The Shadow of Official Development Assistance: Influence over the Shadow Economy

• In Event: International Political Economy of Aid

Abstract

While the shadow economy seems to have positive and negative effects on a country’s macro economy, almost all governments have attempted to control the shadow economy. It is because the shadow economy can decrease tax revenues, which the government should use for its own expenditures. Even though official development assistance (ODA) supposedly has no relationship with the shadow economy, we often observe a relationship between the two in recipients. We argue that ODA can increase the size of the shadow economy of recipients through government and individual-level flows of ODA to the shadow economy. We conducted empirical studies with the dataset of the shadow economy of 105 recipients from 1990–2018, showing that recipients receiving a higher volume of ODA are more likely to have a larger volume of the shadow economy. Moreover, the relationship between ODA and the shadow economy can be stronger in more corrupted recipients. As a robustness check, the generalized method of moments also confirmed our findings dealing with endogeneity issues.

Authors

• Chungshik Moon, Chung-Ang University

• Youngwan Kim, Sogang University

• Da Sul Kim