The paper estimates the size of the Shadow Economy (SE) in Ethiopia from 1995 to 2022 and rigorously tests the statistical relationships between the SE and various causal variables. In order to carry out the comprehensive econometric analysis, a multiple indicator multiple causes (MIMIC) model was effectively applied. The main causes of the Ethiopian SE are carefully analyzed, and several economic policies aimed at reducing it are thoughtfully suggested. An appraisal of the reliability of these estimates is conducted, along with an alternative benchmark strategy for the MIMIC approach that was proposed for enhanced accuracy. The findings reveal that the causal variables, including tax burden, inflation rate, trade openness, and economic freedom, significantly influence the shadow economy. Furthermore, it shows that indicator variables, such as currency in circulation and official economic growth rates, significantly indicate the presence and extent of a shadow economy. Thus, based on the insightful findings of the research, the author recommends that the government increase trade relations with the rest of the world and promote greater economic freedom. It also endorses adjusting inflation and tax burdens to effectively minimize the shadow economy in Ethiopia.
| Published in | American Journal of Theoretical and Applied Business (Volume 10, Issue 3) |
| DOI | 10.11648/j.ajtab.20241003.11 |
| Page(s) | 47-59 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2024. Published by Science Publishing Group |
Ethiopia, Latent Variable, Mimic Model, Shadow Economy
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APA Style
Mekonnen, W. (2024). Measuring Size and Causes of Shadow Economy in Ethiopia. American Journal of Theoretical and Applied Business, 10(3), 47-59. https://doi.org/10.11648/j.ajtab.20241003.11
ACS Style
Mekonnen, W. Measuring Size and Causes of Shadow Economy in Ethiopia. Am. J. Theor. Appl. Bus. 2024, 10(3), 47-59. doi: 10.11648/j.ajtab.20241003.11
AMA Style
Mekonnen W. Measuring Size and Causes of Shadow Economy in Ethiopia. Am J Theor Appl Bus. 2024;10(3):47-59. doi: 10.11648/j.ajtab.20241003.11
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Download@article{10.11648/j.ajtab.20241003.11,
author = {Wondimu Mekonnen},
title = {Measuring Size and Causes of Shadow Economy in Ethiopia
},
journal = {American Journal of Theoretical and Applied Business},
volume = {10},
number = {3},
pages = {47-59},
doi = {10.11648/j.ajtab.20241003.11},
url = {https://doi.org/10.11648/j.ajtab.20241003.11},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20241003.11},
abstract = {The paper estimates the size of the Shadow Economy (SE) in Ethiopia from 1995 to 2022 and rigorously tests the statistical relationships between the SE and various causal variables. In order to carry out the comprehensive econometric analysis, a multiple indicator multiple causes (MIMIC) model was effectively applied. The main causes of the Ethiopian SE are carefully analyzed, and several economic policies aimed at reducing it are thoughtfully suggested. An appraisal of the reliability of these estimates is conducted, along with an alternative benchmark strategy for the MIMIC approach that was proposed for enhanced accuracy. The findings reveal that the causal variables, including tax burden, inflation rate, trade openness, and economic freedom, significantly influence the shadow economy. Furthermore, it shows that indicator variables, such as currency in circulation and official economic growth rates, significantly indicate the presence and extent of a shadow economy. Thus, based on the insightful findings of the research, the author recommends that the government increase trade relations with the rest of the world and promote greater economic freedom. It also endorses adjusting inflation and tax burdens to effectively minimize the shadow economy in Ethiopia.
},
year = {2024}
}
TY - JOUR T1 - Measuring Size and Causes of Shadow Economy in Ethiopia AU - Wondimu Mekonnen Y1 - 2024/10/10 PY - 2024 N1 - https://doi.org/10.11648/j.ajtab.20241003.11 DO - 10.11648/j.ajtab.20241003.11 T2 - American Journal of Theoretical and Applied Business JF - American Journal of Theoretical and Applied Business JO - American Journal of Theoretical and Applied Business SP - 47 EP - 59 PB - Science Publishing Group SN - 2469-7842 UR - https://doi.org/10.11648/j.ajtab.20241003.11 AB - The paper estimates the size of the Shadow Economy (SE) in Ethiopia from 1995 to 2022 and rigorously tests the statistical relationships between the SE and various causal variables. In order to carry out the comprehensive econometric analysis, a multiple indicator multiple causes (MIMIC) model was effectively applied. The main causes of the Ethiopian SE are carefully analyzed, and several economic policies aimed at reducing it are thoughtfully suggested. An appraisal of the reliability of these estimates is conducted, along with an alternative benchmark strategy for the MIMIC approach that was proposed for enhanced accuracy. The findings reveal that the causal variables, including tax burden, inflation rate, trade openness, and economic freedom, significantly influence the shadow economy. Furthermore, it shows that indicator variables, such as currency in circulation and official economic growth rates, significantly indicate the presence and extent of a shadow economy. Thus, based on the insightful findings of the research, the author recommends that the government increase trade relations with the rest of the world and promote greater economic freedom. It also endorses adjusting inflation and tax burdens to effectively minimize the shadow economy in Ethiopia. VL - 10 IS - 3 ER -
Domestic Economic Analysis Directorate, National Bank of Ethiopia, Addis Ababa, Ethiopia
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