Modelling the Egyptian Shadow Economy: A MIMIC model and A Currency Demand approach



Abstract. We estimate the size and trend of the Egyptian shadow economy using two of the most commonly used methods: the currency demand approach and the structural equation MIMIC model. To the best of our knowledge, this is the first study to estimate an index of the size of the shadow economy in Egypt during the last four decades (1976 to 2013). We address the long term association between the variables, relax the assumption of multivariate normality and demonstrate different scenarios of constraining the reference variable in the MIMIC model. In addition to the standard explanatory variables used in the literature, we consider variables that are specifically related to the Egyptian economy such as self-employment, agricultural importance and a proxy for institutional quality of democratic institutions. Our results indicate a decreasing trend of the size of the shadow economy, yet it still has a huge weight on the official GDP for a developing country like Egypt leading to some negative externalities and thus hindering the development of the country.

Keywords. Shadow economy of Egypt, MIMIC, CDA.

JEL. C32, H26, I2, O17, P48.


Shadow economy of Egypt; MIMIC; CDA.

Full Text:


Ahumada, H., Alvaredo, F., & Canavese, A. (2007). The monetary method and the size of the shadow economy: A critical assessment. Review of Income and Wealth, 53(2), 363–371. doi. 10.1111/j.1475-4991.2007.00234.x

Alañón, A., & Gómez-Antonio, M. (2005). Estimating the size of the shadow economy in Spain: a structural model with latent variables. Applied Economics, 37(9), 1011–1025. doi. 10.1080/00036840500081788

Alm, J., & Embaye, A. (2013). Using dynamic panel methods to estimate shadow economies around the world, 1984–2006. Public Finance Review, 41(5), 510–543. doi. 10.1177/1091142113482353

Angel-urdinola, D.F., Urdinola, D.F.A., & Tanabe, K. (2012). Micro-Determinants of Informal Employment in The Middle East and North Africa Region, Social Protection and Labour, The World Bank, SP Discussion paper (1201), 48.

Ardizzi, G., Petraglia, C., Piacenza, M., & Turati, G. (2014). Measuring the Underground Economy with the Currency Demand Approach: A Reinterpretation of the Methodology, With an Application to Italy. Review of Income and Wealth, (4), 747–772. doi. 10.1111/roiw.12019

Bajada, C., & Schneider, F. (2005). The shadow economies of the Asia-Pacific. Pacific Economic Review, 10(3), 379–401. doi. 10.1111/j.1468-0106.2005.00280.x

Bollen, K.A. (1989). Structural Equations with Latent Variables. New York, NY: Wiley.

Buehn, A. (2012). The Shadow Economy in German Regions: An Empirical Assessment. German Economic Review, 13(3), 275–290. doi. 10.1111/j.1468-0475.2011.00557.x

Buehn, A., & Schneider, F. (2008). MIMIC Models, Cointegration and Error Correction: An Application to the French Shadow Economy. Forschungsinstitut Zur Zukunft Der Arbeit Institute for the Study of Labor, 33(6), 4-30.

Buehn, A., Farzanegan, M.R. (2013). Impact of Education on the Shadow economy: Institutions matter. Economic Bulletin, 33(3), 2052-2063.

Cagan, P. (1958). The Demand for Currency Relative to the Total Money Supply. Journal of Political Economy, 66(4), 1-33. doi. 10.1086/258056

Caridi, P. & Passerini, P. (2001). The Underground Economy, The Demand for Currency Approach and The Analysis of Discrepancies: Some Recent European Experience. Review of Income and Wealth, 47(2), 239-250. doi. 10.1111/1475-4991.00014

Chaudhuri, K., Schneider, F., & Chattopadhyay, S. (2006). The size and development of the shadow economy: An empirical investigation from states of India. Journal of Development Economics, 80(2), 428–443. doi. 10.1016/j.jdeveco.2005.02.011

Chen, M.A. (2007). Rethinking the Informal Economy Linkages with the Formal Economy and the Formal Regulatory Environment. DESA Working Paper, 1(46), 1–30.

