Size and Causes of the Shadow Economy in Iran: An Analysis with the MIMIC Approach

Hashemi, Soroush; Lotfi Heravi, Mohammad Mahdi; Schneider, Friedrich

doi:10.52547/jep.3.2.127

Size and Causes of the Shadow Economy in Iran: An Analysis with the MIMIC Approach

Document Type : Original Article

Authors

¹ Department of Management, Science and Technology, Amirkabir University of Technology (Tehran Polytechnic), Iran

² Research Institute of Finance and Banking, Johannes Kepler University, A-4040 Linz, Austria

10.52547/jep.3.2.127

Abstract

This study aims to estimate the size of the Iranian Shadow Economy (SE) using the multiple indicators multiple causes (MIMIC) approach, a variant of the structural equation modeling (SEM) approach. The application of the MIMIC approach allows for the consideration of established drivers of the SE as well as potential causes that might be of particular importance to the Iranian SE, namely inflation and the size of the construction sector in the economy, the latter of which is considered in this study for the first time. The significant determinants of the Iranian SE are found to be inflation, unemployment, trade openness, and the size of the construction sector. The SE is also found to be positively related to cash usage and negatively related to the labor force participation rate and the Iranian GDP. Using annual data for the 1979-2019 period, our empirical results show that after an initial surge in SE size during the Iran-Iraq war (1980-1988), the Iranian SE generally decreased, although fluctuations were also present. The average SE size during the entire studied period of 1979-2019 is found to be 31.83% of GDP.

Keywords

20.1001.1.27171485.2022.3.2.6.5

References

Almenar, V., Sánchez, J. L., & Sapena, J. (2020). Measuring the shadow economy and its drivers: The case of peripheral EMU countries. Economic Research-Ekonomska Istraživanja, 33(1): 2904–2918.

Antonakis, J., & Bastardoz, N. (2020). SWAIN: Stata module to correct the SEM chi-square overidentification test in small sample sizes or complex models. In Statistical Software Components. Boston College Department of Economics.

Arab Mazar Yazdi, A. (2001). Black Economy in Iran: A Macroeconomic Approach. Allameh Tabatabai University.

Bagheri Garmarudy, A. (1998). Underground Economy, Estimates and its Effects on Budget Deficit and Private Sector Investment 1971-1995. SBU.

Baklouti, N., & Boujelbene, Y. (2019). The Economic Growth–Inflation–Shadow Economy Trilogy: Developed Versus Developing Countries. International Economic Journal, 33: 1–17.

Berdiev, A. N., & Saunoris, J. W. (2019). On the Relationship Between Income Inequality and the Shadow Economy. Eastern Economic Journal, 45(2): 224–249.

Biswas, A. K., Farzanegan, M. R., & Thum, M. (2012). Pollution, shadow economy and corruption: Theory and evidence. Ecological Economics, 75: 114–125.

Breusch, T. (2005). Estimating the Underground Economy using MIMIC Models. In Econometrics (No. 0507003; Econometrics). University Library of Munich, Germany.

Buehn, A., & Schneider, F. (2012a). Shadow economies around the world: Novel insights, accepted knowledge, and new estimates. International Tax and Public Finance, 19(1): 139–171.

Buehn, A., & Schneider, F. (2012b). Corruption and the shadow economy: Like oil and vinegar, like water and fire? International Tax and Public Finance, 19(1): 172–194.

Dastgerdi, H., Yusof, Z., & Shahbaz, M. (2018). Nexus between economic sanctions and inflation: A case study in Iran. Applied Economics, 50: 1–19.

Dell’Anno, R. (2003). Estimating the Shadow Economy in Italy: A Structural Equation Approach. Department of Economics, Aarhus University (DK), Working paper No. 2003-7.

Dell’Anno, R. (2007). The Shadow Economy in Portugal: An Analysis with the Mimic Approach. Journal of Applied Economics, 10.

Dell’Anno, R. (2021). Theories and definitions of the informal economy: A survey. Journal of Economic Surveys.

Dell’Anno, R., & Davidescu, A. A. (2019). Estimating shadow economy and tax evasion in Romania. A comparison by different estimation approaches. Economic Analysis and Policy, 63(C): 130–149.

