Corruption, Shadow Economy and Economic Growth: An Empirical Survey Across the European Union Countries

Abstract

This study was carried out to empirically investigate the relationships between corruption and shadow economy among the European Union countries, over the period [2005][2006][2007][2008][2009][2010][2011][2012][2013][2014]. Moreover, since one would expect corruption and shadow economy to be more common in poorer countries, this study was therefore carried out to determine how corruption and shadow economy affect economic development. The empirical findings of this study confirm a high and positive relationship between corruption and shadow economy, therefore a higher level of corruption involves a higher level of shadow economy. Regarding the influence of corruption and shadow economy on economic growth, a high and negative relationship was found. This means that increasing corruption and shadow economy negatively affects economic growth.

The Impact of Corruption and Shadow Economy on the Economic and Sustainable Development. Do They “Sand the Wheels” or “Grease the Wheels”?

“…The higher the level of shadow economy the lower the level of economic development) is accepted. Our findings are in line with the "sand the wheels" literature strand regarding the negative influence of the shadow economy on economic development [24,25]. Underground activities come along with tax payments avoidance further decreasing the income of the state.…”

“…The state would need these incomes in order to support its public investments, to cover the expenses of public institutions, to support the development of the national economy and to cover healthcare, education and citizens' protection expenditures. All these may finally hamper productivity and growth [25]. A decrease in the state's income will lead to a reduction of its financial power, which is necessary in order to ensure the normal functioning of state institutions and authorities.…”

“…For instance, the shadow economy has a lower share in high-income countries, while counting for as much as 70% of low-income African economies [24]. In conclusion, a large strand of the literature shows that both corruption and shadow economy seem to have in common the avoidance of regulations and payments of taxes, thus resulting in lower tax revenues, an increase of public expenditures and the hampering of productivity and growth [25].…”

Effect of Corruption on Foreign Direct Investment Inflows in Nigeria

“…Bellos and Subasat (2011) believe that corruption can influence FDI positively because it jettisons all regulatory issues in developing and emerging economies where FDI inflows are seen as an indispensable tool for economic development, in which case most rules are relaxed and the economic setting transformed to reach the desires of foreign investors (Bayar & Alakbarov, 2016). In countries with a low quality of governance, corruption possibly promotes resource allocation and increase output (Borlea, Achim & Miron, 2017). Irrespective of the benefits of corruption in this present time due to globalization, corruption is a prevalent universal challenge that destabilizes countries" political, social, and economic progress, thereby stealing the prospect of young children (Blundell-Wignall & Roulet, 2017; Gribincea, 2017).…”

The Consequences of Shadow Economy and Corruption on Tax Revenue Performance in Nigeria

“…So, Ho1 is accepted and the alternative declined. This result reveals that shadow economy has a negative impact on the tax revenue, but the effect is not significant as revealed in the studies of (Tedika & Mutascu, 2013;Nchor & Konderla, 2016;Borlea et al, 2017;Guillermo & Deyvi, 2018). However, the result contradicts the findings of Peter (2017) which established that shadow economy had a significant positive impact on tax revenue in Zimbabwe.…”