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Does an informal sector reduce the economic dividends of political stability? Empirical evidence

Author

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  • Mazhar, Ummad
  • Jafri, Juvaria
Abstract
Political stability is generally hailed as an asset that yields positive economic dividends. In particular, the macroeconomic environment is likely to benefit from political stability. On the other hand, the existence of a sizeable shadow (or informal) economy represents institutional weaknesses and may undermine the macroeconomic environment. The latter effect is more likely if the shadow economy reduces the government’s tax revenues and disturbs the balance of demand and supply for formal businesses. This paper tests these contradictory tendencies. Circumventing the issues related to reverse causality and endogeneity of the informal sector, we define a qualitative variable for the size of the informal sector. The qualitative variable assumes a value of 1 for all the countries having an informal sector exceeding 25 percent of GDP on average over our sample period. Using a large data set of 162 countries over the 1999 to 2007 period we find that an informal sector can undermine the positive effect of political stability. The results are robust against alternative specifications and satisfy the usual assumptions of valid empirical analysis.

Suggested Citation

  • Mazhar, Ummad & Jafri, Juvaria, 2014. "Does an informal sector reduce the economic dividends of political stability? Empirical evidence," MPRA Paper 60764, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60764
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    Cited by:

    1. Kareem Elhennawi, 2016. "Factors Affecting Business Informality Among Egyptian Opportunity Entrepreneurs: An Exploratory Study," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-18, December.
    2. Nedra Baklouti & Younes Boujelbene, 2020. "A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?," Economic Change and Restructuring, Springer, vol. 53(1), pages 151-170, February.

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    More about this item

    Keywords

    Political stability; Informal sector or shadow economy; Inflation; Openness; tax revenue.;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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