Dell’Anno, R., Davidescu, A. A., & Balele, N. P. (2018). Estimating shadow economy in Tanzania: An analysis with the MIMIC approach. Journal of Economic Studies, 45(1): 100–113.

Dell’Anno, R., Gómez-Antonio, M., & Pardo, A. (2007). The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empirical Economics, 33(1): 51–84.

Dell’Anno, R., & Schneider, F. G. (2006). Estimating the underground economy by using MIMIC models: A response to T. Breusch´s critique. In Economics working papers (No. 2006–07; Economics Working Papers). Department of Economics, Johannes Kepler University Linz, Austria.

Dell’Anno, R., & Solomon, O. H. (2008). Shadow economy and unemployment rate in USA: Is there a structural relationship? An empirical analysis. Applied Economics, 40 (19): 2537- 25

Eisazadeh, S., & Mehranfar, J. (2014). The economic effects of afghan immigrants on employments and wage level in construction of sector of iranian economy, 919(299): 101–122.

Elgin, C., & Uras, B. R. (2013). Public debt, sovereign default risk and shadow economy. Journal of Financial Stability, 9(4), 628–640.

Enste, D., & Schneider, F. (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38: 77–114.

Esfandiari, A. A., & Mehrabani, F. (2007). Investigating of underground economy by using currency ratio and gap between expenditure and income of the family, I 6(423): 133–162.

Estrin, S., & Mickiewicz, T. (2012). Shadow Economy and Entrepreneurial Entry. Review of Development Economics, 16 (4):559-578.

Fishburn, G. (1981). Tax Evasion and Inflation. Australian Economic Papers, 20(37): 325–332.

Fleming, M., Roman, J., & Farrell, G. (2000). The Shadow Economy. Journal of International Affairs, 53.

Giles, D. (1999). Modelling the hidden economy and the tax-gap in New Zealand. Empirical Economics, 24(4): 621–640.

Goel, R. K., & Nelson, M. A. (2016). Shining a light on the shadows: Identifying robust determinants of the shadow economy. Economic Modelling, 58: 351–364.

Gutmann, P. (1977). The Subterranean Economy. 33(26):

Hassan, M., & Schneider, F. (2016a). Modelling the Egyptian Shadow Economy: A Currency Demand and A MIMIC Model Approach (Working Paper No. 5727). CESifo Working Paper.

Hassan, M., & Schneider, F. (2016b). Size and Development of the Shadow Economies of 157 Countries Worldwide: Updated and New Measures from 1999 to 2013 (Working Paper No. 10281). IZA Discussion Papers.

Hayashi, K., Bentler, P. M., & Yuan, K. H. (2011). Structural Equation Modeling. In C. R. Rao, J. P. Miller, & D. C. Rao (Eds.), Essential Statistical Methods for Medical Statistics, 202–234.

Hemmati, A., Niakan, L., & Varahrami, V. (2018). The External Determinants of Inflation: The Case of Iran. Iranian Economic Review, 22(3): 741–752.

Hoinaru, R., Buda, D., Borlea, S. N., Văidean, V. L., & Achim, M. V. (2020). The Impact of Corruption and Shadow Economy on the Economic and Sustainable Development. Do They “Sand the Wheels” or “Grease the Wheels”? Sustainability, 12(2), 481. https://doi.org/10.3390/su12020481

Karbor, R., Karimi Takanlou, Z., & Rostamzadeh, P. (2019). Estimation Of Underground Economy In Iran’s Provinces And Effective Factors. 6(2), 161–188.

Khalatbari, F. (1990). Underground Economy. Journal of Ronagh.

Khandan, A., & Hosseini, S. (2016). Determinants of Inflation: A Case Study of Iran. Applied Economics and Finance, 3.

Maddah, M. (2014). The Effective Factors on Informal Economy in Developing Countries (Panel Data Model). International Journal of Regional Development, 1: 12–25.

Mauleón, I., & Sardà, J. (2016). Unemployment and the shadow economy. Applied Economics, 49: 1–12.

