Against the Shadow: the Role of e-Government

The shadow economy is defined as economic activities which escape from detection in the official estimates of the Gross Domestic Product (GDP). They erode the tax bases and reduce tax revenue, forcing the government to find other sources to finance their spending. The size of shadow economies is associated with a higher inflation rate, public debt, and unemployment, hence becoming a crucial problem to mitigate, especially in the developing countries. This paper aims to see a possible contribution of e-Government (eGov) implementation to reduce the shadow economy. If institutional and regulatory problems are addressed by introducing eGov, we can avoid predatory and obstructive regulations. This will lower compliance costs and the administrative burdens which have been addressed as among major factors affecting the shadow economy. We investigate this phenomenon on a panel of 128 countries during the period 2003-2013, where the data on shadow economy [1] and the eGov index [2] are both available. The analysis shows that the increasing eGov index significantly reduces the size of the shadow economy. We also found that shadow economy is a latent phenomenon and that the impact of eGov will be greatly conditioned by the severity of the historical phenomenon of the shadow economy.