It is thought to be a crucial issue, nevertheless, thatcould reduce the economy''''s official growth rate.The Consumer Price Index, Internet users, Population Growth Rate, TaxRevenue, Index
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS ECONOMETRICS REPORT DETERMINANTS AFFECTING THE SHADOW ECONOMY IN EUROPEAN UNION FROM 2008-2021 Instructor : PhD Vu Thi Phuong Mai Group : 13 Members : Nguyen Duc Thao – 2112150162 Bui Phu Quang – 2113150058 Ngo Hoang Minh – 2113150045 Le Thao Linh – 2112150091 Pham Anh Vu – 2112150187 Course : KTEE309(GD1-HK1-2223).1 Hanoi, October 2022 FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS ECONOMETRICS REPORT DETERMINANTS AFFECTING THE SHADOW ECONOMY IN EUROPEAN UNION FROM 2008-2021 Instructor : PhD Vu Thi Phuong Mai Group : 13 Members : Nguyen Duc Thao – 2112150162 Bui Phu Quang – 2113150058 Ngo Hoang Minh – 2113150045 Le Thao Linh – 2112150091 Pham Anh Vu – 2112150187 Course : KTEE309(GD1-HK1-2223).1 Hanoi, October 2022 I ABSTRACT The shadow economy, also called the underground, informal, or parallel economy, includes illegal activities and unreported income from producing legal goods and services, either from monetary or barter transactions Therefore, any economic operations that are generally taxable and reported to the tax authorities are included in the shadow economy The relationship between the rise of the informal sector or the shadow economy and economic growth has not been clearly demonstrated by theoretical or empirical research It is thought to be a crucial issue, nevertheless, that could reduce the economy's official growth rate The Consumer Price Index, Internet users, Population Growth Rate, Tax Revenue, Index of Economic Freedom, Unemployment Rate, and GDP Growth are the seven variables that this study will examine in order to determine how the growth of the underground economy is influenced by each To examine the correlation between the aforementioned characteristics, we used OLS on panel data gathered from 27 European Union nations between 2008 and 2021 Based on the regression results, we the analysis and provide an explanation of the influence of the components, the unaffected factors, and the factors removed from the model Furthermore, we would like to offer some perspectives and recommendations on the future policy-making of corporations (or the government) Keywords: shadow economy, European Union TABLE OF CONTENTS I ABSTRACT II INTRODUCTION III MAIN CONTENTS Literature Review: Theoretical framework: 10 Empirical Model: 12 3.1 Research method: 12 3.2 Definition of variables 12 3.3 Expected signs of variables and definitions: 14 Data source: 16 4.1 Data descriptive: 16 4.2 Building the theoretical model .17 Estimation results and diagnostic tests: 21 5.1 Analysis of estimated regression results: 21 5.2 Testing for violations of classical linear regression model assumptions 24 5.3 Remedies for violations of classical linear regression model assumptions 26 IV CONCLUSION AND POLICY IMPLICATIONS: 31 REFERENCES 35 TABLE OF FIGURES Table Data Descriptive 16 Table Variables' name explanations 18 Table Summary statistics of the regression model’s variables 18 Table Correlation coefficients among variables using command [corr] .20 Table Estimated regression results 21 Table Results for detection of multicollinearity using command [VIF] .24 Table Estimated regression results after using first-difference transformation 27 Table Estimated regression results after including the first-lagged dependent variable 28 Table Estimated regression results after the model transformation 29 II INTRODUCTION As long as human civilization exists, the mainstream economy has been side by side and along with it, the underground economy follows Though not mainstream, the underground is still one of the crucially important aspects of a country’s general economy The underground economy goes by many names: shadow, informal, unobserved, unrecorded or unofficial economy Unlike its mainstream counterpart, the underground economy includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions It is challenging to determine the size of underground economies because, by their very nature, they are not subject to governmental control; as a result, the economic activity neither generates tax returns nor appears in official statistical reports However, even though the transactions are hidden, keeping track of outgoing expenses can provide a sense of statistics In other words, spending that is not reflected in documented transactions presumably reflects the scope of black market activities It is important to look at this issue in detail, identify the root causes that determine its size and growth, and devise policies that target those causes in order to bring the majority of the underground businesses into the formal sector and enable the government and policy framework The problems of the underground economy are too numerous and damaging to ignore, and the prolonged existence of the shadow economy would ultimately reduce the overall tax revenue and damage the macroeconomic policy framework For this reason, we decided to conduct a research on factors affecting the economies of 27 countries within the span of 13 years This report will help dig further into those key factors as in the role they play in the countries’ economies as well as their relevance to the operation of the underground economy In this report, the content is organized as follows: The first part will be the state of knowledge in this field, the second part will present the methodological coordinates and data analysis and Document continues below Discover more from:tế lượng Kinh Trường Đại học… 22 documents Go to course Hướng dẫn tự học môn Kinh tế lượng-… Kinh tế lượng None Tổng hợp công thức môn Kinh tế… Kinh tế lượng None Nhận dạng đề thi Kinh tế lượng Kinh tế lượng None đề tài nghiên cứu dự 25 giá vàng Kinh tế lượng 46 Kinh tế lượng - AAA Class Kinh tế lượng 14 None None Bài tập KTL Exercise - tập kinh tế… 14 Kinh tế lượng None validations in the determinants of the shadow economy And the final part will summarize all the results as well as present the limitations and