What is Hidden, in the Hidden Economy of Pakistan? Size, Causes, Issues, and Implications

Abstract

There is a worldwide contemporary debate about the role of the hidden economy in achieving the goal of sustained and inclusive economic growth and development, especially in the context of its spillover effects on the formal economy. For this purpose, policy makers and academicians have made concerted efforts to estimate the size of the hidden economy and to analyze its causes, issues and implications on key macroeconomic variables. However, there is a consensus among the policy makers that a better macroeconomic policy formulation and its true implementation are subject to the proper management of the associated issues of the hidden economy with suitable policy measures. In Pakistan, it is generally assumed that the hidden economy contributes about 30% to 50% to the overall GDP. The purpose of this paper is to estimate more precisely the size of the hidden economy with the determination of its potential causes and implications. Five statistical and structural modeling approaches namely; simple monetary approach, modified monetary approach using dynamic ordinary least square (DOLS), multiple-indicators multiple-causes (MIMIC) approach, electricity consumption approach and labor market survey based approach are used to estimate the size of the hidden economy and to analyze the characteristic nature of its growth over the period. The study also investigates the potential determinants of the hidden economy and various interrelated socio-economic issues in perspective of achieving national goal of inclusive growth and development. Finally, policy implications are provided consistent with pervading facts of the hidden economy in Pakistan especially in the context of the 18 th Amendment and the 7 th NFC Award.JEL Classifications: C10, E26, D78, H20, H50, O53

Corruption and Entrepreneurship: Cross‐Country Evidence from Formal and Informal Sectors

“…In the related literature our results support the complementarity between informality and corruption (Gulzar, Junaid, and Haider ; Buehn and Schneider ; William and Shahid 2016). Furthermore, our results are broadly consistent with Autio and Fu () who find that institutional quality plays an important role in the allocation of entrepreneurial activity across the formal and informal sector.…”

Informal entrepreneurship and institutional theory: explaining the varying degrees of (in)formalization of entrepreneurs in Pakistan

“…Whatever the exact figure, this is one of the highest levels of informality in the world and the widespread consensus is that the informal economy is growing (Burqi and afaqi 1996;Gulzar and Junaid 2010). Until now, however, the only study on the prevalence of informal entrepreneurship is an ILO study conducted in 2003/2004.…”

“…In Pakistan, a similar negative relationship is found. ahmed (2009) and Gulzar and Junaid (2010) argue that public sector corruption reduces the trust of entrepreneurs in government and drives them to operate in the informal sector.…”

“…The World Bank doing Business survey (2013) ranks Pakistan 98th out of 185 economies in terms of its 'ease of starting a business' with a Pakistani entrepreneur having to complete 11 procedures, invest 10% of income per capita and spend at least 21 days to comply with the registration requirements for starting a new firm. This burdensome regulatory environment is for many a key determinant of informality in Pakistan (Gulzar and Junaid 2010;Iqbal 1998;Kemal 2007;Shabsigh 1995).…”

Cross‐country Evidence of Corruption Spillovers to Formal and Informal Entrepreneurship

“…Because corruption generates high costs of operating in the formal sector and diminishes the benefits of formal sector institutions, the growth of formal entrepreneurship is impeded while the development of informal entrepreneurship is accelerated. Empirical literature finds a considerable amount of support for the argument that economic agents react to corruption by moving to the shadow sector (see, e.g., Hindriks, Keen, and Muthoo ; Friedman et al ; Johnson et al ; Hibbs and Piculescu ; Gulzar, Junaid, and Haider ; Buehn and Schneider ; Goel and Saunoris ) . Closely related is Autio and Fu () who find that economic and political institutions impact the allocation of entrepreneurship across formal and informal sectors employing data for 18 Asia Pacific countries .…”