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Out of the shadows or into the dark? Economic openness, IMF programs, and the growth of shadow economies

Author

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  • Robert G. Blanton

    (University of Alabama at Birmingham)

  • Bryan Early

    (State University of New York Albany)

  • Dursun Peksen

    (University of Memphis)

Abstract

The existence of shadow economies is an important, yet understudied, issue for international political economy and development. This study examines how two distinct types of international economic engagement—economic openness and participation in International Monetary Fund (IMF) programs—affect the growth of shadow (informal) sectors. We theorize that increased economic openness will reduce the size of countries’ shadow sectors. More specifically, we posit that eliminating market-distorting trade barriers will decrease the incentives for shadow sector activities such as smuggling. Additionally, we posit that increased participation in global production and supply chains is likely to lead to a positive, “climb to the top” effect on states’ regulatory and labor policies that enhance the prospective benefits associated with formal sectors. Conversely, we argue that participation in IMF structural adjustment programs can lead to great shadow sector activity as IMF-imposed structural conditions might cause significant near-term economic hardship and degrade states’ regulatory capacity. The results from a panel of 145 countries from 1971 to 2012 indicate that economic openness reduces the size of the shadow economy, while participation in IMF programs is significantly related to a larger shadow economy. These findings have important implications for understanding how the divergent forms of international economic engagement might affect shadow economies.

Suggested Citation

  • Robert G. Blanton & Bryan Early & Dursun Peksen, 2018. "Out of the shadows or into the dark? Economic openness, IMF programs, and the growth of shadow economies," The Review of International Organizations, Springer, vol. 13(2), pages 309-333, June.
    • Handle: RePEc:spr:revint:v:13:y:2018:i:2:d:10.1007_s11558-018-9298-3
    DOI: 10.1007/s11558-018-9298-3
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    Cited by:

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    2. Aziz N. Berdiev & Brandon Gomes & James W. Saunoris, 2023. "Revisiting the nexus between globalisation and the shadow economy: Untying the influences of de jure versus de facto globalisation," The World Economy, Wiley Blackwell, vol. 46(1), pages 27-54, January.
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    4. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    5. Brendan Skip Mark & Huei-Jyun Ye & Andrew Foote & Tiffani Crippin, 2021. "It’s a Hard-Knock Life: Child Labor Practices and Compliance with IMF Agreements," Social Sciences, MDPI, vol. 10(5), pages 1-21, May.
    6. Committeri, Marco & L´Hotellerie-Fallois, Pilar & Algarra, Monica & Balteanu, Irina & Eijking, Carlijn & Estefanía, Julia & Gallego, Sonsoles & Garelli, Serena & Gibson, Heather & Heinbuecher, Robert , 2019. "Conditionality and design of IMF-supported programmes," Occasional Paper Series 235, European Central Bank.
    7. Selçuk Akçay & Emre Karabulutoğlu, 2021. "Do remittances moderate financial development–informality nexus in North Africa?," African Development Review, African Development Bank, vol. 33(1), pages 166-179, March.
    8. Mara, Eugenia Ramona, 2021. "Drivers of the shadow economy in European Union welfare states: A panel data analysis," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 309-325.
    9. Renee Bowen & Manfred Elsig, 2018. "Trade and investment: Introduction to the special issue," The Review of International Organizations, Springer, vol. 13(2), pages 137-142, June.
    10. Elbahnasawy, Nasr G., 2021. "Can e-government limit the scope of the informal economy?," World Development, Elsevier, vol. 139(C).
    11. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.
    12. Hailin Chen & Friedrich Schneider & Qunli Sun, 2020. "Measuring the size of the shadow economy in 30 provinces of China over 1995–2016: The MIMIC approach," Pacific Economic Review, Wiley Blackwell, vol. 25(3), pages 427-453, August.
    13. Kpognon, Koffi D., 2022. "Effect of Natural Resources on the Size of Informal Economy in sub-Saharan Africa: An Empirical Investigation," Structural Change and Economic Dynamics, Elsevier, vol. 63(C), pages 1-14.

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    More about this item

    Keywords

    Shadow Economies; IMF; Globalization; Structural adjustment;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • F6 - International Economics - - Economic Impacts of Globalization
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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