Investigation of the Shadow Economy in Egypt

The purpose of this thesis is to investigate the shadow economy in Egypt over the period 1997-2013. The thesis explains the main drivers and the effects of the shadow economy for the Egyptian economy. The study explains the definition of the shadow economy, its current status in Egypt and how the government can play a crucial role in issuing laws that create a better environment for the Micro and Small Enterprises (MSEs), which represent the largest segment of the shadow economy in Egypt. We also examine the impact of the shadow economy in reducing unemployment levels, poverty alleviation and accelerating economic growth in Egypt. The thesis uses the Multiple Indicator Multiple Causes (MIMIC) approach to analyze the main drivers of the shadow economy. Our MIMIC model suggests that the main forces for the shadow economy in Egypt are the unemployment rate, the quality of government regulations and institutions, and the net tax payments. Our model also shows that the main indicator is the secondary enrollment ratio. We find out that among three indicators (gross domestic product, government expenditure, and secondary enrollment ratio), the shadow economy mostly affects the secondary enrollment ratio. Our model suggests that as the size of shadow economy in Egypt increases, the secondary enrollment ratio is the mostly (and negatively) affected indicator. Finally, based on our empirical results, we try to provide some policy recommendations that the Government of Egypt should apply in order to formalize the informal sector in Egypt and how to gradually integrate the informal activities into the formal economy.