Public spending and informal economy in the Asian countries

Figures & data

Table 1. A summary of the selected papers concerning the effects of public spending on the informal economy

Authors	Period/sample	Methods	Main findings
Berdiev and Saunoris (2018)	1984–2016 &108 countries	VAR	Government spending has a positive effect on the shadow economy
Elgin and Oztunali (2014)	1984–2009 &141 countries	Fixed effect	There is a positive impact of government spending on the informal economy
Xu et al. (2018)	1999–2007 &131 countries	GMM	Public spending contributes to the extent of the informal economy
Esaku (2021)	1991–2015 for Uganda	ARDL	Government expenditure rises the shadow economy
Khan and Rehman (2022)	2004–2015 &141 countries	The fixed effect, Random effect, GMM	An increase in public spending leads to an increase in the shadow economy
Goel et al. (2019)	1870–2014 for the United States	ARDL	The results supported the positive effect of government expenditure on the shadow economy in the short run.

Notes: VAR: Vector autoregression; GMM: Generalized Method of Moment; ARDL: Autoregressive Distributed Lag

Table 2. List of countries included in the analysis

Armenia	Hong Kong SAR, China	Kuwait	Qatar
Azerbaijan	India	Lao PDR	Singapore
Bahrain	Indonesia	Lebanon	Saudi Arabia
Bangladesh	Iran, Islamic Rep.	Malaysia	Tajikistan
Bhutan	Israel	Nepal	Thailand
Brunei Darussalam	Japan	Pakistan	Turkey
Cambodia	Jordan	Oman	United Arab Emirates
China	Kazakhstan	Philippines	Vietnam

Table 3. Description of variables and measurement

No.	Variable	Measurement	Abbreviation	Source
Dependent variable
1	Informal economy	Informal economy (per cent of GDP)	IE	Medina and Schneider (2019)
Independent variables
2	Public spending	General government final consumption expenditure (per cent of GDP)	PS	World Development Indicators
3	Budget imbalance	Fiscal deficit (per cent of GDP)	BI	Fiscal Monitor
Control variables
4	Economic growth	GDP growth (annual %)	GDPG	World Development Indicators
5	Tax burden	Tax burden	TR	Heritage Foundation
6	Control Corruption	Control Corruption index (ranges from approximately −2.5 (totally corrupt) to 2.5 (not corrupt)	CC	Worldwide Governance Indicators
7	The rule of law	The rule of law index (ranges from approximately −2.5 (no rule of law) to 2.5 (the total rule of law)	RL	Worldwide Governance Indicators

Table 4. Descriptive statistics

	Observations	Mean	Std. Dev.	Min	Max
IE	576	28.001	12.033	10.317	60.600
$\mathrm{\Delta }$ IE	544	−0.115	0.448	−1.506	2.221
PS	576	13.481	5.524	3.460	30.003
$\mathrm{\Delta }$ PS	544	0.027	1.344	−5.479	6.436
BI	576	−0.327	8.292	−24.000	43.300
$\mathrm{\Delta }$ BI	544	−0.169	5.308	−35.200	33.000
GDPG	576	5.390	4.203	−14.100	34.500
$\mathrm{\Delta }$ GDPG	544	−0.122	4.035	−21.000	18.707
TB	576	80.051	20.008	0.000	99.900
$\mathrm{\Delta }$ TB	544	0.681	5.758	−11.200	90.200
CC	576	−0.047	0.905	−1.496	2.325
$\mathrm{\Delta }$ CC	544	0.001	0.137	−0.420	1.029
RL	576	−0.031	0.783	−1.390	1.860
$\mathrm{\Delta }$ RL	544	0.006	0.102	−0.343	0.475
PS*BI	576	30.062	351.731	−861.515	2321.01
$\mathrm{\Delta }$ PS*BI	544	−6.800	207.297	−1898.15	1167.896

Notes:IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 5. The correlation matrix

Variables	IE	PS	BI	GDPG	TB	CC	RL
IE	1.0000
PS	−0.307***	1.0000
BI	−0.075**	0.043	1.0000
GDPG	0.145***	−0.246***	0.122***	1.0000
TB	−0.046	−0.207***	0.058	0.021	1.0000
CC	−0.571***	0.389***	0.195***	−0.187***	−0.023	1.0000
RL	−0.373***	0.255***	0.332***	−0.023	−0.032	0.064***	1.0000

Notes: *** significance at 1 per cent level.

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Figure 1. The shadow economy for the Asia countries from 2000 to 2017.

Table 6. Cross-section dependence test results

Variables	IE	PS	BI	GDPG	TB	CC	RL	PS*BI
CD test	40.982***	16.514***	14.996***	21.029***	14.125***	2.848***	9.018***	13.265***
p-value	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000

Notes: *** significance at 1 per cent level.

