The underground economy, political regimes, and economic growth: International evidence

This dissertation presents empirical evidence on the determinants of the size of the underground economy and the effects of the underground economy on economic growth. To achieve these objectives this dissertation tackles "the political regime variable" for the first time in this field and identifies its effect on the size of underground economy as well as economic growth.;For the data on the underground economy this dissertation uses the index of the black market issued by Heritage Foundation and the size of underground economy in 76 countries compiled by Friedmann et al. (2000) and Schneider et al. (2000). And it employs the index of country grading issued by Freedom House for the data on the political regime. Using OLS analysis, this dissertation finds that the political regime variable is one of the variables which effects on the size of underground economy as well as the "proximate" determinants of the size of the underground economy, property rights, regulation, taxes, and corruption. So, the political regime may affect the size of the underground economy both directly and indirectly through the "proximate" determinants.;The analysis of the determinants of economic growth showed that the size of the underground economy had a negative effect on the rate of economic growth only when there were no controls on property rights and regulation. The same can be said for the political regime. It was not a significant determinant of economic growth when the black market (underground economy), property rights, and regulation were included in the model of economic growth.;In summary, our analysis shows that the political regime does not affect the rate of economic growth directly, but only indirectly through the black market, and regulation. The underground economy does not affect the rate of economic growth when its "proximate" determinant (regulation) is included in the growth model.;The political regime is viewed as an exogenous variable, not subject to policy making. On the other hand, regulation is policy variable and seems to be important determinant of both the size of the underground economy and the rate of economic growth. This finding suggests that policy should be directed toward the improvement in deregulatory policy.