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Abstract
Using the theoretical framework of Robert M. Solow’s growth accounting, the paper examines the effects of the shadow economy on the growth of each factor of production and overall GDP per-capita for 44 countries from 1990 through 2018. The measurements for the size of the informal sector are obtained from Elgin et al. (2021). In particular, this paper relies mainly on the Dynamic General Equilibrium model estimation of the size of the shadow economy but also considers the MIMIC model estimates for the robustness exercise. The rest of the data is taken from the Penn World Table 10.01. The findings of this study suggest an inverse relation between shadow practices and economic growth. The DGE as well as the MIMIC model-based analysis, in the case of all 44 states, show that informal economic activities reduce the growth of Total Factor Productivity (TFP), and consequently, GDP per-capita. Furthermore, increasing growth in the capital-to-output ratio is associated with the diminishing marginal productivity of capital. The analysis also points that growth accounting is unable to capture any changes in the growth of the average-annual-hours per-capita variable. Due to a three times greater decline in the growth of TFP and on average two times larger size of the informal sector, economic growth in upper-middle-income countries is more susceptible to the shadow economy than it is in high-income ones.
Keywords: shadow economy, informal sector, economic growth, growth accounting, TFP, the Capital-to-output ratio, GDP per-capita growth, average-annual-hours per-capita, DGE model, MIMIC model, Robert M. Solow
| Title | UNDERSTANDING THE EFFECTS OF THE SHADOW ECONOMY ON ECONOMIC GROWTH USING SOLOW’S GROWTH ACCOUNTING ANALYSIS |
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