Using ordinary least squares to measure the impact of the factors affecting underground economy: a comparison between Bangladesh, India, Pakistan and Turkey

Shadow economy is a source of concern since it distorts policy framework of a country and weakens the government. Previous studies have mainly focused on shadow economies of developed countries and have measured its size. This study sheds light on developing countries which are in dire need of policies that tackle this issue and identifies the reasons as to why these countries have large shadow economies in the first place. Using secondary data from 2000-2013 and applying Ordinary Least Squares (OLS) regression model, this study tests the impact of tax revenue, unemployment rate, Index of Economic Freedom, population and GDP growth rates, inflation and internet users on the shadow economies of Bangladesh, India, Pakistan and Turkey in absolute and comparative dimensions. In the first part of the study, the concept and significance of underground economy along with the objectives of this study are discussed, the second part of the study comprises literature review. The third, fourth and fifth parts of the study use OLS to estimate the impact of aforementioned variables on the size of shadow economy. It has been found that Index of Economic Freedom has the most significant impact on all the countries. Wider tax base and a simple tax system will facilitate Bangladesh, India and Pakistan while greater transparency in the usage of ICT will enable Bangladesh, Pakistan and Turkey to reduce the size of their shadow economies.