Dell’Anno, R., & Schneider, F. (2009). A Complex Approach to Estimate The Shadow Economy: The Structural Equation Modelling. In Coping with Complexity of Economics, Springer,111-130. doi. 10.1007/978-88-470-1083-3_7

Dell’Anno, R., Gómez-Antonio, M., & Pardo, A. (2007). The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empirical Economics, 33(1), 51-84. doi. 10.1007/s00181-006-0084-3

Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. The Quarterly Journal of Economics, 117(1),1-37. doi. 10.1162/003355302753399436

Farzanegan, M.R. (2009). Illegal trade in the Iranian economy: Evidence from a structural model. European Journal of Political Economy, 25(4), 489–507. doi. 10.1016/j.ejpoleco.2009.02.008

Federation of Economic Development Associations (FEDA) (2009). Policy paper on the Rationale of a Draft Law for Street Vendors.

Feige, E. (1979). How Big is the Irregular Economy?. Challenge,22(1), 5-13. doi. 10.1080/05775132.1979.11470559

Frey, B.S., & Weck-Hanneman, H. (1984). The hidden economy as an “unobserved” variable. European Economic Review, 26(1-2), 33–53. doi. 10.1016/0014-2921(84)90020-5

Gao, S., Mokhtarian, P.L., & Johnston, R. a. (2009). Nonnormality of Data in Structural Equation Models. Transportation Research Record: Journal of the Transportation Research Board, 2082(1), 116–124. doi. 10.3141/2082-14

Gërxhani, K., & Van De Werfhorst, H.G. (2013). The effect of education on informal sector participation in a post-communist country. European Sociological Review, 29(3), 464–476. doi. 10.1093/esr/jcr087

Gutmann, P.M. (1977). The Subterranean Economy. Financial Analysts Journal, 33(6), 25-26+34. doi. 10.2469/faj.v33.n6.26

Hernandez, M.A. (2009). Estimating the size of the hidden economy in Peru: A currency demand approach. Revista de Ciencias Empresariales Y Economia, (8), 85–104.

Hu, L. & Bentler, P.M. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling,6(1), 1-55. doi. 10.1080/10705519909540118

Hu, L., & Bentler, P.M. (1998). Fit indices in covariance structure modeling: Sensitivity to underparameterized model misspecification. Psychological Methods, 3(4), 424–453. doi. 10.1037/1082-989X.3.4.424

Iacobucci, D. (2010). Structural equations modeling: Fit Indices, sample size, and advanced topics. Journal of Consumer Psychology, 20(1), 90–98. doi. 10.1016/j.jcps.2009.09.003

Isachsen, A.J., & Strøm, S. (1985). The size and growth of the hidden economy In Norway. Review of Income and Wealth, 31(1), 21–38. doi.10.1111/j.1475-4991.1985.tb00496.x

Johnson, S.K.., Zoido-Lobaton, P. (1997). Regulatory Discretion and the Unofficiai Economy. American Economic Review Papers and Proceedings, 88(2), 387–393.

Joreskog, K.G., & Goldberger, A.S. (1975). Estimation of a Model with Multiple Indicators and Multiple Causes of a Single Latent Variable. Journal of the American Statistical Association, 70(351a), 631–639. doi. 10.1080/01621459.1975.10482485

Kline, R.B. (2011). Principles and Practice of Structural Equation Modelling. Third Edition. The Guilford Press

Loayza, N.V. (1996). The economics of the informal Sector: a simple model and some empirical evidence from Latin America, Carnegie-Rochester Conference Series on Public Policy,45, 129–162. doi. 10.1016/S0167-2231(96)00021-8

Macias, J.B., & Cazzavillan, G. (2009). The dynamics of parallel economies. Measuring the informal sector in Mexico. Research in Economics, 63(3), 189–199. doi. 10.1016/j.rie.2009.07.004

Macias, J.B., & Cazzavillan, G. (2010). Modeling the informal economy in Mexico: a structural equation approach.Journal of Developing Areas, 44(1), 345-365. doi. 10.1353/jda.0.0077

Nagarajan, K.V. (2013). Egypt’s Political Economy and the Downfall of the Mubarak Regime. International Journal of Humanities and Social Science, 3(10), 22-39.

Petersen, H.G., Thießen, U., & Wohlleben, P. (2010). Shadow Economy, Tax Evasion, and Transfer Fraud – Definition, Measurement, and Data Problems. International Economic Journal, 24(4), 421–441. doi. 10.1080/10168737.2010.525973

Pickhardt, M., & Sarda, J. (2011). The size of the underground economy in Germany: a correction of the record and new evidence from the modified-cash-deposit-ratio approach. European Journal of Law and Economics, 32(1), 143–163. doi. 10.1007/s10657-010-9186-7

Razmi, M.J., Falahi, M.A., & Montazeri, S. (2013). Institutional Quality and Underground Economy of 51 OIC Member Countries. Universal Journal of Management and Social Sciences, 3(2), 1–14.

