This paper presents estimations of the shadow economies for 162 countries, including developing, Eastern European, Central Asian, and high income OECD countries over 1999 to 2006/2007. According to our estimations, the weighted average size of the shadow economy (as a percentage of ‘official’ GDP) in Sub-Saharan Africa is 37.6%, in Europe and Central Asia (mostly transition countries) 36.4% and in high income OECD countries 13.4%. We find that an increased burden of taxation (direct and indirect ones), combined with (labour market) regulations and the quality of public goods and services as well as the state of the ‘official’ economy are the driving forces of the shadow economy.

This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and the shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 98 countries. Our results show that there is no robust relationship between corruption and the size of the shadow economy when perceptions-based indices of corruption are used. Employing an index of corruption based on a structural model, however, corruption and the shadow economy are complements in countries with low income, but not in high income countries.

This paper presents various methods used for estimating the size of the shadow economy. Each method is evaluated and its strengths and weaknesses are discussed, as well as results each method yields. The purpose of the paper is threefold: Firstly, to demonstrate that there is no single infallible method for estimating the size and development of the shadow economy and results can differ significantly between different approaches. The MIMIC approach, discussed in greater detail, is often used due to its flexibility. Secondly, the paper discusses the very definition of the shadow economy and factors contributing to its growth. Finally, latest estimations of the size of the shadow economies of 143 countries over the period 1996 to 2014 are presented.

Estimations of the shadow economies for 120 countries, including developing, Eastern Europe and Central Asian and high income OECD countries over 1999 to 2006 are presented. The average size of the shadow economy (as a percent of “official” GDP) in 2004/05 in 76 developing countries is 35.5%, in 19 Eastern and Central Asian countries 36.7% and in 25 high income OECD countries 15.5%. An increased burden of taxation and social security contributions, combined with labour market regulations are the driving forces of the shadow economy. Furthermore, the results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. Finally, the various estimation methods are discussed and critically evaluated.