Inclusive Growth, Institutions, and the Underground Economy
IMF Working Papers, February 1, 2012
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Bibliographic details
- Authors: Adil Mohommad, Anoop Singh, Sonali Jain-Chandra
- Published: February 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463937089.001
Overview
- Worldwide protests against the perceived lack of economic opportunity and failure of governance have refocused attention on the need for inclusive growth and strong institutions.
- In developing countries, large informal economies limit state capacity to deliver governance and strong institutions, which in turn discourages participation in and expansion of the formal economy.
- The paper analyzes the determinants of the underground economy, with particular emphasis on the role of institutions and the rule of law.
Key findings
- When businesses face onerous regulation, inconsistent enforcement, and corruption, they have an incentive to hide their activities in the underground economy.
- Empirical analysis suggests that institutions are a more important determinant of the size of the underground economy than tax rates.
Empirical analysis and evidence
- The paper places particular emphasis on the role of institutions and the rule of law in determining the size of the underground economy.
- Comparative assessment highlights institutional quality and enforcement consistency as stronger correlates of underground economic activity than tax rate levels.
Policy implications and recommendations
- Strengthening institutions and the rule of law is central to reducing the size of the underground economy.
- Reducing onerous regulation, improving enforcement consistency, and addressing corruption can incentivize businesses to participate in the formal economy.
- Policies aimed solely at adjusting tax rates are likely less effective than institutional reforms in shrinking the underground economy.
Source: Adil Mohommad, Anoop Singh, and Sonali Jain-Chandra, "Inclusive Growth, Institutions, and the Underground Economy", February 1, 2012.