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What are the drivers of shadow economy? A further evidence of economic integration and institutional quality

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  • Phuc Nguyen Canh
  • Christophe Schinckus
  • Su Dinh Thanh

Abstract

This article uses panel-corrected standard errors (PCSE) estimator and dynamic fixed effects autoregressive distributed lag (DFE ARDL) estimator to examine the influence of the institutional quality and economic integration on shadow economy for a global sample of 112 economies (between 2005 and 2015). Our empirical research shows that the inward foreign direct investment (FDI), trade openness, institutional quality, and shadow economy have bi-causal relationships. Notably, the results show a strong negative impact of institutional quality and FDI inflows but a weaker negative influence of trade openness on shadow economy. There is also long-run cointegration between institutional quality, economic integration with shadow economy, and heteroscedastic effects of these factors in short run- and long run. Especially, trade openness has a negative impact in both short run and long run, while FDI inflows have a negative influence in the short run but it is positive in the long run. Interestingly, the influence of the institutional quality is quite heterogeneous since the control of corruption and the rule of law have a significant negative impact in the short run, while the political stability has significant negative impact in the long run.

Suggested Citation

  • Phuc Nguyen Canh & Christophe Schinckus & Su Dinh Thanh, 2021. "What are the drivers of shadow economy? A further evidence of economic integration and institutional quality," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 30(1), pages 47-67, January.
    • Handle: RePEc:taf:jitecd:v:30:y:2021:i:1:p:47-67
    DOI: 10.1080/09638199.2020.1799428
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    Cited by:

    1. Samar F. Abou Ltaif & Simona Mihai-Yiannaki & Alkis Thrassou, 2024. "Lebanon’s Economic Development Risk: Global Factors and Local Realities of the Shadow Economy Amid Financial Crisis," Risks, MDPI, vol. 12(8), pages 1-21, July.
    2. Colin C. Williams, 2023. "A Modern Guide to the Informal Economy," Books, Edward Elgar Publishing, number 18668.
    3. Segun Thompson Bolarinwa & Munacinga Simatele, 2024. "Asymmetric Analysis of Causal Relations in the Informality–Globalisation Nexus in Africa," Economies, MDPI, vol. 12(7), pages 1-25, June.
    4. Aziz N. Berdiev & Brandon Gomes & James W. Saunoris, 2023. "Revisiting the nexus between globalisation and the shadow economy: Untying the influences of de jure versus de facto globalisation," The World Economy, Wiley Blackwell, vol. 46(1), pages 27-54, January.
    5. Sèna Kimm Gnangnon, 2022. "Do Aid for Trade Flows Help Reduce the Shadow Economy in Recipient Countries?," Economies, MDPI, vol. 10(12), pages 1-33, December.
    6. Ha, Le Thanh & Dung, Hoang Phuong & Thanh, To Trung, 2021. "Economic complexity and shadow economy: A multi-dimensional analysis," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 408-422.
    7. Ioana Alexandra Horodnic & Colin Charles Williams & Jan Windebank & Adriana Zaiț & Claudia Ioana Ciobanu, 2021. "Explaining consumer motives to purchase in the informal economy," PLOS ONE, Public Library of Science, vol. 16(10), pages 1-22, October.
    8. Canh Phuc Nguyen & Binh Quang Nguyen, 2023. "Does the shadow economy matter for tourism consumption? New global evidence," Empirical Economics, Springer, vol. 65(2), pages 729-773, August.
    9. Isaac Ketu & Arsene Mouongue Kelly & Jules-Eric Tchapchet Tchouto, 2024. "Does economic complexity reduce the size of the shadow economy in African countries?," SN Business & Economics, Springer, vol. 4(1), pages 1-27, January.
    10. Canh Phuc Nguyen & Binh Nguyen Quang & Thanh Dinh Su, 2023. "Institutional frameworks and the shadow economy: new evidence of colonial history, socialist history, religion, and legal systems," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 50(3), pages 647-675, September.
    11. Paraskevi Koufopoulou & Colin C. Williams & Athanassios Vozikis & Kyriakos Souliotis & Antonios Samprakos, 2021. "Estimating Shadow Economy Size in Greece 2000 - 2018: A Flexible MIMIC Approach," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 71(3-4), pages 23-47, July-Dece.
    12. Nguyen, Canh Phuc, 2022. "Does economic complexity matter for the shadow economy?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 210-227.
    13. Korhan K. Gokmenoglu & Aysel Amir, 2023. "Investigating the Determinants of the Shadow Economy: The Baltic Region," Eastern European Economics, Taylor & Francis Journals, vol. 61(2), pages 181-198, March.
    14. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.
    15. Ting Xu & Zhike Lv, 2023. "The effect of tourism on the shadow economy: The level of economic development is key," Tourism Economics, , vol. 29(8), pages 2129-2142, December.

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