The impact of economic complexity and government expenditure on the relative size of the shadow economy in Asian countries

Abstract

The research is conducted by the authors to analyze the impact of economic complexity and government expenditure on the relative size of the shadow economy. At the same time, the research considers and evaluates the influence of other factors such as GDP per capita, total population, economic freedom, and foreign direct investment on the relative size of the shadow economy. The authors use regression estimation methods for panel data including Pooled OLS, Fixed Effect Model, Random Effect Model, Feasible Generalized Least Squares (FGLS), and Panel Corrected Standard Errors (PCSE) in a sample of 38 Asian countries from 1995 to 2017. The results show that economic complexity has a positive impact on the relative size of the shadow economy in Asian countries, which means that if Asian countries focus on increasing economic complexity,“it can lead to an increase in the size of the shadow economy relative to the formal economy.”However, this is only true for low and lower-middle-income, and upper-middle-income countries. For high-income in Asian countries, increasing economic complexity can cause the relative size of the shadow economy to decline. Government expenditure has a positive impact on the relative size of the shadow economy in Asian countries. Whether it is a low-income or high-income country,“the more government expenditure, the more the size of the shadow economy expands compared to the formal economy.”The high government expenditures can put pressure on private companies to leave the formal economy and enter the shadow economy.