Medina, L., Mircheva, B., Kelmanson, M. B., Kirabaeva, K., & Weiss, J. (2019). Explaining the Shadow Economy in Europe: Size, Causes and Policy Options. In IMF Working Papers (No. 2019/278; IMF Working Papers). International Monetary Fund.

Medina, L., & Schneider, F. (2017). Shadow Economies around the World: New Results for 158 Countries over 1991-2015. In CESifo Working Paper Series (No. 6430; CESifo Working Paper Series). CESifo.

Medina, L., & Schneider, F. (2018). Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? In IMF Working Papers (No. 2018/017; IMF Working Papers). International Monetary Fund.

Medina, L., & Schneider, F. (2019). Shedding Light on the Shadow Economy: A Global Database and the Interaction with the Official One (Working Paper No. 7981). CESifo Working Paper. h

Medina, L., & Schneider, F. (2021). The evolution of shadow economies through the 21st century. In C. Deléchat & L. Medina, The Global Informal Workforce: Priorities for Inclusive Growth, International Monetary Fund, 10–69.

Pang, J., Li, N., Mu, H., & Zhang, M. (2021). Empirical analysis of the interplay between shadow economy and pollution: With panel data across the provinces of China. Journal of Cleaner Production, 285: 124864.

Piraee, K., & Rajaee, H. (2015). Estimate of underground economy in Iran and investimation causes and effects, 3(9): 21–42.

Sameti, M., Sameti, M., & Dalaaei Milan, A. (2010). Estimating the underground economy in Iran (1965-2005): a MIMIC approach, international economics studies, 2(35): 89–114.

Satorra, A., & Bentler, P. M. (1994). Corrections to test statistics and standard errors in covariance structure analysis. In Latent variables analysis: Applications for developmental research, Sage Publications, Inc. 399–419.

Schneider, F. (2012). The Shadow Economy and Work in the Shadow: What Do We (Not) Know? In IZA Discussion Papers (No. 6423; IZA Discussion Papers). Institute of Labor Economics (IZA).

Schneider, F. (2017). Estimating a Shadow Economy: Results, Methods, Problems, and Open Questions. Open Economics, 1: 1–29.

Schneider, F., Buehn, A., & Montenegro, C. E. (2010). Shadow economies all over the world: New estimates for 162 countries from 1999 to 2007. In Policy Research Working Paper Series (No. 5356; Policy Research Working Paper Series). The World Bank.

Schneider, F., & Savaşan, F. (2007). Dymimic Estimates of the Size of Shadow Economies of Turkey and of Her Neighbouring Countries. International Research Journal of Finance, 9.

Schreiber, J. B., Nora, A., Stage, F. K., Barlow, E. A., & King, J. (2006). Reporting Structural Equation Modeling and Confirmatory Factor Analysis Results: A Review. The Journal of Educational Research, 99(6), 323–338.

Shahabadi, A., Kurdbacheh, H., & Shahsavandi, H. (2020). Estimate Size of Underground Economy in Selected Developing Countries with Natural Resource Abundance. New Economy and Trad, 15(3), 51–80.

Sharifkarimi, M., Delangiz, S., & Heydariyan, R. (2017). The Investigation of the Impact of Hidden Economy on Tax Revenues and Economic Growth (MIMIC Approach). Quarterly Journal of Fiscal and Economic Policies, 5(19): 55–80.

Smith, P. (1994, May 30). Assessing the Size of the Underground Economy: The Statistics Canada Perspective - ARCHIVED.

Tan, Y.-L., Habibullah, M., Kaliappan, S., & Radam, A. (2017). Some new estimates of shadow economy for 80 countries using pooled mean group estimator. International Journal of Business and Society, 18: 133–156.

Thomas, J. (2001). What is the Informal Economy, Anyway? SAIS Review, 21: 1–11.

Venturini, S., & Mehmetoglu, M. (2017). plssem: A Stata Package for Structural Equation Modeling with Partial Least Squares. Journal of Statistical Software. Williams, C. C., & Schneider, F. (2016). Measuring the Global Shadow Economy. In Books. Edward Elgar Publishing.