Chapter 14: Shadow Economy, Voice and Accountability, and Corruption
Benno Torgler, Friedrich Schneider and Alison Macintyre 14.1 INTRODUCTION While economics has devoted extensive resources to understanding the legitimate side of market operations, there is not yet a commensurate body of work on the ‘shadow economy’. Tanzi (2002) reflects on this situation and states, ‘it seems that the economic profession, immersed as it was in its theories, could not cope or was unwilling to cope with the messy world of the underground economy’ (p. xiii). Encouragingly, in the past decades economists have ceased to ignore the topic, and interest in this phenomenon has increased (see, for example, Schneider and Enste, 2000, 2002). The transformation of socialist economies ignited the current concern regarding governance quality, as institutional weaknesses and corruption surfaced as major obstacles to market reforms (Abed and Gupta, 2002). However, even now, investigation into the causes of the shadow economy is still an undeveloped yet critical area of research. There is ‘universal recognition of the importance of the unofficial economy’ (Choi and Thum, 2005, p. 818, see also Virta, 2009), as the informal sector plays a large and important role both in transition countries and in developing countries. Furthermore, employment in the informal sector seems to be a significant source of income for many people. The lack of reliable data may be responsible for the relative lack of work on this topic (Dreher and Schneider, 2010), and as noted by Choi and Thum (2005, p. 817): ‘By definition, the unofficial economy constitutes activities that are not recorded by government...
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