Exploring legal and political-institutional determinants of the informal economy of Pakistan

Figures & data

Figure 1. General Structure of a MIMIC Model.

Figure 2. MIMIC Model used for estimation.

Table 1. Summary of Literature Review on the informal Economy of Pakistan

Author(s)	Theoretical Model (estimation technique used)	Average The informal Economy Estimates for Pakistan
M. Ahmed and Ahmed (1995),	Modified Tanzi’s Monetary Approach * (OLS)	41.79%
Shabsigh (1995),	Modified Tanzi’s Monetary Approach (OLS)	22.70%
Aslam (1998),	Modified Tanzi’s Monetary Approach (OLS)	39.33%
Iqbal et al. (1998),	Modified Tanzi’s Monetary Approach (OLS)	34.30%
M. A. Kemal (2003),	Modified Tanzi’s Moentary Approach(OLS)	31.82%
Yasmin and Rauf (2004),	Tanzi’s Approach(OLS)	23.62%
M.A. Kemal (2007),	Modified Tanzi’s Approach(OLS and **VAR model)	25.77, 49.54, and 36.37 %
Q.M. Ahmed and Hussain (2008)	Modified Tanzi’s Approach(OLS)	25.22% and 30.51%
Arby et al. (2010)	Modified Tanzi’s Approach(***ARDL model)	29.68%
	MIMIC Approach (SEM)	29.43%
	Electricity Consumption	21.60%
Gulzar et al. (2010)	Tanzi’s Approach(OLS)	34.11%
	Modified Tanzi’s Approach (****DOLS)	23.84%
	MIMIC (SEM)	29.93%
	Electricity Consumption Approach	50.25%
	Labor Market Approach	26.74%
Kemal and Qasim (2012)	Discrepancy Approach based on import & export mis-invoicing	91.44%
Kiani et al. (2015)	Modified Tanzi’s Approach(ARDL model)	26.72%
Mughal and Schneider (2018)	Currency Demand Approach (ARDL model)	26.4, 25.3 & 26.1 %

*Ordinary Least Squares

**Vector Auto regression model

***Autoregressive distributed lag model

****Dynamic Ordinary Least Scale

Table 2. Variables data sources

Variables	Source
Causal variables
Protection of property rights(Legal institutional variable)	Fraser Institute
Law and Order (legal institutional variable)	International Cooperation Review Group (ICRG)
Bureaucratic quality	ICRG
Religion in Politics	ICRG
Tax Burden	World Bank Data
Unemployment Rate	World Bank Data
Indicator variables
Currency Ratio	Calculated from State Bank of Pakistan Data
GDP growth rate per capita	World Bank Data

Annotation: yearly data

Description of variables (See Appendix).

Table 3. Specification I (6-1-2)

Causes	1	2	3	4	5	6
	Religion in Politics	Protection of Property Rights	Law and Order	Bureaucratic Quality	Unemployment Rate	Tax Revenue
	3.794***	−.2045***	−1.473***	−2.112***	−.1426***	−.0986***
Indicators	GDP	Currency Ratio
	1	20.94***
Statistical tests	**RMSEA	*Chi Square
	.030	.403

* Chi square is sensitive to sample size

** Root main square error of approximation

Own calculations by taking most significant indicator variables of institutional quality

Table 4. Model specification II (2-1-2)

Causes	1	2
	Religion in Politics	Law and Order
	1.348***	−1.699***
Indicators	GDP	Currency Ratio
	1	18.27
Statistical tests	**RMSEA	*Chi Square
	.072	.3393

* Chi square is sensitive to sample size

** RMSEA is Root mean square error of approximation

Own calculations by reducing the indicator variables from 6 to 2 on the basis of significance.

Figure 3. Trend of The informal Economy as a percentage of GDP.

Figure 4. Trend of The informal Economy and GDP growth rate over the years.

Figure 5. Comparison of estimates of the informal economy in literature.

Table 5. Estimates of the informal economy of Pakistan and comparison with literature

Year	Schneider (2007)	Schneider et al. (2010)	Arby et al. (2010) MIMIC estimated only	Medina and Schneider (2018)	Authors
1995			29.5	34.48	36.81
1996			29.5	32.81	37.71
1997			29.3	34.58	33.98
1998			29.1	34.63	40.05
1999	36.8	37.2	29.3	35.35	33.98
2000		36.8	29.3	36.8	45.18
2001	37.9	37.2	29.3	35.12	33.98
2002		36.4	29.2	34.97	38.56
2003	38.7	35.6	29.1	33.58	37.49
2004		35.5	28.9	33.87	35.91
2005	39.2	34.7	28.6	31.19	36.37
2006		36.3	28.7	30.94	37.04
2007	39.5		28.7	30.84	42.68
2008			28.9	30.49	39.21
2009				31.28	43.20
2010				30.28	39.37
2011				30.91	37.14
2012				31.12	36.50
2013				30.62	36.35
2014				30.29	36.33
2015				31.62	35.99
2016					36.58
2017					38.07

Source: Schneider (2007), Schneider et al. (2010), Arby et al. (2010), Medina and Schneider (2018)

Table

Variable	Definition
Bureaucratic quality	Institutional strength and quality of the bureaucracy is a shock absorber that tends to minimize revisions of policy when governments change. In low-risk countries, the bureaucracy is somewhat autonomous from political pressure.
Law and Order	Two measures comprising one risk component. Each sub-component equals half of the total. The “law” sub-component assesses the strength and impartiality of the legal system, and the “order” sub-component assesses popular observance of the law.
Religion in Politics	domination of society or governance by a single religious group that seeks to replace civil law by religious law to exclude other religions from the political or social process.
Protection of Property Rights	Property rights, including over financial assets, are poorly defined and not protected by law.
	Tax Burden is tax revenue to GDP which is taken from World Bank data.
Unemployment Rate	Unemployment as a percentage of total labor force.
GDP Growth Rate	GDP Growth rate per Capita
Currency Ratio	Monetary base to broad money ratio is calculated from State Bank of Pakistan data.

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