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Ruesga Benito, Santos M.
Carbajo Vasco, Domingo
Pérez Trujillo, Manuel
Year of Publication: 
[Journal:] Atlantic Review of Economics [ISSN:] 2174-3835 [Volume:] 2 [Year:] 2013
Abstract (Translated): 
There is nothing new about the resurface on the debate of the expansion of the underground economy in times of crisis. It is a reiterated topic claiming that irregular practices in the economy are cushioning the social effects in times of economic depression. However, the extensive literature related to the issue, for almost half a century, is not conclusive about the possible countercyclical effect of unregistered activities. This paper reviews relationships between the submerged and the regular sides of economic system, in order to know if they evolve in the same direction or, on the contrary, you can see a counter-cyclical behaviour on the hidden side of the economy. It aims, therefore, to analyse this relationship, first reviewing the academic literature on this subject. Second, establish a set of rational conjectures about the dynamics of both sides of the economic system, registered and hidden, in an autonomous way and interacting between them, from the perspective of developed countries. This develops a line of research that relies on the definition of a function of cost-benefit, little used in academic literature, trying to draw any conclusion on the convergent or divergent dynamics of both, on a widespread basis. And here a function containing the different benefits that, might be expected, dipping subjects obtain from all or part of its business activity, as well as costs arising from this (economic, criminal or other nature) is built to identify the dynamics of both sectors at different stages of the cycle. The outcome is very difficult to evaluate quantitatively and it defines the economic incentive for breaching the barrier of the formality or regularity at each point in time and according to the situation. This function involves certain facts assessable in monetary form, and other difficult to estimate, but that, no doubt, contributes to define the profile of the transgression to the informal economy, such as the moral pressure of the social and economic environment in which the offender lives or the intensity of auditing for compliance with the rules made by the tax, labour and other authorities, etc. And, finally it comes to an empirical estimate that allows us to compare, through an estimated model of structural equations similar to the one developed by the Austrian Professor Schneider, the dynamics of the hidden sector of the economy in major European Union countries in the last decade, and it also allow us to observe the dissimilar behaviour in times of expansion and in moments of recession of the world economy. After that analysis, it can be observed a counter-cyclical behaviour of the underground economy. The direction of the relationship of the hidden economy with the economic growth, in principle reverse - which confirm its counter-cyclical nature - and the intensity of such a relationship are variables in the comparative analysis among countries, depending the outcome in each country on their economic, institutional and cultural characteristics. Such a conclusion updates some of the most relevant work carried out in the field of estimation of the underground economy, at the international level. And in spite of this, it is noted the low contribution of the economy submerged to the dynamics of growth of the whole economic system.
underground economy
economic cycles
fiscal fraud
cost-benefit analysis
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