The Effective Factors on Informal Economy in Developing Countries (Panel Data Model)

Abstract

A part of countries' economic activities is appertained to informal economy in which the activities done are not recorded in countries' formal statistics. Existence of the informal economy causes reduction in government incomes and has undesirable impact on policies' efficiency. Various factors are involved in formation and growth of the informal economy. In this article, the effect of macroeconomic variables on informal economy volume is investigated and analyzed for 98 developing countries using panel data model during 1999 to 2007. Estimation results show that there is a direct relationship between inflation and unemployment rate indices and the informal activities volume throughout countries, so that by one percent increase in inflation and unemployment indices, informal economy’s share in gross domestic product of the investigated countries is increased by (0.19) and (0.04) percent, respectively. Economy's openness degree and the index presenting economic corruption and economy's openness degree interaction affect the informal economy volume negatively. Informal economy's elasticity relative to each of these indices is attained equal to (-0.05) and (-0.04) respectively. This significant finding shows that although there is an indirect relationship between economy's openness degree and the informal economy volume, in countries where there is higher degree of economy openness and lower economic corruption simultaneously, informal economy's share in gross domestic product is also lower thereby economic corruption has a significant effect on informal economy volume. The present article also investigates oil economies role in the informal economy volume. The model estimation results confirm higher the informal economy volume in oil-exporting countries relative to non-oil economies.