Authoritarian legislature, legitimacy strategy, and shadow economy

ABSTRACT

How do the electoral institutions in authoritarian regimes affect the development of the shadow economy? While understanding the determinants of the shadow economy is important for the study of political economy and development, little is known about the political determinants of the shadow economy. We argue that authoritarian governments reduce the size of the shadow economy through legislatures. Electoral institutions allow regimes to strengthen their claim to performance legitimacy as they need to cater to a larger winning coalition. This results in increased spending on domestic socio-economic policies that effectively reduce the size of the shadow economy. Using panel data of 54 authoritarian regimes between the years 1991 and 2010, we find authoritarian regimes with electoral institutions have a significant, negative effect on the size of the shadow economy. This study has important implications for understanding the determinants of the shadow economy as well as the effect of political contestation in authoritarian regimes.

KEYWORDS:

• authoritarian regime
• shadow economy
• regime legitimation
• seemingly democratic institutions
• competitive authoritarian regime

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Alm and Embaye, “Using Dynamic”; Medina and Schneider, “Shadow Economies”; Schneider and Enste, “The Shadow Economy.”

2 Neuwirth, October 28, 2011. https://foreignpolicy.com/2011/10/28/the-shadow-superpower/

3 Blanton et al., “Out of the Shadows”; Enste and Schneider, “Shadow Economies.”

4 See Elbahnasawy, “Political Instability” as a notable exception.

5 Gandhi and Przeworski, “Authoritarian Institutions”; Gandhi, Political Institutions; Wahman et al., “Authoritarian Regime”; Magaloni, “Credible Power-Sharing.”

6 Keefer, “Clientelism, Credibility”; Gandhi, Political Institutions; Gehlbach and Keefer, “Investment Without”; Wright, “To Invest or?”; Moon, “Political Institutions.”

7 Gandhi, Political Institutions; Magaloni, Credible Power-Sharing.

8 See Medina and Schneider, “Shadow Economies”

9 Alm et al., “‘Sizing’ the Problem.”

10 Alm and Embaye, “Using Dynamic.”

11 Medina and Schneider, “Shadow Economies.”

12 See Williams and Lansky, “Informal Employment” for the discussion of the competing perspectives on the informal economy.

13 Boeke, Economics and economic; Greertz, Old Societies; Lewis, The theory of economic growth.

14 Roberts, “Peripheral Accumulation”; Bajada and Schneider, “Unemployment and the Shadow Economy”; Williams et al., “Explaining Participation.”

15 Kus, “Regulatory Governance”; Enste, “Shadow Economies”; Johnson et al., “Regulatory Discretion.”

16 Dell’Anno, “The Shadow Economy”; Dreher et al., “How Do Institutions”; Schneider and Enste, The Shadow Economy.

17 Berrittella, “The Effect of.”

18 Feld and Frey, “Tax Compliance”; Jordà et al., “Betting the House.”

19 Blanton et al, “Out of the Shadows.”

20 Early and Peksen, “Searching in the Shadows”

21 Elbahnasawy et al, “Political Instability.”

22 Gandhi, Political Institutions; Geddes, Why Parties; Graham et al., “The Bar Fight.”; Lust-Okar, “Elections Under”; Magaloni, “Credible Power-Sharing”; Mason and Greig, “State Capacity”; Miller, “Elections, Information”; Przeworski and Gandhi, “Authoritarian Institutions.”

23 Levitsky and Way, “Elections Without.”

24 Howard and Roessler, “Liberalizing Electoral,” 367.

25 Gerschewski, “The Three Pillars,” 18.

26 Backes and Kailitz, Ideocracies in Comparison; Brady, “Mass Persuasion.”

27 Ulfelder, “Contentious Collective.”

28 Von Soest and Grauvogel, “Identity, Procedures.”

29 Ibid.

30 Note that single strategy is not necessarily used exclusively.

31 Bueno de Mesquita et al, The Logic of Political Survival.

32 Miller, “Elections, Information.”

33 Blaydes, Elections and Distributive; Gandhi and Przeworski, “Cooperation, Cooptation”; Geddes, “Why Parties”; Lust-Okar, “Elections Under.”

34 Gehlbach and Keefer, “Investment Without”; Magaloni, “Credible Power-Sharing”; Svolik The Politics; Wright, “To Invest or?”

