Does government effectiveness moderate public spending on education–shadow economy nexus in ASEAN countries?

A plethora of empirical work has aimed to investigate the determinants of the shadow economy over the last few years. The impacts of government spending on the shadow economy have been explored. However, the effect of a moderating factor that affects this nexus has been largely ignored in the existing literature. Hence, the purpose of this paper is to explore the moderating role of government effectiveness on public spending on the education–shadow economy nexus, in eight Southeast Asian countries from 2001 to 2017. This paper uses the dynamic ordinary least squares (DOLS), fully modified ordinary least squares (FMOLS), and the panel causality approach to analyze the data. Empirical findings from this paper indicate that public spending on education and government effectiveness negatively impacts the size of the shadow economy. Interestingly, government effectiveness serves as a critical catalyst in shaping the effect of government spending on education. We also observed that economic growth and foreign direct investment have significant negative effects, while unemployment and inflation have significant positive effects on the shadow economy. Additionally, the causality results confirmed the presence of bidirectional causality in public spending education, government effectiveness, economic growth, foreign direct investment, and unemployment in the shadow economy. This study recommends that governments and policymakers pursue policies and programs that invest more in education and enhance government effectiveness.