The Impact of Economic Freedom on the Size of the Informal Economy: Evidence from Developing Asian Countries
Main Article Content
Abstract
This study investigates the impact of economic freedom on the size of the informal economy in developing Asian countries. The sample covers 15 economies—Bangladesh, China, India, Indonesia, Jordan, Kazakhstan, Kuwait, Lebanon, Malaysia, Oman, Pakistan, Philippines, Syria, Thailand, and Vietnam, over the period 1995–2018. Employing panel data estimation techniques, including Pooled OLS, Fixed Effects, and Driscoll–Kraay standard errors, the findings indicate that greater economic freedom, particularly trade freedom, is associated with a reduction in the informal economy. Based on these results, the study suggests that governments in developing Asia should further promote economic liberalization, especially by enhancing trade freedom. Such reforms not only contribute to reducing informality but also generate substantial benefits for the state, including higher tax revenues, improved policy planning through more reliable data, and strengthened financial and social stability
Keywords
economic freedom, trade freedom, informal economy, developing Asian countries
Article Details
References
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Saunoris, J. W., & Sajny, A. (2017). Entrepreneurship and economic freedom: cross-country evidence from formal and informal sectors. Entrepreneurship & Regional Development, 29(3-4), 292-316.
Schneider, F., Buehn, A., & Montenegro, C. E. (2011). Shadow economies all over the world: New estimates for 162 countries from 1999 to 2007. In Handbook on the shadow economy. Edward Elgar Publishing.
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Simba, A., & Tajeddin, M. (2023). Enabling economic and social change in Sub-Saharan Africa: An informal economy perspective. Journal of Developmental Entrepreneurship, 28(03), 2350022.
Tran, D. V. (2019). A study on the impact of economic freedom on economic growth in ASEAN countries. Business and Economic Horizons, 15(3), 423-449.
Welter, F., Smallbone, D., & Pobol, A. (2015). Entrepreneurial activity in the informal economy: a missing piece of the entrepreneurship jigsaw puzzle. Entrepreneurship & Regional Development, 27(5-6), 292-306.
Williams, C. C. (2006). The hidden enterprise culture: Entrepreneurship in the underground economy. In The Hidden Enterprise Culture. Edward Elgar Publishing.
Wu, D. F., & Schneider, M. F. (2019). Nonlinearity between the shadow economy and level of development. In IZA Discussion Papers, No. 12385. Institute of Labor Economics (IZA), Bonn.
Ahmed, S., Mushtaq, M., Fahlevi, M., Aljuaid, M., & Saniuk, S. (2023). Decomposed and composed effects of economic freedom on economic growth in south Asia. Heliyon, 9(2), e13478.
Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3-4), 323-338.
Bayar, Y., & Öztürk, O. m. F. (2019). Economic freedom, globalization, and the shadow economy in the European Union transition economies: a panel cointegration analysis. Organizations and Markets in Emerging Economies, 10(2), 378-391.
Berdiev, A. N., & Saunoris, J. W. (2018). Does globalisation affect the shadow economy? The World Economy, 41(1), 222-241.
Berdiev, A. N., & Saunoris, J. W. (2019). Globalization and informal entrepreneurship: A cross-country analysis. Atlantic Economic Journal, 47, 65-80.
Berdiev, A. N., Saunoris, J. W., & Schneider, F. (2018). Give me liberty, or I will produce underground: Effects of economic freedom on the shadow economy. Southern Economic Journal, 85(2), 537-562.
Berggren, N. (2003). The benefits of economic freedom: a survey. The independent review, 8(2), 193-211.
Buehn, A., & Farzanegan, M. R. (2012). Smuggling around the world: evidence from a structural equation model. Applied Economics, 44(23), 3047-3064.
D’Agostino, E., De Benedetto, M. A., & Sobbrio, G. (2023). Does the economic freedom hinder the underground economy? Evidence from a cross-country analysis. Economia Politica, 40(1), 319-341.
Dang, B. K. (2025a). Economic freedom and financial development: do they reduce the shadow economy? A case study of Southeast Asian countries. International Journal of Sustainable Economy, 17(3), 255-275.
Dang, B. K. (2025b). The Impact of Formal Entrepreneurship and Economic Freedom on the Size of the Shadow Economy in Asian Countries. Organizations and Markets in Emerging Economies, 16(2(33)), 387–411.