35 Geddes, “Why Parties”; Magaloni Voting for; Simpser, Why Governments.

36 Lust-Okar, “Elections Under.”, Magaloni Voting for; Magaloni, “Credible Power-Sharing.”

37 Miller, “Elections, Information.”

38 Milner, “Electoral Authoritarianism,” 1535.

39 One may wonder, then, why voters in authoritarian regimes support the opposition. For a detailed discussion on this issue, see Gandhi and Lust-Okar, “Election Under,” 409.

40 Malaczewska, “Useful Government.”

41 Buehn and Farzanegan, “Impact of Education.”

42 Berrittella, “The Effect of Public.”

43 Gehlbach and Keefer, “Investment Without”; Wright, “Do Authoritarian.”

44 Johnson et al., “Regulatory Discretion.”; Friedman et al., “Dodging the Grabbing”; Dreher et al., “How do Institutions.”

45 Gandhi, Political Institutions; Svolik, The Politics.

46 Holland “Forbearance”; Holland “The Distributive Politics.”

47 Ibid, 357.

48 We have a preliminary finding that the effect of the electoral authoritarianism on the shadow economy is negatively conditioned by the size of poor voters in the nation.

49 Linz, Totalitarian and Authoritarian Regimes.

50 Mansfield and Snyder, “Democratization”; Razi, “Legitimacy, Religion.”

51 Brownlee, “Hereditary Succession.”

52 See note 29 above, 297.

53 Magaloni, Voting for Autocracy.

54 De Boef, “Modeling”; De Boef and Keele, “Taking Time.”

55 Hoechle, “Robust Standard.”

56 Beck and Katz, “What to do (and not to do).”

57 See note 54 above, 284.

58 One may be concerned whether the main results are primarily driven by a small number of closed regimes as the majority of the panels have elections every year (See appendix Table A2).

59 Isachsen and Strøm, “The Size and Growth”; Pedersen, “Size of the Public.”

60 Elbahnasawy et al., “Political Instability.”

61 Franz, “Wie groß”; MacAfee, “A Glimpse of”; O’Higgins, Assessing the; Petersen, “Size of the Public Sector”; Del Boca, “Parallel Economy”; Park, Reconciliation.

62 Elbahnasawy et al., “Political Instability,” 33.

63 Medina and Schneider, “Shadow Economies.”

64 Schneider, “The Influence of.”

65 See note 63 above.

66 See note 64 above.

67 Magaloni, “Credible Power-Sharing”; Magaloni et al., “Autocracies.”

68 World Bank, “World Development.”

69 Linzer and Staton, “A Global Measure.”

70 Adding year fixed effects does not change the main findings.

71 We calculated the standard error using Bewley transformation. Bewley, “The Direct.”

72 Gleditsch et al. “Diffusion and the International”; Miller “Electoral Authoritarianism”; Levitsky and Way Competitive authoritarianism; Simmons et al. “Introduction”; Star “Democratic Dominoes”

73 Following Miller “Electoral Authoritarianism,” we define countries located within 24 miles neighbors.

74 See appendix Table A3. They pass all the identification tests.

75 If there were some subgroups in the sample with higher average correlations than the instruments, the IV estimate results might be larger than the OLS estimate. While the former estimates a local average treatment effect, the latter estimates an average marginal effect on the entire sample (see Card “Estimating,”1156-1157.)Of course, this does not necessarily imply that the estimation results are wrong. As long as the instruments are relevant and valid, we can better estimate the effect of the independent variable on the dependent variable using the IV approach.

76 See note 29 above, 287.

77 Alm and Embaye, “Using Dynamic”; Blackburn et al., “Tax Evasion”; Bose et al., “The Impact of Banking”; Capasso and Jappelli, “Financial Development”; Enste and Schneider, “Shadow Economies.”

Additional information

Notes on contributors

Da Sul Kim

Da Sul Kim is a Ph.D. student in the Department of Government at Georgetown University. Her research interest focuses on authoritarian regimes, inequality, and redistribution.

Chungshik Moon

Chungshik Moon is an Associate Professor of Political Science and International Relations at Chung-Ang University. His research focuses on the causes and consequences of economic globalization, with specific emphasis on foreign direct investment, official development assistance, and authoritarian politics. His work has appeared in Comparative Political Studies, Democratization, International Studies Quarterly, Journal of Conflict Resolution, among others.