Shadow economies: the role of corruption and economic development

ABSTRACT The COVID-19 global pandemic has had a devastating impact on economies and could lead to a surge in shadow or informal economic activity. Perhaps more than ever it is imperative to understand the nature and drivers of shadow economies. The primary focus of this analysis is to reexamine the relationship between corruption and shadow economies by extending previous research to consider a possible moderating effect between economic development and corruption on shadow economies. It is hypothesised that the effect of corruption on the shadow economy will vary with the level of economic development, with corruption having the strongest positive effect in low income countries, but this effect will be mitigated as the level of economic development increases. We find empirical evidence to support this hypothesis using multiple data measures of country corruption and the size of the shadow economy. Policy implications are offered based on the empirical results.