directions for future research III MAIN CONTENTS Literature Review: The first studies in the area of the shadow economy defined the word in terms of the output of products and services (whether legal or illegal) not included in the official estimates of the gross domestic product in an effort to determine the size of the shadow economy (Smith, 1994) The shadow economy is defined by Schneider (1994) and Lubell (1991) as any economic activity that is not included in the computation of the gross national product Other scholars claim that the "unreported revenue from the legal creation of products and services in monetary exchanges or barter, so all economic activity which would ordinarily be taxed" is what they refer to as the "underground economy" (Schneider and Enste, 2000, p 5) The majority of the research on the underground economy uses Friedrich Schneider's studies' estimations of it as a dependent variable (2004, 2005; 2010) The widespread use of these estimations suggests that they are reliable In order to put this study's findings into perspective, Mai Hassan and Friedrich Schneider's study's most recent calculations of the extent of the underground economy were used for being one of the most recent estimations and have not been utilized in any previous studies (2016) One of the foremost factors relating to the shadow economy that most literature articles mention is tax revenue and tax rate The higher overall tax burden and/or lower monitoring and enforcement, the stronger incentive for tax evasion and underreporting of wages (Schneider and Williams 2013, Hassan and Schneider 2016) The overall tax burden's distortion influences labor-leisure choices and may increase the labor supply in the shadow economy The motivation to lower the tax wedge and work in the shadow economy increases with the gap between total labor costs in the official sector and after-tax earnings (from work) The overall tax burden and the social security burden/payments are both impacted by this tax wedge, making them important factors of the shadow economy's viability (Thomas 1992; Johnson, Kaufmann, and ZoidoLobatón 1998a, b; Giles 1999a; Tanzi 1999; Schneider 2003, 2005; Dell’Anno 2007; Dell’Anno, Gomez-Antonio and Alanon Pardo 2007) Many articles have indicated that there is a relationship between the underground economy and inflation rate Seigniorage earnings increase along with the rise of inflation As a result, both the tax rate and tax distortions can be reduced since the government no longer needs to impose high taxes in order to generate more revenue through seigniorage Lower taxes encourage formal sector activity as opposed to production for the illegal market Consumer price index has been used to calculate inflation in the majority of earlier studies (Erdinỗ, 2016; Gulzar, Junaid, & Haider, 2010; Schneider & Bajada, 2003) The connection between unemployment and the size of the shadow economy is a topic of discussion There may be a negative relationship because an economic downturn would result in unemployment in both the formal and informal sectors The majority of previous research has used the unemployment rate as a proportion of the workforce to calculate unemployment Other criteria, particularly the degree of education, have an impact on the size of the underground economy (Gulzar et al., 2010; M Hassan & Schneider, 2016; Kanniainen, Päkkönen, & Schneider, 2004; Saafi, Farhat, & Haj Mohamed, 2015; Sarac, 2012; Savasan, 2003) What’s more, in an economic downturn, unemployment would occur in both the official and unofficial economies, meaning that a greater unemployment rate during the recession phase might indicate negative effects on both economic kinds According to literature, regulations, such as those governing the labor market or trade barriers, are another significant factor that limits people's freedom (of choice) in the formal economy They substantially raise labor costs in the official economy, giving people more of an incentive to work in the shadow sector: nations with higher levels of regulation typically have a higher percentage of the shadow sector in total GDP The main factor affecting the burden placed on businesses and people, leading them to participate in the shadow economy, is enforcement, not the entire scope of legislation, which is typically not enforced (Johnson, Kaufmann, and Shleifer 1997; Johnson, Kaufmann, and Zoido-Lobatón 1998b; Friedman, Johnson, Kaufmann, and Zoido- Lobatón 2000; Kucera and Roncolato 2008; Schneider 2011; Hassan and Schneider 2016) Another aspect that may be a key factor to the underground economy is the development of the official economy The lower the GDP growth, the higher the incentive to work in the shadow economy, ceteris paribus (Schneider and Williams 2013; Feld and Schneider 2010) But regarding the EU region's strong institutional standards and high level of governance, it is difficult for businesses and individuals to comply with economic regulations, therefore national GDP performance may be enhanced but also businesses are easily driven into the shadow economy Using the Internet has proven to have negative correlation with the growth of the shadow economy As more people use the internet, they’ll have the insight of drastic consequences of activities such as corruption or tax evasion As a result, awareness will be raised and people will take their own measures to alleviate and reduce the risks and sizes of such activities, leading to the reduction of the underground economy For instance, since the underground economy gives a strong foundation for corruption, reducing it will lead to the size decrease in the shadow economy (Elbahnasawy, 2014; Elgin, 2012; Goel, Nelson, & Naretta, 2012; Shrivastava & Bhattacherjee, 2014) While there’s no direct link between population growth and the shadow economy itself, this factor is a key component to corruption, a very crucial aspect when it comes to measuring the shadow economy Therefore, the connection between population growth and the shadow economy is an indirect one As population growth develops, it fuels corruption more and from there increases the size of the shadow economy