Is Unofficial Economy a Source of Corruption?

Published: 14/12/1999
Publication Working Papers
Issue W - 2
Authors Michael Faulend and Vedran Šošić
Date January 2000
JEL O17, H26, K42
ISSN 1334-0131


working papers, Official economy, Unofficial economy, Corruption, Tax Evasion

This paper discusses the link between unofficial economy and overall economic efficiency. Special emphasis is put on tax evasion and corruption and their interaction with unofficial economy. The role of the state in the genesis of unofficial economy and corruption is addressed in the first part. The second part gives insight into the multitude and ambiguity of definitions used to describe the unofficial economy and the impact of the particular definition chosen on the final conclusions. Although we opt for the ‘classical' definition of unofficial economy as unrecorded economic activity, we maintain that, according to this definition, unofficial economy in transition countries does not have an adverse effect on economic efficiency and growth. It is also important to make a clear distinction between unofficial economy and tax evasion, as well as between unofficial economy and corruption. Arguments are provided in support of the view that such activities are linked more closely with official than unofficial economy, as the former uses them as a mechanism for protection against competition. Unlike unofficial economy, these irregular activities pose a more serious threat to general welfare, economic efficiency and growth. We conclude that both unofficial economy and irregular activities are caused by a high degree of politicisation, the reduction of which would have a positive impact on the reduction of both. In the final part, the measures which could help preventing irregular activities are addressed. The stated anti-corruption strategy would not completely eliminate unofficial economy, but would disable activities impairing economic efficiency and growth.