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 7. Slope homogeneity test results

	Slope homogeneity test
	$\Delta$	${\Delta }_{adj}$
Equation (1)	−11.314*** (0.000)	−3.411*** (0.000)
Notes: *** significant at 1% level.

Table 8. Panel unit root test results

Variables	CADF		CIPS		Order of Integration
	Level	First Difference	Level	First Difference
IE	−0.944	−1.306*	−1.878	−3.229***	I (1)
PS	0.045	−5.519***	−1.928	−3.454***	I (1)
BI	−1.049	−2.468***	−1.806	−4.220***	I (1)
GDPG	−1.059	−3.346***	−1.717	−4.899***	I (1)
TB	−0.074	−5.125***	−1.814	−3.927***	I (1)
CC	0.702	−3.623***	−1.648	−4.895***	I (1)
RL	1.549	−4.079***	−1.748	−4.378***	I (1)
PS*BI	−0.554	−1.988**	−1.874	−4.543***	I (1)

Notes: *,**, *** significant at 10 per cent, 5 per cent and 1 per cent levels, respectively.

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 9. Results of the cointegration test

	Statistics
Pedroni
Modified Phillips-Perron t	9.828***
Phillips-Perron t	4.133***
Augmented Dickey-Fuller t	2.270**
Kao
Modified Dickey-Fuller t	−17.169***
Dickey-Fuller t	−15.434***
Augmented Dickey-Fuller t	−10.778***
Unadjusted modified Dickey-Fuller t	−17.734***
Unadjusted Dickey-Fuller t	−15.501***
Westerlund
Variance Ratio	24.534***

Notes: **, *** significant at 5% and 1% level, respectively

Table 10. Empirical findings on the relationship between public spending, budget imbalance and informal economy using the GMM estimation techniques

Variables	SE
PS	0.268***
BI	0.134***
GDPG	0.143***
TB	0.160***
CC	−0.096
RL	−0.051
PS*BI	0.001***
Cons	41.420
AR (2) test	0.134
Sargan test	0.000
Hansen test	0.892

Notes: *p < 0.10; **p < 0.05; ***p < 0.01

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Figure 2. Public spending and shadow economy: the role of budget imbalance.

Table 11. Empirical findings from two sub-samples: a sample of large informal economy versus a sample of a small informal economy

Variables	High SE	Low SE
PS	0.195**	0.392*
BI	0.046***	0.177*
GDPG	0.040**	0.005
TB	0.037*	0.023*
CC	−0.144**	−3.802*
RL	0.180	2.076
PS*BI	0.001*	0.009*
Cons	10.696	42.636
AR (2) test	0.178	0.245
Sargan test	0.000	0.000
Hansen test	1.000	1.000

Notes: *p < 0.10; **p < 0.05; ***p < 0.01

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 12. Empirical findings from two sub-samples: a sample of high-income countries versus a sample of the middle-income countries

Variables	High-income countries	Middle-income countries
PS	0.058*	0.204***
BI	0.179***	1.234***
GDPG	−0.156	0.099**
TB	0.132**	0.096**
CC	−0.919**	−0.399**
RL	0.430	0.490
PS*BI	0.002**	0.057***
Cons	35.073	28.658
AR (2) test	0.091	0.315
Sargan test	0.000	0.000
Hansen test	1.000	1.000

Notes: *p < 0.10; **p < 0.05; ***p < 0.01

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 13. A robust analysis using the CCE-GMM estimation

Variables	SE
PS	0.261***
BI	0.120*
GDPG	0.061***
TB	0.118**
CC	−0.597*
RL	0.349
PS*BI	0.009**
SE_csa	0.258**
PS_csa	0.338
BI_csa	0.085
GDPG_csa	0.025
TB_csa	0.133
CC_csa	1.272
RL_csa	−1.016
PS*BI_csa	0.002
Cons	34.514**
No. obs.	576

Notes: *p < 0.10; **p < 0.05; ***p < 0.01. The suffix _csa is used to denote the cross-section average of the preceding variable. The mean group estimates are unweighted.

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: the rule of law

Table 14. A robustness analysis using an interaction variable

Variables	SE
PS	0.389***
BI	0.228***
GDPG	0.110***
TB	0.152***
CC	−1.196*
RL	5.974
GDPG*PS*BI	0.002***
Cons	42.122***
AR (2) test	0.154
Sargan test	0.000
Hansen test	0.936

Notes: *p < 0.10; **p < 0.05; ***p < 0.01

IE: Informal economy; PS: Public spending; BI: Budget imbalance; GDPG: GDP growth; TB: Tax burden; CC: Control Corruption; RL: Rule of law

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