Conference Paper
Financial Development, Corruption and Shadow Economy: Evidence from MENA Countries
No.
ERF29thAC_117
Publisher
ERF
Date
May, 2023
In this paper we examine the relationship between the financial development, corruption, and the size of shadow economies in the MENA region over the period from 1996 to 2018. An important contribution is the study how financial development and corruption can interplay to affect informality. Several pooled regressions are run on the entire sample and various subsamples in order to understand the heterogeneity that might exist among countries. Even after addressing the potential endogeneity problem of the variables, we find robust results showing the following: increases in corruption and financial development reduce the size of the informal sector. Corruption is, hence, playing the role of “grease of the wheels” in MENA region. Moreover, these two dimensions are substitutable in relationship with the unofficial economy; the marginal impact of increasing along one dimension is higher when the other dimension is low. The subsample analysis reveal that the impacts of financial development and corruption can be remarkably different between lowly corrupt and highly corrupt countries. Interestingly, the statistical significance of these two factors vanishes for the high-income countries. Obviously, the efforts against informality in the MENA region are multidimensional and
dynamic and at each stage of economic, financial, and institutional development, new factors may appear and gain importance.
Authors
Houda Haffoudhi
Associate Professor, Gabes University
Research Fellows
Brahim Guizani
Assistant Professor, Tunis Business School