THE UNDERGROUND ECONOMY AND THE strongUNDERDEVELOPMENTstrong TRAP - AIEL.pdfVIP

Preliminary draft October 2000 THE UNDERGROUND ECONOMY AND THE UNDERDEVELOPMENT TRAP by Maria Rosaria Carillo ♣ and Maurizio Pugno ♠ 0. Introduction The “underground economy” is an uncomfortable subject for both economists and policy makers. The economists find it difficult to define and to measure, while their main explanation of it is very partial. In fact, they find extremely different estimates of the underground economy for a same country, depending on the definitions and on the method 1 used (Lippert and Walker 1997) . By contrast, the explanations of the phenomenon at theoretical and empirical level are usually limited to the heavy weight of the tax burden and to the excessive regulations (Schneider 1997; Feige 1989; Tanzi 1980). The policy makers are discomforted by the fact that the underground economy is detrimental to tax revenues and, more generally, to social order, while it is able to generate employment and income. A step further for better understanding and dealing with the problem of the underground economy is to consider it in connection with the structure of the economy, whether advanced or less developed. The various estimates agree that the underground economy is most widespread in the less developed part of the Western industrialised world, ♣ Università del Molise e Istituto