Dang, B. K., & Nguyen, K. D. (2024). The effect of the shadow economy and economic freedom on entrepreneurship: an empirical study in Asian countries. Journal of Developmental Entrepreneurship, 29(03), 2450017.
Dang, V. C., Nguyen, Q. K., & Tran, X. H. (2023). Corruption, institutional quality and shadow economy in Asian countries. Applied Economics Letters, 30(21), 3039-3044.
Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of economics and statistics, 80(4), 549-560. Economics, W. (2025a). Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP). Retrieved 29/09/2025 from https://www.worldeconomics.com/Regions/CPTPP/ Economics, W. (2025b). Regional Comprehensive Economic Partnership (RCEP). Retrieved 29/09/2025 from https://www.worldeconomics.com/Regions/RCEP/ Elbahnasawy, N. G. (2021). Can e-government limit the scope of the informal economy? World Development, 139, 105341.
Elbahnasawy, N. G., Ellis, M. A., & Adom, A. D. (2016). Political instability and the informal economy. World Development, 85, 31-42.
Elgin, C., Kose, M. A., Ohnsorge, F., & Yu, S. (2021). Understanding informality. In CAMA Working Paper 76/2021. Australian National University.
Farzanegan, M. R., Hassan, M., & Badreldin, A. M. (2020). Economic liberalization in Egypt: A way to reduce the shadow economy? Journal of Policy Modeling, 42(2), 307-327.
Freytag, A., Schneider, F., & Spiegel, S. E. (2022). The Influence of Economic Freedom on the Shadow Economy in Developed and Developing Countries. The Economists’ Voice, 19(2), 183-205.
Fujita, M. (2021). Can ASEAN retain centrality in Indo-Pacific region?-From a GVC point of view. Journal of Contemporary East Asia Studies, 10(1), 108-122.
Goel, R. K., Ram, R., Schneider, F., & Potempa, A. (2020). International movements of money and men: impact on the informal economy. Journal of Economics and Finance, 44, 179-197.
Goel, R. K., & Saunoris, J. W. (2014). Global corruption and the shadow economy: spatial aspects. Public Choice, 161, 119-139.
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics. In: McGraw-Hill.
Heritage Foundation. (2025). The 2025 Index of Economic Freedom. https://www.heritage.org/index/pages/report#indexHumanFlourishing Huynh, C. M., & Nguyen, T. L. (2020). Fiscal policy and shadow economy in Asian developing countries: does corruption matter? Empirical Economics, 59(4), 1745-1761.
Loayza, N. V. (2016). Informality in the Process of Development and Growth. The World Economy, 39(12), 1856-1916.
Medina, L., & Schneider, M. F. (2018). Shadow economies around the world: what did we learn over the last 20 years? International Monetary Fund.
OECD. (2023). Informality and Globalisation: In Search of a New Social Contract. In. Paris: OECD Publishing.
Ouédraogo, I. M. (2017). Governance, corruption, and the informal economy. Modern Economy, 8(2), 256-271.
Saunoris, J. W., & Sajny, A. (2017). Entrepreneurship and economic freedom: cross-country evidence from formal and informal sectors. Entrepreneurship & Regional Development, 29(3-4), 292-316.
Schneider, F., Buehn, A., & Montenegro, C. E. (2011). Shadow economies all over the world: New estimates for 162 countries from 1999 to 2007. In Handbook on the shadow economy. Edward Elgar Publishing.
Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes, and consequences. Journal of economic literature, 38(1), 77-114.
Simba, A., & Tajeddin, M. (2023). Enabling economic and social change in Sub-Saharan Africa: An informal economy perspective. Journal of Developmental Entrepreneurship, 28(03), 2350022.
Tran, D. V. (2019). A study on the impact of economic freedom on economic growth in ASEAN countries. Business and Economic Horizons, 15(3), 423-449.
Welter, F., Smallbone, D., & Pobol, A. (2015). Entrepreneurial activity in the informal economy: a missing piece of the entrepreneurship jigsaw puzzle. Entrepreneurship & Regional Development, 27(5-6), 292-306.
Williams, C. C. (2006). The hidden enterprise culture: Entrepreneurship in the underground economy. In The Hidden Enterprise Culture. Edward Elgar Publishing.
Wu, D. F., & Schneider, M. F. (2019). Nonlinearity between the shadow economy and level of development. In IZA Discussion Papers, No. 12385. Institute of Labor Economics (IZA), Bonn.