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5 SUMMARY AND CONCLUSIONS

There have been many obstacles to overcome to measure the size of the shadow economy and to analyze its consequences on the official economy but as this article shows some progress has been made and some insights into the size and development of the shadow economy of developing, transition and highly developed OECD countries can be given.

The first conclusion from these results is that for all countries investigated the shadow economy has reached a remarkably large size and the empirical results convincingly demonstrate that an increasing burden of taxation and social security payments combined with rising state regulatory activities are the major driving forces for the size and growth of the shadow economy.

Moreover it can be demonstrated that there is an empirically strong interaction of the shadow economy with government policies and with the official economy. The shadow economy has a statistically significant and quantitatively important influence on the growth of the official economy. For industrialized and/or transition countries this impact is positive while for developing countries it is negative and these results (at least partly) confirm the theoretical considerations about the dynamic effects of the shadow economy on the official sector.

Finally to conclude: shadow economies are a complex phenomenon and are present in all type of economies to an important extent. People engage in shadow economic activities for a variety of reasons and among many we can count government actions, taxation and regulation as the most important ones. With these two insights goes a third, no less important one: a government aiming to decrease shadow economic activity has first and foremost to analyze the complex relationships between the official economy and the shadow economy – and even more important – the consequences of its own policy decisions.

6 APPENDIX

Table 1: Panel Regression for the entire sample

Dependent Variable	Annual GDP per capita Growth Rate
Explanatory Variables:	Estimated Coefficients:

Shadow Economy Industrialized Countries [7]	0.077**
	(2.63)
Shadow Economy Developing Countries	-0.052**
	(2.37)
Openness	0.012**
	(2.14)
Inflation Rate Other Countries	0.023
	(1.32)
Inflation Rate Transition Countries	-0.021**
	(4.10)
Government Consumption	-0.181**
	(3.23)
Lagged Annual GDP per capita Growth Rate	0.154**
	(3.06)
Total Population	0.000036**
	(2.07)
Capital Accumulation Rate	0.019*
	(1.88)
Constant	0.062**
	(4.13)

Number of countries	104

Overall R-Squared	0.347
Within R-Squared	0.266
Between R-Squared	0.417

Wald-CHI²	94.63
	(0.000)

Absolute value of z-statistics in parentheses * significant at 10 % ** significant at 5 % Random effects GLS-regressions, 104 countries, period 1990-2000, annual data

Source: Own Calculation by authors

Table 2: Panel Regression for 21 highly developed OECD countries

Dependent Variable	Annual GDP per capita Growth Rate
Explanatory Variables:	Estimated Coefficients:

Trend Variable	-0.003**
	(3.36)
Shadow Economy	0.078**
	(2.05)
Openness	0.016**
	(2.47)
Capital Accumulation Rate	0.127**
	(3.47)
Annual FDI Growth Rate	0.004**
	(2.49)
Annual Labor Force Growth Rate	0.951**
	(2.44)
Constant	6.206**
	(3.36)

Number of countries	21

Overall R-Squared	0.370
Within R-Squared	0.213
Between R-Squared	0.716

Wald-CHI²	51.10
	(0.000)

Absolute value of z-statistics in parentheses * significant at 10 % ** significant at 5 % Random effects GLS-regressions, 21 countries, period 1990-2000, annual data

Source: Own Calculation by authors

Table 3: Panel Regression for 83 transition and developing countries

Dependent Variable	Annual GDP per capita Growth Rate
Explanatory Variables:	Estimated Coefficients:

Shadow Economy Transition Countries	0.099**
	(3.80)
Shadow Economy Developing Countries	-0.045**
	(-2.36)
FDI lagged	0.00049
	(0.05)
Inflation Rate Other Countries	0.0263
	(1.28)
Inflation Rate Transition Countries	-0.021**
	(-3.69)
Government Consumption	-0.184**
	(3.25)
Lagged Annual GDP per capita Growth Rate	0.154**
	(3.06)
Total Population	0.000036*
	(1.80)
Capital Accumulation Rate	0.015
	(1.42)
Constant	0.067**
	(5.00)

Number of countries	83

Overall R-Squared	0.321
Within R-Squared	0.263
Between R-Squared	0.443

Wald-CHI²	73.89
	(0.000)

Absolute value of z-statistics in parentheses* significant at 10 % ** significant at 5 % Random effects GLS-regressions, 83 countries, period 1990-2000, annual data

Source: Own Calculation by authors

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Footnotes

[7] These are here 23 transition countries and 21 highly developed OECD countries of western type.

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