Shadow Economy and Corruption in the ASEAN: Complement or Substitute?

Very few empirical studies have been attempted to investigate the possible link between shadow economy and corruption for developing and transition economies, in particular, for the Association of Southeast Asian Nations (ASEAN). The lack of the studies can be explained by the fact that both "shadow economy" and "corruption" are ultimately unobservable. Using the MIMIC approach, this empirical study fills the gap. Data from the ASEAN (excluding the two high-income countries - Singapore and Brunei) for the period from 1995 to 2014 are utilised in this study. The findings from this study indicate that (i) there is a positive causal relationship between shadow economy and corruption in the ASEAN and that (ii) the effect from corruption on shadow economy is more profound than the effect from shadow economy on corruption. Shadow economy and corruption are complement, not substitute, for the ASEAN. The implication for macroeconomic policies in these countries is that controlling corruption is a good starting policy to minimise the growth of the shadow economy.