The Shadow Economy and Financial Development in the Turkish EconomyRabia Kapıcıoğlu
The shadow economy is a term associated with several macro variables. While the course of these variables may in some cases lead to an increase in the shadow economy, in others it may have a reducing effect. Financial development, however, is a concept closely related to the shadow economy and according to the relevant literature is said to have a reducing effect on the shadow economy. This study examines the relationship between the shadow economy and financial development for the case of Turkey. While this study represents financial development with the indices of financial development, financial institutions, and financial markets, it indicates the shadow economy by using data estimated by Elgin, Kose, Ohnsorge, & Yu (2021)’s dynamic general equilibrium (DGE) model. Covering the period 1990-2017, the study employs the augmented Dickey-Fuller (ADF) unit root and Fourier Todo-Yamamoto causality tests for the empirical analysis. The results obtained from the study state only one causality to be present between the financial markets and the shadow economy. In line with this conclusion, the importance of financial development should be remembered and not ignored in the struggle with the shadow economy, with financial development being able to be said to have a shrinking effect on the shadow economy.
Kayıtdışı Ekonomi ve Finansal Gelişme Arasındaki İlişki: Türkiye ÖrneğiRabia Kapıcıoğlu
Kayıtdışı ekonomi, birçok makro değişken ile ilişkili olan bir kavramdır. Bu değişkenlerde yaşanan seyir kayıtdışı ekonominin artmasına neden olabilirken, bazı durumlarda kayıtdışı ekonomiyi azaltıcı etki gösterebilir. Finansal gelişme de kayıtdışı ekonomi ile yakın ilişkili bir kavramdır. Literatürde yer alan çalışmalar ve teorik ifadeler finansal gelişmenin artmasının kayıt dışılığı azaltıcı etki göstereceği yönündedir. Bu çalışmada da kayıtdışı ekonomi ile finansal gelişme arasındaki ilişki Türkiye örneklemi üzerinden incelenecektir. Çalışmada finansal gelişmeyi temsilen, finansal gelişme, finansal kurumlar ve finansal piyasalar endeksi kullanılmıştır. Kayıtdışı ekonomiye ilişkin değişken olarak da Elgin, Kose, Ohnsorge ve Yu (2021)’nin DGE modeli ile tahmin ettiği seriler kullanılmıştır. 1990 ile 2017 dönemine ait yıllık veriler ele alınmıştır. Çalışmanın ampirik analizinde FADF, ADF birim kök testi ve Fourier Todo-Yamamoto nedensellik testi kullanılmıştır. Çalışmadan elde edilen sonuç finansal piyasalar ve kayıtdışı ekonomi arasında tek yönlü nedensellik olduğu yönündedir. Bu sonuç doğrultusunda, kayıtdışı ekonomiyle mücadele edilirken, finansal gelişmenin önemi hatırlanmalı ve göz ardı edilmemelidir. Finansal gelişmenin artması ile kayıtdışı ekonominin küçüleceği ifade edilebilir.
The shadow economy is defined as activities that contribute to the officially calculated but unrecorded gross domestic product (GDP) (Schneider & Enste, 2000). Many causes exist for the shadow economy. While some of these causes decrease the size of the shadow economy, others are able to increase its size. When looking at the causes of the shadow economy, they can be listed as being economic, political, social, psychological, cultural, legal, and administrative, among others. This study emphasizes financial development, which is seen as one of the causes of the shadow economy, and reveals the relationship between the two empirically.
Financial development has a shrinking effect on the shadow economy. Increases in financial development facilitate the follow-up of economic activities. The shadow economy generally operates with cash, which is preferred because keeping track of cash is difficult and keeping cash is easier compared to other prohibited goods. Increases in financial development also decrease the use of cash, with various other methods being able to be used in place of cash. This will facilitates monitoring the flow of money through various means.
The main function of the financial system is the transfer of funds from savers to companies and individuals. Financial development not only helps savings to change hands but also operationalizes various functions. It facilitates the exchange of goods and services and also provides resource allocation and organizational control. These both are the factors that increase economic growth while reducing the shadow economy. Firms and individuals will have to operate in the formal sector to take advantage of financial development, which will then reduce the shadow economy. They get encouraged to operate in the formal economy due to financial development. Therefore, a negative relationship exists between financial development and the shadow economy.
Studies in the literature have found a negative relationship between the shadow economy and financial development, stating that increases in financial development decrease the shadow economy. When examining these studies, they are seen to generally use panel data analysis (Ajide, 2021; Bayar, & Özturk, 2016; Berdiev, & Saunoris, 2016; Bose, Capasso, & Wurm, 2012; Canh, & Thanh, 2020; Capasso, & Jappelli, 2013; Gharleghi, & Jahanshahi, 2020; Gobbi, & Zizza, 2007; Khan, Abdul Hamid, & Rehman, 2021; Njangang, Nembot, & Ngameni, 2020). This study presents the relationship between financial development and the shadow economy by considering the example of Turkey. The study uses indices involving financial development, financial markets, and financial institutions to represent financial development and the shadow economy forecast data revealed by Elgin et al. (2020) for representing data on the shadow economy. The study covers the years 1990-2017 and also uses the augmented Dickey-Fuller (ADF) unit root, Fourier ADF unit root, and Fourier Todo-Yamamoto causality tests.
As a result of the findings, a causal relationship has been found between the shadow economy and financial markets. The direction of causality has been found to go from financial markets to the shadow economy. With regard to the analyzed period, the shadow economy has been affected by the movements of financial markets. Under favorable financial markets conditions, firms and individuals can diversify their savings and increase their earnings. As a result of the effective and smooth operation of financial markets, the income obtained from the formal economy may exceed the income obtained from the shadow economy. Effective financial markets encourage firms, and individuals tend toward a formal economy. While struggling with the shadow economy, the relationship between financial development and the shadow economy should be considered. Economies that have more developed financial systems see both stimulation regarding economic growth as well as a decline in the shadow economy.