Workshop 03: Causes and Effects of the Shadow Economy: MENA and the Mediterranean Countries versus the Rest of the World
Abstract
Shadow economy or underground/unrecorded economy is prevalent in most countries, although the scope of such activity varies substantially. Whereas the prevalence of the shadow economy has been recognized both by academics and policymakers, formal investigations of its causes and effects are relatively recent and many issues remain unresolved and underexplored. Some of the key aspects requiring additional research focus include but are not limited to: (i) the relationship between the size of shadow economy and income levels of nations; (ii) the relationship of the shadow economies with other forms of illegal activity, notably corruption; (iii) the impact of the size and scope of government activity on unofficial activity; and (iv) the role of non-economic forces, including institutions, socio-economic norms, and historical precedents, in shaping the size, persistence and scope of the shadow economy. The proposed workshop seeks to synthesize the extant research and encourage new investigations with special attention to the MENA region and the developing and emerging economies around the Mediterranean.
The following key research questions are interesting both from a policy perspective and in contributing to the extant body of knowledge:
• What are key determinants of shadow economy?
• What are the social and economic effects of shadow economy?
• How are shadow economies around the Mediterranean and in the MENA region different from the Rest of the World? What are the policy implications, if any, of these differences in the characteristics of shadow economies in these regions and elsewhere?
• What is the nexus between corruption and shadow economy?
• Has the spread of the internet aided or abetted the informal sector?
• How should the size of shadow economy be measured?
• What are key recommendations for controlling shadow economy?
Description
Shadow economy or underground economy is prevalent in most countries, although the scope of such activity varies substantially. Some enterprises or individuals operate wholly underground, while others conduct only part of their activities underground. Examples include unregistered businesses (e.g., unauthorized taxis), businesses underreporting reporting their activities (e.g., hiring undocumented workers), workers engaging in activities without requisite professional licenses or government clearances (e.g., unlicensed real estate agents), etc.
The impetus for engaging in activities outside of the official sector might arise from the desire to avoid high government taxes, tough regulations, or might merely be driven by tradition and historical norms in certain economies. Similarly, there are many consequences of the unrecorded economy, the most obvious being undermining of the government’s ability to generate tax revenues or collect social security contributions, while others include an imprecise accounting of the economy’s resources (e.g., the number of qualified doctors when some practitioners are not registered or are operating without a license) creating planning and resource allocation challenges for governments. There are also serious personal consequences for actors of the unrecorded economy such as unregistered workers who get deprived of the benefits of social insurance schemes, including pension and health benefits.
Whereas the prevalence of the shadow economy has been recognized both by academics (see Gerxhani, 2003, for a literature review) and policymakers, formal investigations of its causes and effects are relatively recent (see, for example, Dreher et al., 2007; Dreher and Schneider, 2010; Friedman et al., 2000; Helberger and Knepel, 1988; Johnson et al., 1997 and 1998; Schneider and Enste, 2000 and 2003), and many issues remain unresolved and underexplored. A key underlying issue is the inability to adequately measure the extent of the shadow economy. Individuals and enterprises operating underground are not easily tractable (see Schneider, 2005a,b) for the seminal work in this area; also see Frey and Weck, 1983). Further, certain activities might be in the “gray” area and might not easily fit in the formal or informal sector definitions. The proposed workshop seeks to synthesize the extant research and encourage new investigations with special attention to the MENA region and the developing and emerging economies around the Mediterranean.
Even with the recently enhanced research focus on the shadow economy (see above), a number of contentious issues remain. For example, we still do not have a good idea regarding whether the shadow economy would be greater in low income or high income nations (see Dreher and Schneider, 2010) and whether certain other characteristics of a nation or a group of nations would make them more susceptible to a larger shadow economy. In this context, the proposed workshop will seek to draw out research on the MENA/Mediterranean regions in comparison with the rest of the world. Do socio-economic and historical characteristics of the MENA/Mediterranean regions make countries in these parts of the world more, or less, likely to have underground economies with significant shares in economic activity?