Satorra, A., & Bentler, P.M. (1994). Corrections to test statistics and standard errors in covariance structure analysis. In Latent Variable Analysis: Applications to Developmental Research, Sage.

Schneider, F. (1986). Estimating the size of the Danish shadow economy using the currency demand approach: An attempt. The Scandinavian Journal of Economics, 88(4), 643–668. doi. 10.2307/3440435

Schneider, F. (2000). Dimensions of the Shadow Economy. Independent Review, 5(1), 81-91.

Schneider, F. (2005). Shadow economies around the world: What do we really know? European Journal of Political Economy, 21(3), 598–642. doi. 10.1016/j.ejpoleco.2004.10.002

Schneider, F. (2010). The influence of public institutions on the shadow economy: An empirical investigation for OECD countries. Review of Law and Economics, 6(3), 441-468. doi. 10.2202/1555-5879.1542

Schneider, F., & Enste, D.H. (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38(1),77-114. doi. 10.1257/jel.38.1.77

Schneider, F., & Enste, D.H. (2013). The Shadow Economy, An International Survey: 2nd Edition. Cambridge University Press.

Schneider, F., & Williams, C.C. (2013). The Shadow Economy. The Institute of Economic Affairs. Edward Elgar.

Schneider, F., Buehn, A., & Montenegro, C.E. (2010). New Estimates for the Shadow Economies all over the World. International Economic Journal, 24(4), 443–461. doi. 10.1080/10168737.2010.525974

Schneider, F., Chaudhuri, K., & Chatterjee, S. (2003). The Size and Development of the Indian Shadow Economy and a Comparison with other 18 Asian Countries: An Empirical Investigation, 43.

Schumacker, R.E., & Lomax, R.G. (2010). A Beginner’s Guide to Structural Equation Modelling. Third Edition. Routledge, UK.

Singh, R. (2009). Does my structural model represent the real phenomenon?: a review of the appropriate use of Structural Equation Modelling (SEM) model fit indices. The Marketing Review, 9(3), 199–212. doi. 10.1362/146934709X467767

Smith, P. (1994). Assessing the size of the underground economy: the statistics canada perspective. Canadian Economic Observer, 28, 13-604.

Solomon, O.H., & Shrestha, S. (2014). Does the Informal Sector Thrive Under Democracy or Autocracy?: The Case of Nepal. The Journal of Developing Areas, 48(3), 245–267. doi. 10.1353/jda.2014.0044

Tafenau, E., Herwartz, H., & Schneider, F. (2010). Regional Estimates of the Shadow Economy in Europe. International Economic Journal, 24(4), 629–636. doi. 10.1080/10168737.2010.526010

Tanzi, V. (1983). The underground economy in the United States: annual estimates, 1930-80. Staff Papers - International Monetary Fund, 31(4), 283–305. doi. 10.2307/3866994

Tanzi, V. (1999). Uses and abuses of estimates of the underground economy. The Economic Journal, 109(456), 338–347.

Tedds, L. (2005). The Underground Economy in Canada. Published in: in Size, Causes and Consequences of the Underground Economy, Chris Bajada and Friedrich Schneider eds., Ashgate Publishing, UK (2005)

Teobaldelli, D., & Schneider, F. (2013). The influence of direct democracy on the shadow economy. Public Choice, 157(3-4), 543–567. doi. 10.1007/s11127-013-0098-2

Torgler, B., & Schneider, F. (2007). Shadow economy, tax morale, governance and institutional quality: a panel analysis, IZA Discussion Paper, No. 2563.

Vuletin, G.J. (2008). Measuring the Informal Economy in Latin America and the Caribbean. IMF Working Papers, No.08/102.

Wedderburn, C., Chiang, E.P., & Rhodd, R. (2012). The informal economy in Jamaica: Is it feasible to tax this sector? Journal of International Business and Cultural Studies, 6, 15-26.

Williams, C.C. (2006). Evaluating the magnitude of the shadow economy: a direct survey approach. Journal of Economic Studies, 33(5), 369–385. doi. 10.1108/01443580610706591

Zellner, A. (1970). Estimation of Regression Relationships Containing Unobservable Independent Variables. International Economic Review, 11(3), 441-454. doi. 10.2307/2525323



  • There are currently no refbacks.


Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE -

ISSN: 2148-8347. Editor :   Secretarial:   Istanbul - Turkey.

Copyright © KSP Journals