Naslov
Corruption and Underground Economy-Two Sides of the Same Coin?

Autori
Lovrinčević, Željko ; Mikulić, Davor ; Budak, Jelena

Vrsta, podvrsta i kategorija rada
Radovi u zbornicima skupova, cjeloviti rad (in extenso), znanstveni

Izvornik
Third International Conference An Enterprise Odyssey: Integration or Disintegration Proceedings / Lovorka Galetić - Zagreb : Faculty of Economics and Business University of Zagreb, Mikrorad d.o.o. Zagreb, 2006, 47-48

Skup
Third International Conference An Enterprise Odyssey: Integration or Disintegration

Mjesto i datum
Zagreb, Hrvatska, 15.06.2006. - 17.06.2006

Vrsta sudjelovanja
Predavanje

Vrsta recenzije
Međunarodna recenzija

Ključne riječi
Corruption; Underground economy; Transition progress

Sažetak
The paper examines the link between the underground economy and corruption and the related influence of tax burdens, transition reforms and government effectiveness. Our empirical analysis contributes to existing research in this field for two reasons. Firstly, it targets a specific group of transition countries that share common institutional path-dependence in their accession efforts to the EU, namely new EU-member states (NMS-9) and candidate countries (CEC-3). Secondly, the analysis employs data on the size of underground economy in year 2000 estimated by the consistent EUROSTAT approach, making the data on the size of the underground economy comparable for cross-country analysis. Based on the recent research on the relationship between the underground economy and corruption, we have tested the validity of two different theories in selected group of countries. One theory argues that underground economy mitigates government-induced distortions, so high corruption ultimately leads to less unofficial economy, meaning that corruption and underground economy are substitutes (Choi and Thum, 2004 ; Dreher, 2005). The opposite theory assumes that high corruption leads to high unofficial economy, and vice versa, so corruption and underground economy are complements (Friedman, 2000 ; Johnson et al., 1997, 1998, 2000). Our main goal was to examine whether corruption and underground economy are complements or substitutes in NMS-9 and CEC-3. To measure the institutional quality presumably associated with the presence of the underground economy, three indicators were included in the empirical analysis. In our main empirical model, the dependent variable is the size of the underground economy for which we have used data on the share of the underground economy as a percentage in the GDP estimated by the EUROSTAT method. Independent variables are Corruption Perception Index and share of tax revenues in total budget revenues. The econometric regression results confirm our hypothesis that there is a significant positive relation between the size of underground economy and corruption perceptions. Underground economy and corruption are proven to be complements in the observed group of new member states and candidate countries to the EU membership. Besides less tax burdens' direct and significant positive influence on the bigger size of an underground economy, additional empirical modeling provided arguments on indirect influence of institutional determinants to the size of underground economy. In the second regression model the dependent variable is the Corruption Perceptions Index. Independent variables are the transition index standing for the effect of successful transition reforms and the government effectiveness indicator. Government effectiveness and even more significantly the success in transition reforms, have strong and positive influence in reducing the corruption perceptions. Conclusively, through its effect on seizing corruption, improved government effectiveness and transition progresses simultaneously contribute to the lower size of the underground economy. Since corruption and underground economy are complements, seizing the share of underground economy in a country GDP goes hand in hand with seizing the corruption prevalence. The effect of the transition progress implies that the fight against underground economy and corruption should be based broadly on speeding up transition reforms rather than on traditional piecemeal measures.

Izvorni jezik
Engleski

Znanstvena područja
Ekonomija

POVEZANOST RADA