Shadow economy in Palestinian territories using currency demand approach.
| Autor | Abuamsha, Mohammad Kamal |
-
Introduction
Shadow economy (SE), prominently, became an important aspect in the various research studies during the last decade when its negative impact on various world economies began to outspread. The International Labour Organization officially recognized this phenomenon in 1972 as a fact of economic reality in almost every nation of the world, irrespective of whether the nation has been developed or was developing. SE was found to severely weaken many countries' economic plans and policies, possibly threatening global economic stability. AlMutairi (2012) and Cagan (1958) were the first to appreciate this phenomenon by using the currency demand model that examined the relationship between currency demand and the burdenof tax and considered itas one of the main causes of SE in the United States during the period 1919-1955. However, according to Al-rafati (2007), anti-money laundering policies have hampered the capital attraction, resulting in negative effects on the national economy, banking activities and customer satisfaction. Some studies conducted in certain countries attempted to figure out the SE. It accounted to be 17.1% of the scientific economies that were found in both developed and developing nations; D'Hernoncourt and Meon (2012), Schneider and Buehn (2012), Hassan and Schneider (2016) and Buehn (2012) stated in their studies that the average size of the SE for 157 countries of the world is 33.77%.
The Palestinian territories have been suffering from a condition threatening their economy - considering the occupation and the geographical and political divide between the two parts of the Palestinian homeland (the West Bank and the Gaza Strip). These have also led to a slackening in the government institutions, resulting in SE's emergence in the territory. The Palestinian Authority's decision-makers do not have access to any study or international report so that they may assess the proportion or SE size in the Palestinian territories. This could help them in making better decisions. As the activity of SE is often out of the control of the policymakers, an increase in its size may lead to inconsistencies in the objectives and trends of both the formal economy and the SE. However, there are some studies, such as those of Al-Aiez (2008), Alghalth (2012), Amour and Durgham (2009), Ladadwah (2003) and Malki et al. (2004), that have dealt with the causes of SE. The matter of concern is that the data reflecting the state of the formal economy is imprecise, which greatly reduces the strength of economic policies and thus hinders economic growth (Guru and Yadav, 2019).
The lack of studies on the size of the SE in the Palestinian territories was a source of motivation for taking up this study. Its goal is to assess the extent of SE in Palestinian territories from 2008 to 2018 using relevant standard procedures. The study will be deemed beneficial with recommendations that can assist economic and political decision-makers in dealing with the Palestinian territories' SE.
Al-Mutairi (2012), Al-Subaie (2011), Yahyaoui (2016), Schneider and Enste (2000), Jilani (2007) and Chaudhuri et al. (2006) estimated the size of the SE by constructing a standard model of the equation of demand for currency, or what is referred to as the approach of Tanzi (1980). Hassan (2005) implemented the multiple indicators and multiple causes (MIMIC) model to estimate the SE in Egypt. In the case of international studies, Schneider (2008) and Lars and Schneider (2010) applied the causes and indicators method and the currency demand model. On the other side, Halicioglu (1999) followed the quantitative theory of money for measuring SE in the Turkish Republic. DellA'Anno (2007), Kanao and Hamori (2010) and Gulzar et al. (2010) acted upon the Tanzi approach and model with some adjustments adapted to the nature of the reality in each of the countries in which their studies were conducted. The present study is also based on the Tanzi approach. However, a new independent variable, namely, the ratio of workers in their own interests to actual workers, has been added to the existing equation to study its significant impact on SE.
-
Literature review
In this section, we present previous studies' results in estimating the size of the SE in applied studies and the impact of the SE on the political, economic and social realms.
2.1 Shadow economy size
This is the most famous method of estimating SE. It has been widely applied in many Arab and foreign studies. By applying this method, the study by Reda (2018) found that the size of SEinAlgeria from 1970to 2004 was about 24%of the gross domestic product (GDP). Another study by Al-Subaie (2011) found that the size of the SE in Saudi Arabia was, on average, 15.28% of the GDP from 1992 to 2008. In addition, another study by Gulzar et al. (2010) found that the size of the SE in Pakistan between 1982 and 2010 was between 32 and 38% of the GDP. Finally, a study by Kanao and Hamori (2010) applied to Japan from 1971 to 2007 found that the size of the SE was about 25% on average of the GDP.
2.2 Shadow economy impact
Yap et al. (2018) investigated the non-linear relationship between SE and income inequality and determined whether the SE size influences the level of income inequality. The study found that income inequality and SE resemble an inverted-N relationship, as in developed countries (OECD) (Celikay, 2020). However, for developing countries, it has shown an inverted-U relationship, similar to the original Kuznets hypothesis. Wiseman (2015) examined the association between productive and unproductive formal sector entrepreneurial activity and lower and higher levels of informal economic activity. The study found a strong significant negative and positive relationship between SE size and productive and unproductive entrepreneurship. Corruption validity cannot be rejected in regressions on productive and net entrepreneurship scores. Virta (2010) examines the impact of corruption on the size of the SE in countries with different levels of income and location, how corruption differs from country to country, and what consequences they have. The study concluded that corruption does not seem to affect the size of the SE outside the tropics. Moreover, corruption and the SE seem to be substitutes in the tropics. Williams and Horodnic's (2016) paper aimed to assess the percentage in which people in formal jobs conduct shadow work and their characteristics. It found that formally employed personnel have a disproportionate share of the shadow work, and it is conducted by those who benefit least from the formal economy, mostly unmarried low-level employees. Byun et al.'s (2018) research examined the global patterns in shadow education. The researcher found a massive pattern in the use of shadow education in the modern world and that students in poorer countries are more likely to depend on shadow education than students from rich countries. Schneider et al.'s (2015) paper explored the size of the SE in European Union (EU) countries. And to identify tax evasion in those countries, it was found that the average size of the SE in EU countries was 22.6% (of official GDP) in 2003 and decreased to 18.6% in 2014. The SE's most important driving forces were found to be unemployment, self-employment and tax morale. The purpose of Vousinas's (2017) paper was to study tax evasion and SE in Greece; the study concluded that these two variables are formed due to a lack of tax awareness, the tax burden, the structure of the tax system, the role of the state, the level of improvement of public authority, self-employment, unemployment and the level of organization of the economy.
This study shall add to the existing research stock, as it is based on a recent period (20082018) with a different estimation method in an economy that does not own any currency in its state. In addition, some available studies have addressed the relationship of SE to certain aspects such as unemployment, consumption and crime rates. At the same time, this research intended to study the size of the SE in relation to the GDP of the...
Para continuar leyendo
Solicita tu pruebaCOPYRIGHT GALE, Cengage Learning. All rights reserved.
