run relationship between the shadow economy and trade openness in Uganda. Cogent Economics & Finance, 9(1), 1930886. https://doi.org/10.1080/23322039.2021.1930886
Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, 76(3), 459-493. https://doi.org/10.1016/S0047-2727(99)00093-6
Gardiner, S., Parry, J., & Robinson, S. (2017). Integrity and the corruption debate in sport: Where is the integrity?. European sport management quarterly, 17(1), 6-23.
Goel, R. K., & Saunoris, J. W. (2014). Global corruption and the shadow economy: spatial aspects. Public Choice, 161, 119-139. https://doi.org/10.1007/s11127-013-0135-1
Heinrich, F., & Hodess, R. (2011). Measuring Corruption. In Handbook of Global Research and Practice in Corruption. Edward Elgar Publishing. https://www.elgaronline.com/edcollbook/9781849805018.xml#page=32
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Johnson, M. T., Bloemen, P. J. H., Den Broeder, F. J. A., & De Vries, J. J. (1996). Magnetic anisotropy in metallic multilayers. Reports on Progress in Physics, 59(11), 1409. https://doi.org/10.1088/0034-4885/59/11/002
Klitgaard, R. (1998). Strategies against corruption. Presentation at Agencia Española de Cooperación Internacional Foro Iberoamericano sobre el Combate a la Corrupción, Santa Cruz de la Sierra, Jun, 15-16.
Koreshkova, T. A. (2006). A quantitative analysis of inflation as a tax on the underground economy. Journal of Monetary Economics, 53(4), 773-796. https://doi.org/10.1016/j.jmoneco.2005.02.009
Medina, L., & Schneider, M. F. (2018). Shadow economies around the world: what did we learn over the last 20 years?. International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow-Economies-Around-the-World-What-Did-We-Learn-Over-the-Last-20-Years-45583
Medina, L., & Schneider, F. (2019). Shedding Light on the Shadow Economy: A Global Database and the Interaction with the Official One (No. 7981). CESifo. https://doi.org/10.2139/ssrn.3502028
Mogensen, G. V., Kvist, H. K., Körmendi, E., & Pedersen, S. (1995). The Shadow Economy in Denmark 1994: Measurement and Results. Study No. 3, Rockwool Foundation Research Unit, Copenhagen.
Monteverde, V. (2021). Great corruption–theory of corrupt phenomena. Journal of Financial Crime, 28(2), 580-592. https://doi.org/10.1108/JFC-07-2019-0104
Moulton, B. R. (1986), ‘Random group effects and the precision of regression estimates’, Journal of econometrics, 32(3), 385-397. https://doi.org/10.1016/0304-4076(86)90021-7
Moulton, B. R. (1990), ‘An illustration of a pitfall in estimating the effects of aggregate variables on micro units’, The Review of Economics and Statistics, 72, 334-338. https://doi.org/10.2307/2109724
Ross, S. A. (1973). The economic theory of agency: The principal's problem. The American Economic Review, 63(2), 134-139.
Saha, S., Beladi, H., & Kar, S. (2021). Corruption control, shadow economy and income inequality: Evidence from Asia. Economic Systems, 45(2), 100774. https://doi.org/10.1016/j.ecosys.2020.100774
Saunoris, J. W., & Sajny, A. (2017). Entrepreneurship and economic freedom: cross-country evidence from formal and informal sectors. Entrepreneurship & Regional Development, 29(3-4), 292-316. https://doi.org/10.1080/08985626.2016.1267806
Schneider, F. (2007). Shadow economies and corruption in transition countries: some preliminary findings. Dostopno preko http://www. econ. jku. at/Schneider, 3(9), 2009.
Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes, and consequences. Journal of Economic Literature, 38(1), 77-114. https://doi.org/10.1257/jel.38.1.77
Schneider, F., & Enste, D. H. (2013). The shadow economy: An international survey. Cambridge University Press. https://doi.org/10.1017/CBO9781139542289
Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New Estimates for the Shadow Economies all over the World. International Economic Journal, 24(4), 443-461. http://doi.org/10.1080/10168737.2010.525974
Shleifer, A., & Vishny, R. W. (1993). Corruption. The quarterly journal of economics, 108(3), 599-617. https://doi.org/10.2307/2118402
Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 70(1), 65-94. https://doi.org/10.2307/1884513
Teobaldelli, D., & Schneider, F. (2013). The influence of direct democracy on the shadow economy. Public Choice, 157, 543-567. https://doi.org/10.1007/s11127-013-0098-2
Torgler, B., & Schneider, F. (2009). The impact of tax morale and institutional quality on the shadow economy. Journal of Economic Psychology, 30(2), 228-245. https://doi.org/10.1016/j.joep.2008.08.004
Virta, H. (2010). The linkage between corruption and shadow economy size: does geography matter? International Journal of Development Issues, 9(1), 4-24. https://doi.org/10.1108/14468951011033770
Vo, D. H., Ha, D. T. T., & Ly, T. H. (2015). Shadow Economy and Corruption in the ASEAN: Complement or Substitute?. In A New Paradigm for International Business: Proceedings of the Conference on Free Trade Agreements and Regional Integration in East Asia (pp. 151-169). Springer Singapore. https://doi.org/10.1007/978-981-287-499-3_8
Williams, C. C., & Schneider, F. (2013). The shadow economy. London: Institute of Economic Affairs. https://doi.org/10.13140/2.1.1324.1286
Zubal’ová, A., Geško, M., & Borza, M. (2020). Effectivity of progressive taxation from the micro-and macroeconomic perspective. Danube, 11(3), 228-238. https://doi.org/10.2478/danb-2020-0013
Bayar, Y., & Ӧztürk, Ӧ. F. (2019). Economic freedom, globali-zation, and the shadow economy in the European union transition economies: A panel cointegration analysis. Organizations and Markets in Emerging Economies, 10(2), 378–391. https://doi.org/10.15388/omee.2019.10.19
Berggren, N. (2003). The benefits of economic freedom: A survey. The Independent Review, 8(2), 193-211. https://www.jstor.org/stable/24562685
Bhattacharyya, S., & Hodler, R. (2010). Natural resources, democracy and corruption. European Economic Review, 54(4), 608-621. https://doi.org/10.1016/j.euroecorev.2009.10.004
Borlea, S. N., Achim, M. V., & Miron, M. G. (2017). Corruption, shadow economy and economic growth: An empirical survey across the European Union countries. Studia Universitatis Vasile Goldiș Arad, Seria Științe Economice, 27(2), 19-32. https://doi.org/10.1515/sues-2017-0006
Buehn, A., & Schneider, F. (2009). Corruption and the shadow economy: a structural equation model approach. https://doi.org/10.2139/ssrn.1409286
Canh, P. N., Schinckus, C., & Dinh Thanh, S. (2021). What are the drivers of shadow economy? A further evidence of economic integration and institutional quality. The Journal of International Trade & Economic Development, 30(1), 47-67. https://doi.org/10.1080/09638199.2020.1799428
Coolidge, J., & Rose-Ackerman, S. (1997). High-level rent-seeking and corruption in African regimes: theory and cases (No. 1780). The World Bank.
Choi, J. P., & Thum, M. (2005). Corruption and the shadow economy. International Economic Review, 46(3), 817-836. https://doi.org/10.1111/j.1468-2354.2005.00347.x
Đặng Văn Cường (2016). Tác động của tự do kinh tế và dân chủ đến tham nhũng tại các quốc gia đang phát triển. Tạp chí Kinh tế và Ngân hàng Châu Á, (118 -119). https://ajeb.hub.edu.vn/vi/article/tac-dong-cua-tu-do-kinh-te-va-dan-chu-den-tham-nhung-tai-cac-quoc-gia-dang-phat-trien
Dang, V. C., Nguyen, Q. K., & Tran, X. H. (2022). Corruption, institutional quality and shadow economy in Asian countries. Applied Economics Letters, 1-6. https://doi.org/10.1080/13504851.2022.2118959
Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics, 38(10), 1091-1110. https://doi.org/10.1080/00036840500392078
Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: An empirical analysis. Public Choice, 144, 215-238. https://doi.org/10.1007/s11127-009-9513-0
Ergene, S. (2015). Growth, inflation, interest rate and informality: Panel VAR evidence from OECD economies. Economics Bulletin, 35(1), 750-763. http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I1-P79.pdf
Esaku, S. (2021). The long-and short-run relationship between the shadow economy and trade openness in Uganda. Cogent Economics & Finance, 9(1), 1930886. https://doi.org/10.1080/23322039.2021.1930886
Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, 76(3), 459-493. https://doi.org/10.1016/S0047-2727(99)00093-6
Gardiner, S., Parry, J., & Robinson, S. (2017). Integrity and the corruption debate in sport: Where is the integrity?. European sport management quarterly, 17(1), 6-23.
Goel, R. K., & Saunoris, J. W. (2014). Global corruption and the shadow economy: spatial aspects. Public Choice, 161, 119-139. https://doi.org/10.1007/s11127-013-0135-1
Heinrich, F., & Hodess, R. (2011). Measuring Corruption. In Handbook of Global Research and Practice in Corruption. Edward Elgar Publishing. https://www.elgaronline.com/edcollbook/9781849805018.xml#page=32
Hibbs Jr, D. A., & Piculescu, V. (2005). Institutions, corruption and tax evasion in the unofficial economy. Institutions, 2005(08), 02c3. https://core.ac.uk/reader/16311250
Hindriks, J., Keen, M., & Muthoo, A. (1999). Corruption, extortion and evasion. Journal of Public Economics, 74(3), 395-430. https://doi.org/10.1016/S0047-2727(99)00030-4
Johnson, M. T., Bloemen, P. J. H., Den Broeder, F. J. A., & De Vries, J. J. (1996). Magnetic anisotropy in metallic multilayers. Reports on Progress in Physics, 59(11), 1409. https://doi.org/10.1088/0034-4885/59/11/002
Klitgaard, R. (1998). Strategies against corruption. Presentation at Agencia Española de Cooperación Internacional Foro Iberoamericano sobre el Combate a la Corrupción, Santa Cruz de la Sierra, Jun, 15-16.