Another unresolved, yet very important, issue is the relationship of the shadow economies with other forms of illegal activity, notably corruption. Are shadow economy and corruption substitutes or complements (Dreher and Schneider, 2010)? How are shadow economy and corruption related in MENA countries? While in recent years substantial research has been undertaken on the causes and effects on corruption on different nations (Bardhan, 1997; Dreher et al., 2007; Goel and Nelson, 2005 and 2010; Klitgaard, 1988; Rose-Ackerman, 1999, and Shleifer and Vishny, 1999), also including the MENA region (Sayan, 2009), there is less corresponding focus on shadow economies, and even less on the corruption-shadow economy nexus (Dreher et al., forthcoming; Dreher and Schneider, 2010; Johnson et al., 1988). More importantly, the nexus between corruption and shadow economy is not fully understood and one of the themes of the workshop will be to draw some conclusions in this regard, especially with respect to MENA and Mediterranean nations.
Further, the impact of the size and scope of government activity needs to be examined in greater detail. Which types of government activity aids (e.g., greater bureaucracy) and abets (e.g., greater enforcement) unrecorded economy and whether these effects are similar across rich and poor nations and across transition and MENA countries and around the Mediterranean?
Finally, the role of non-economic forces, including institutions, socio-economic norms, and historical precedents, in shaping the size, persistence and scope of the shadow economy are not well understood. Are countries with long histories of democracy are more or less likely to have large shadow economies? What about countries whose populations belong to different faiths or have different ethno-cultural affiliations? In this context, the MENA region has some unique attributes that might make it more or less susceptible to a large unofficial sector. This stresses the need for cross-disciplinary research on the subject and the proposed workshop will strive to include related scholarship across disciplines.
Research questions
Understanding of the causes and effects of shadow economies would be furthered in a number of ways from the workshop. The following key research questions are interesting both from a policy perspective and in contributing to the extant body of knowledge:
• What are key determinants of shadow economy? Are wealthier nations less likely to have a shadow sector?
• What are the effects of shadow economy?
• How are shadow economies in the MENA and Mediterranean regions different from the Rest of the World?
• What is the nexus between corruption and shadow economy?
• Has the spread of the internet aided or abetted the informal sector?
• Evaluation of different measures of the shadow economy?
• What are key recommendations for controlling the shadow economy?
The workshop will also consider submissions of authoritative surveys of the extant literature. The workshop will conclude with the workshop directors summarizing and synthesizing the findings of the workshop and suggesting some directions for future research.
Potential participants
This workshop would appeal to a number of disciplines fostering interdisciplinary collaborations and insights. A mix of junior and senior scholars from a variety of disciplines including (but not limited to) business, economics, history, law and political science would be encouraged to submit. Both individual/regional country case studies and cross-country/-cultural investigations would be welcome, as well as theoretical and empirical approaches. Selected papers from the workshop will be considered for publication in a special issue of a reputable journal or an edited volume to be published by a reputed international publisher (please see below for more on this).
Workshop directors and Publications to follow the workshop
Both workshop directors have published extensively in the area of institutions and corruption. They possess complementary skills: Goel focuses on cross-national empirical studies, while Sayan’s forte is intuitional details and specials insights into the MENA region. Their participation in conferences and workshops worldwide along with their experience in serving on the editorial boards of international scholarly journals have enabled them to develop professional contacts which should be quite useful in drawing a healthy pool of applicants for the proposed workshop. Sayan’s network also covers the membership roster of the Middle East Economic Association (http://www.meeaweb.org) currently led by Sayan as the President.
Sayan previously guest-edited a special issue of Emerging Markets Finance and Trade, a journal covered by the SSCI, and a symposium in the Journal of Economics and Finance where he published selected papers presented at the Mediterranean Research Meeting Workshop he directed. Should the present proposal be approved, the directors would either guest-edit a journal special issue again, and/or edit a book to be published by Palgrave-MacMillan in the publisher’s new series on the MENA economies where Sayan serves as a member of the editorial board.
Bibliography
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Dreher, A., C. Kotsogiannis and S. McCorriston, “Corruption around the World: Evidence from a Structural Model”, Journal of Comparative Economics, 2007, 35, 443-466.
Dreher, A., C. Kotsogiannis and S. McCorriston, “How do Institutions Affect Corruption and the Shadow Economy?” International Tax and Public Finance, forthcoming.
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Page last updated on 04 September 2018