Estimating the Size of the Informal Trade Across the World: Evidence from a MIMIC Approach

This paper presents the informal trade estimates for 184 countries including North America, Latin America and the Caribbean, South Asia, East Asia and Pacific, Europe and Central Asia, Middle East and North Africa, and the countries of Sub-Saharan Africa covering the period 2002–2013. In the presence of a model with multiple indicators and multiple causes (MIMIC), the empirical results indicate that the average rate of global informal trade (in % of formal trade) in 184 countries is 20.06%, 22.22% in 35 North America, Latin America and the Caribbean countries, 20.048% in 8 South Asia countries, 15.57% in 27 East Asia and Pacific countries, 16.67% in 48 Europe and Central Asia countries, 18.43% in 21 Middle East and North Africa countries, and 25.23% in 45 Sub-Saharan Africa countries. We suggest policies (economic) to solve the informal trade dilemma not only in the abovementioned regions but also in different countries. The solutions include simplifying regulations and procedures, promoting effective and free government, tackling corruption, increasing the likelihood of control over borders, reducing unnecessary transaction costs; and finally, creating or reforming market institutions.