Using information from all International Monetary Fund conditionality programmes from 1990 to 2018, we implement a dynamic Augmented Inverse Probability Weighting Regression Adjustment approach to enquire whether public-sector employment retrenchment may be incompatible with the goal of shrinking the informal economy. The estimated effect 5 years after the policy intervention indicates an increase in the share of the shadow economy to GDP by about 1.3 percentage points. More importantly, this change involves a sizable reallocation of private economic activity from its formal to its informal part; that is, the size of the formal private sector relative to the size of the informal sector decreases by seven percentage points. We interpret these findings through a two-sector model in which there is interdependence between worker incomes and the allocation of product demand across the formal and informal sectors.

This JOIE symposium features some of the most influential papers presented in the seventh version of the conference on The shadow economy, tax behaviour, and institutions. Accordingly, it brings together contributions from several disciplines and schools of thought in the social sciences and the humanities exploring such issues as the role of formal and informal institutions in understanding the shadow economy, the importance of social aversion in the motivations for tax compliance, and the dual nature of corruption. This introduction lays out the scope of the symposium, summarises the preceding literature on the topic, and provides a brief outline of each contributing article, noting that, although each paper focuses on a different economic and cultural context, they share several elements in common with alternative theories addressing the institutional, psychological, and sociological aspects of tax law compliance and other appropriate behaviours.

This paper reviews work that tests (1) how formal and informal institutions, and especially their interaction, affect participation in the shadow economy in transition countries; and (2) how participating in these shadow economies affects individuals' well-being. The key findings are that a clash of individuals' perceptions of formal institutions with their informal institutions increases involvement in the shadow economy. Conversely, a trustworthy relationship with the government and other individuals makes people more inclined to comply. The importance of their social and institutional context also appears in how individuals' involvement in the shadow economy relates to their well-being. These findings complement insights from the rich literature on tax morale, on the exchange between public institutions and citizens and between culture and institutions more generally. The findings also contribute to the institutional economic literature by empirically showing that: (1) focusing on formal institutions alone, that is strengthening the rule of law, is a necessary but insufficient response to the shadow economy; (2) taking informal institutions, such as individuals' trust and tax morale, into account is of equal importance; and (3) most importantly, formal and informal institutions go hand in hand, and their interaction should be an essential part of the new institutional perspective.

The ambiguous phenomenon of corruption has long been the cause of great theoretical debate in economics. By using Structural Equation Modelling, with the two types of corruption as a latent variable, this paper employs causal and indicative variables to the Latin American region to test for rent seeking and systemic corruption during 1980–2018. The findings provide evidence for two types of corruption, one generated by greed, and the other a solution to market failures. Such results support the view that corruption encompasses a complex set of social behaviours that may require a stronger definitional approach.

We build an open-economy dynamic stochastic general equilibrium (DSGE) model that allows us to: (i) derive a time series for labor informality in Brazil spanning the period 2004–2018, whose evolution is consistent with the behavior of the main series provided by Pesquisa Nacional por Amostra de Domicílios (PNAD); (ii) run dynamic simulations showing that, in the presence of a large informal labor market (around 50% of the total labor force), expenditure-cutting measures lead, at worst, to mild short-run recessions in the formal sector and are likely to foster public debt sustainability. Likewise, adjustments through some kinds of distortionary taxation, mainly the corporate tax, and to a lesser extent, the consumption tax, also seem to improve both public debt dynamics and fiscal collection without a significant cost in terms of output. Thus, in countries with large informal economies experiencing fiscal woes, expenditure-based consolidations, as well as some sorts of tax-based adjustments, should be relied upon.

Since the opening of the Sino-Burmese border trade in 1988, the movement of goods and people from both sides has increased rapidly. In 2011, China became Burma's largest trading partner and over half the total volume of goods was accrued in cross-border trade via Yunnan. However, national figures on import-export volumes are derived solely from legal flows, while contraband is largely overlooked. To date, academic studies on contraband have remained insufficient, partly due to the difficulty accessing Burmese border areas, and partly due to the mere challenges in obtaining information about smuggling from those who engage in such activity. This paper, based on multiple fieldwork sites over several years, examines a particular contraband – the smuggling of Chinese motorcycles to Burma on the ‘new’ Burma Road. This shadow economy thrived between 2000 and 2014. While highlighting its economic rationality beyond state control, I attempt to make diachronic and synchronic comparisons by engaging with dialogues within the historical trading mechanism of the mule convoys in the region and also with theories of shadow economies generated from contemporary case studies in other parts of the world. I argue that the formation of this shadow economy is not haphazard but adheres to the ethos of the mule caravan trade, predicated on local knowledge and social networks.