Estimating the Size of the Ethiopian Shadow Economy from 1995 - 2023 Open Access

Abstract

The shadow economy constitutes a substantial portion of economic activities, especially in developing countries like Ethiopia, influencing public policy effectiveness and economic development. Understanding its scale and drivers is crucial for effective policy making and economic reforms. This study aims to estimate the size and identify key drivers of Ethiopia's shadow economy over the period 1995–2023, highlighting factors influencing its fluctuations and implications for policy. An Error Correction Multiple Indicators Multiple Causes (EMIMIC) model was utilized, integrating cointegration analysis to capture both long-run equilibrium relationships and short-run dynamics. The chosen specification is a MIMIC (6-1-2) model, refined with alternative calibration approaches to enhance robustness. The findings indicate that the average size of Ethiopia's shadow economy is approximately 47.46\% of GDP, with a notable peak of 55.43\% in 2020. Tax burden and government expenditure emerged as the most influential long-run determinants, each exhibiting a negative relationship with shadow economic activity. The study underscores the critical need for policymakers to address fundamental structural challenges alongside economic reforms. It cautions that recent reform initiatives may inadvertently expand the informal sector if these core structural issues remain unresolved.

Table of Contents

Table of Contents

1 Introduction...................................... 1

2 LiteratureReview .................................. 2

2.1 DefiningtheShadowEconomy.......................... 2

3 Methodology ..................................... 6

3.1 ErrorCorrectionModel(ECM) ......................... 6

3.2 MIMICModel................................... 8

3.3 Error Correction Representation of the EMIMIC Model . . . . . . . . . . . . 10

3.4 VariableSelection................................. 12

4 ApplyingtheEMIMICmodel........................... 17

5 Result ......................................... 19

6 Conclusion....................................... 25

7 References....................................... 26 

About this Honors Thesis

Rights statement

• Permission granted by the author to include this thesis or dissertation in this repository. All rights reserved by the author. Please contact the author for information regarding the reproduction and use of this thesis or dissertation.

School	Emory College
Department	Quantitative Science
Degree	B.S.
Submission	Honors Thesis
Language	English
Research Field	Economics, General
Keyword	Shadow Economy MIMIC Ethiopia
Committee Chair / Thesis Advisor	Dr. Ruoxuan Xiong, Emory University
Committee Members	Dr. Kevin McAlister, Emory University Dr. Abhishek Ananth, Emory University

Last modified

Primary PDF

Thumbnail	Title	Date Uploaded	Actions
	Estimating the Size of the Ethiopian Shadow Economy from 1995 - 2023 ()	2025-04-09 11:05:41 -0400	Press to Select an action Download

Supplemental Files

Thumbnail	Title	Date Uploaded	Actions