Using Ordinary Least Squares to Measure the Impact of the Factors Affecting Underground Economy: A Comparison between India and Turkey

Underground economy is a source of concern since it distorts policy framework of a country and weakens its government. This paper sheds light on the underground economies of two developing countries namely India and Turkey by identifying the factors contributing towards their large size as well as measuring the impact of those factors. Using secondary data from 2000-2013 and applying Ordinary Least Squares (OLS) regression model, this paper tests the impact of tax revenue, unemployment rate, Index of Economic Freedom, population and GDP growth rates, inflation and internet users on the size of underground economies of India and Turkey in absolute and comparative dimensions. The first part of the paper explains the concept of underground economy and discusses its significance followed by the hypotheses that are put to test. Using OLS, impact of aforementioned variables on the size of underground economy are estimated. It has been found that high Index of Economic Freedom reduces the size of underground economy in both countries hence better institutions are pivotal. Wider tax base and a simple tax system will facilitate India while greater transparency in the usage of ICT will enable Turkey to reduce the size of its underground economy.

Anahtar Kelimeler: Underground Economy, Ordinary Least Squares, Developing Countries

Underground economy is a source of concern since it distorts policy framework of a country and weakens its government. This paper sheds light on the underground economies of two developing countries namely India and Turkey by identifying the factors contributing towards their large size as well as measuring the impact of those factors. Using secondary data from 2000-2013 and applying Ordinary Least Squares (OLS) regression model, this paper tests the impact of tax revenue, unemployment rate, Index of Economic Freedom, population and GDP growth rates, inflation and internet users on the size of underground economies of India and Turkey in absolute and comparative dimensions. The first part of the paper explains the concept of underground economy and discusses its significance followed by the hypotheses that are put to test. Using OLS, impact of aforementioned variables on the size of underground economy are estimated. It has been found that high Index of Economic Freedom reduces the size of underground economy in both countries hence better institutions are pivotal. Wider tax base and a simple tax system will facilitate India while greater transparency in the usage of ICT will enable Turkey to reduce the size of its underground economy.

Keywords: Underground Economy, Ordinary Least Squares, Developing Countries