Koreshkova, T. A. (2006). A quantitative analysis of inflation as a tax on the underground economy. Journal of Monetary Economics, 53(4), 773-796. https://doi.org/10.1016/j.jmoneco.2005.02.009
Medina, L., & Schneider, M. F. (2018). Shadow economies around the world: what did we learn over the last 20 years?. International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow-Economies-Around-the-World-What-Did-We-Learn-Over-the-Last-20-Years-45583
Medina, L., & Schneider, F. (2019). Shedding Light on the Shadow Economy: A Global Database and the Interaction with the Official One (No. 7981). CESifo. https://doi.org/10.2139/ssrn.3502028
Mogensen, G. V., Kvist, H. K., Körmendi, E., & Pedersen, S. (1995). The Shadow Economy in Denmark 1994: Measurement and Results. Study No. 3, Rockwool Foundation Research Unit, Copenhagen.
Monteverde, V. (2021). Great corruption–theory of corrupt phenomena. Journal of Financial Crime, 28(2), 580-592. https://doi.org/10.1108/JFC-07-2019-0104
Moulton, B. R. (1986), ‘Random group effects and the precision of regression estimates’, Journal of econometrics, 32(3), 385-397. https://doi.org/10.1016/0304-4076(86)90021-7
Moulton, B. R. (1990), ‘An illustration of a pitfall in estimating the effects of aggregate variables on micro units’, The Review of Economics and Statistics, 72, 334-338. https://doi.org/10.2307/2109724
Ross, S. A. (1973). The economic theory of agency: The principal's problem. The American Economic Review, 63(2), 134-139.
Saha, S., Beladi, H., & Kar, S. (2021). Corruption control, shadow economy and income inequality: Evidence from Asia. Economic Systems, 45(2), 100774. https://doi.org/10.1016/j.ecosys.2020.100774
Saunoris, J. W., & Sajny, A. (2017). Entrepreneurship and economic freedom: cross-country evidence from formal and informal sectors. Entrepreneurship & Regional Development, 29(3-4), 292-316. https://doi.org/10.1080/08985626.2016.1267806
Schneider, F. (2007). Shadow economies and corruption in transition countries: some preliminary findings. Dostopno preko http://www. econ. jku. at/Schneider, 3(9), 2009.
Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes, and consequences. Journal of Economic Literature, 38(1), 77-114. https://doi.org/10.1257/jel.38.1.77
Schneider, F., & Enste, D. H. (2013). The shadow economy: An international survey. Cambridge University Press. https://doi.org/10.1017/CBO9781139542289
Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New Estimates for the Shadow Economies all over the World. International Economic Journal, 24(4), 443-461. http://doi.org/10.1080/10168737.2010.525974
Shleifer, A., & Vishny, R. W. (1993). Corruption. The quarterly journal of economics, 108(3), 599-617. https://doi.org/10.2307/2118402
Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 70(1), 65-94. https://doi.org/10.2307/1884513
Teobaldelli, D., & Schneider, F. (2013). The influence of direct democracy on the shadow economy. Public Choice, 157, 543-567. https://doi.org/10.1007/s11127-013-0098-2
Torgler, B., & Schneider, F. (2009). The impact of tax morale and institutional quality on the shadow economy. Journal of Economic Psychology, 30(2), 228-245. https://doi.org/10.1016/j.joep.2008.08.004
Virta, H. (2010). The linkage between corruption and shadow economy size: does geography matter? International Journal of Development Issues, 9(1), 4-24. https://doi.org/10.1108/14468951011033770
Vo, D. H., Ha, D. T. T., & Ly, T. H. (2015). Shadow Economy and Corruption in the ASEAN: Complement or Substitute?. In A New Paradigm for International Business: Proceedings of the Conference on Free Trade Agreements and Regional Integration in East Asia (pp. 151-169). Springer Singapore. https://doi.org/10.1007/978-981-287-499-3_8
Williams, C. C., & Schneider, F. (2013). The shadow economy. London: Institute of Economic Affairs. https://doi.org/10.13140/2.1.1324.1286
Zubal’ová, A., Geško, M., & Borza, M. (2020). Effectivity of progressive taxation from the micro-and macroeconomic perspective. Danube, 11(3), 228-238. https://doi.org/10.2478/danb-2020-0013