Does economic complexity matter for the shadow economy?

Abstract

Reflecting the geography of economic activities, economic complexity may be important for the shadow economy. This study is the first attempt to analyse the influence of economic complexity on the shadow economy. Analyses are carried out for 115 economies and three subsamples (i.e., 45 low- and lower-middle-income economies (LMEs); 32 upper-middle-income economies (UMEs); and 38 high-income economies (HIEs)) from 1995 to 2017. Several estimates are applied to panel data, providing robust results. First, increases in economic complexity are found to (i) reduce the relative size of the shadow economy (% official GDP); while (ii) increasing the absolute size of the shadow economy (constant USD). This implies that economic complexity might have benefits for both the official and shadow economies, but the benefits for the official economy are likely dominant over the shadow economy. Second, economic complexity appears to have a negative influence on both the relative and absolute size of the shadow economy in the long run. Third, the analyses for the three subsamples add further findings. The influence of economic complexity on the shadow economy is found to be consistent in HIEs and LMEs, while economic complexity has a negative influence on both the relative and absolute size of the shadow economy in UMEs.