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Comparative Analysis of the Relationship Between Poverty and Underground economy in the Highly developed, Transition and Developing Countries

Author

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  • Elijah, Obayelu Abiodun
  • Uffort, Larry

Abstract

This study was undertaken with the goal of analyzing the relationship between poverty rates and size of underground economy in the developed and developing countries and exploring whether there is a link between them. There are technical problems in linking them in that getting information from those who have undertaken underground activities are difficult. Secondary data were used to established hypothetical relationship and primary data for the empirical analysis. The results of the descriptive analysis revealed that underground economy and poverty have no geographical boundary. Although the incidence, and the size differs from one country to another. The incidences of poverty and shadow economy are larger in the poor (developing and transition) countries when compared with the highly developed countries. There is also a causal link between poverty and underground economy especially in the developing and transition countries with common factors such as high unemployment and corruption rates affecting both poverty and underground economy. High social security system and tax burden were found to account for the high rates of underground economies in the highly developed countries even with people’s awareness of its implications when caught. In developing countries like Nigeria, most people embark on unlicensed (and hence illegal) micro-enterprises / activities like production and sale of pure water, yoghurts, cutting down of economic trees, illegal running of private schools, drug trafficking, prostitution, black-market currency exchange, fake disclosure of actual business profit, in order to increase their levels of income by tax evasion or avoidance in the name of surviving. Government can reduce this menace to certain extent by engaging itself in sustainable poverty reduction activities, tax policy changes, embarking anti-corruption campaign and increase in job opportunities within the formal economy. Key words: Poverty, underground economy, developed, transition and developing countries

Suggested Citation

  • Elijah, Obayelu Abiodun & Uffort, Larry, 2007. "Comparative Analysis of the Relationship Between Poverty and Underground economy in the Highly developed, Transition and Developing Countries," MPRA Paper 2054, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:2054
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    References listed on IDEAS

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    1. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-766, May.
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    Cited by:

    1. Sefa Karagoz, 2020. "The Importance of the Informal Economy for Social Policy," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 70(2), pages 479-505, December.
    2. 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.
    3. Gustavo Adolfo Caballero Orozco, 2010. "Risk Preferences Under Extreme Poverty: A Field Experiment," Documentos CEDE 7717, Universidad de los Andes, Facultad de Economía, CEDE.

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    More about this item

    Keywords

    Poverty; underground economy; developed; transition and developing countries;
    All these keywords.

    JEL classification:

    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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