Examining the impact of the shadow economy on economic vulnerability

Subject Areas : Economic Development, Innovation, Technological Change, and Growth

Luay Adil Abbood ¹ , S. Jamaledin Mohseni Zonouzi ² , Yousef Mohammadzadeh ³

1 - PHD student of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran, [e-mail]
2 - Associate Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran, (Crossponding Authur), [e-mail]
3 - Associate Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran, [e-mail]

Received: 2025-01-05 Accepted : 2025-05-03 Published : 2025-07-19

Keywords: Shadow Economy, Economic Vulnerability, PSTR Approach JEL Classification: O17, O40, C33,

Abstract :

In recent decades, economic vulnerability has become a pressing concern for developing countries, driven by factors such as globalization and structural instability. Despite its significance, the role of the shadow economy in exacerbating this vulnerability has received limited attention. This study investigates the nonlinear impact of the shadow economy on economic vulnerability in emerging economies from 2007 to 2021, emphasizing the moderating effect of natural resource endowments. Utilizing the Panel Smooth Transition Regression (PSTR) method, which captures threshold-dependent dynamics, the analysis differentiates between resource-rich and resource-poor countries. The results indicate that the shadow economy significantly increases economic vulnerability, but this effect is less severe in countries with abundant natural resources. Additionally, the study finds that financial development and strong governance—particularly government efficiency and control of corruption—can mitigate vulnerability. Policy recommendations include reforming tax systems, improving monitoring of economic transactions, strengthening financial institutions, enhancing governance, and managing natural resources more effectively. By incorporating both the nonlinear effects of informality and the influence of natural resources, the study offers a nuanced framework for policymakers in emerging economies.

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