More Light in the Shadows? New Results on the Shadow Economy

In this survey article, Friedrich Schneider estimates the size and development of the shadow economy for 157 countries between 1991 and 2017 using the MIMIC (“Multiple Indicators Multiple Causes”) approach and reviews the relevant literature. OECD countries exhibit the smallest shadow economies, with values below 20 percent of official GDP, while countries in Latin America and Sub-Saharan Africa show the largest, averaging about 38 and 39 percent respectively. The average across all countries is 30.9 percent. Over time, the shadow economy has declined, with an average decrease of 6.8 percentage points. Particularly large shadow economies are observed in countries such as Bolivia (62.9 percent of GDP) and Georgia (61.7 percent), while particularly small ones are found in countries such as Switzerland (6.4 percent) and the United States (7.6 percent). To test robustness, the MIMIC estimates are compared with results from the discrepancy approach for 23 countries, yielding broadly similar results for most cases. Finally, the interaction between the shadow economy and the official economy is examined; first empirical results for Pakistan (1976–2015) indicate a short-term negative but long-term positive effect of the shadow economy on GDP.