Estimating the shadow economy at the provincial level in Indonesia: A MIMIC model approach
Keywords:
shadow economy; MIMIC model; regulation; tax burden
Abstract
The shadow economy encompasses economic activities that are not recorded in the Gross Domestic Product (GDP), resulting in reporting bias and diminished state revenue. This study estimates the size of the shadow economy across 34 Indonesian provinces from 2015 to 2021 using the Multiple Indicators and Multiple Causes (MIMIC) method. The results indicate that the estimated average shadow economy ranges from 4.73% to 42.64% of the provincial GRDP. Key influencing factors include tax burden, government regulations, regional autonomy, self-employed labor, and economic openness. These findings support policies aimed at reducing the shadow economy through tax efficiency, improved regulations, and enhanced welfare for micro, small, and medium enterprises (MSMEs) backed by local governments.
Keywords: shadow economy; MIMIC model; regulation; tax burden
JEL Classification: E61; E62
References
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[28] Kartiasih, F., Djalal Nachrowi, N., Wisana, I. D. G. K., & Handayani, D. (2023). Inequalities of Indonesia’s regional digital development and its association with socioeconomic characteristics: a spatial and multivariate analysis. Information Technology for Development, 29(2–3), 299–328. https://doi.org/10.1080/02681102.2022.2110556
[29] Kartiasih, F., Nachrowi, N. D., Wisana, I. D. G. K., & Handayani, D. (2023a). Potret Ketimpangan Digital dan Distribusi Pendapatan di Indonesia: Pendekatan Regional Digital Development Index (1st ed.). UI Publishing.
[30] Kartiasih, F., Nachrowi, N. D., Wisana, I. D. G. K., & Handayani, D. (2023b). Towards the quest to reduce income inequality in Indonesia: Is there a synergy between ICT and the informal sector? Cogent Economics and Finance, 11(2). https://doi.org/10.1080/23322039.2023.2241771
[31] Kaufmann, D., & Kaliberda, A. (2016). Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence. In The International Politics of Eurasia: v. 8: Economic Transition in Russia and the New States of Eurasia (pp. 81–120). Routledge. https://doi.org/10.1596/1813-9450-1691
[32] Langfeldt, E. (1982). The unobserved economy in the federal republic of Germany: A preliminary assessment. Vortragsmanuskript Für Die International Conference on the Unobserved Economy, Netherlands Institute for Advanced Study, Wassenaar. https://doi.org/10.1017/cbo9780511571749.010
[33] Lemieux, P. (2007). The underground economy. Causes, extent, approaches. Montreal Economic Institute Research Paper.
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[35] Medina, L., & Schneider, F. (2018). Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, WP/18/17, January 2018. https://doi.org/10.5089/9781484338636.001
[36] Mughal, K. S., & Schneider, F. G. (2018). Shadow Economy in Pakistan: Its Size and Interaction with Official Economy. https://mpra.ub.uni-muenchen.de/87812/
[37] Naylor, R. T. (1995). From underworld to underground: Enterprise crime, “informal
sector” business and the public policy response. Crime, Law and Social Change, 24, 79–150. https://doi.org/10.1007/bf01298379
[38] Nguyen, T. M. H., Nguyen, T. H. G., Vu, T. M. N., & Nguyen, V. D. (2013). Whether or not the informal economy is an engine for poverty alleviation in Vietnam. https://mpra.ub.uni-muenchen.de/48378/
[39] OECD, P. (2002). Measuring the non-observed economy: A handbook. Paris (France) OECD.
[40] O’Neill, D. M. (1983). Growth of the underground economy, 1950-81: Some evidence from the current population survey: a study (Vol. 98). US Government Printing Office.
[41] Rocque, M., Saunoris, J. W., & Marshall, E. C. (2019). Revisiting the Relationship Between the Economy and Crime: The Role of the Shadow Economy. Justice Quarterly, 36(4), 620–655. https://doi.org/10.1080/07418825.2018.1424230
[42] Rothenberg, A. D., Gaduh, A., Burger, N. E., Chazali, C., Tjandraningsih, I., Radikun, R., Sutera, C., & Weilant, S. (2016). Rethinking Indonesia’s Informal Sector. World Development, 80, 96–113. https://doi.org/10.1016/j.worlddev.2015.11.005
[43] Russo, F. F. (2018). Informality: the doorstep of the legal system. Open Economics, 1(1), 49–70. https://doi.org/10.1515/openec-2017-0004
[44] Safuan, S., Habibullah, M. S., & Sugandi, E. A. (2021). Mitigating the shadow economy through financial sector development in Indonesia: some empirical results. Heliyon, 7(12). https://doi.org/10.1016/j.heliyon.2021.e08633
[45] Schneider, F., & Enste, D. H. (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38(1), 77–114. https://doi.org/10.1257/jel.38.1.77
[46] Schneider, M. F., & Enste, D. (2002). Hiding in the shadows: the growth of the underground economy. International Monetary Fund. https://doi.org/10.5089/9781589061538.051
[47] Sibagariang, F. A., Mauboy, L. M., Erviana, R., & Kartiasih, F. (2023). Gambaran Pekerja Informal dan Faktor-Faktor yang Memengaruhinya di Indonesia Tahun 2022. Prosiding Seminar Nasional Official Statistics 2023, Vol.1 2023, 151–161. https://doi.org/10.34123/semnasoffstat.v2023i1.1892
[48] Tafenau, E., Herwartz, H., & Schneider, F. (2010). Regional estimates of the shadow economy in Europe. International Economic Journal, 24(4), 629–636. https://doi.org/10.1080/10168737.2010.526010
[49] Tan, Y.-L., Habibullah, M. S., Kaliappan, S. R., & Radam, A. (2017). Some new estimates of shadow economy for 80 countries using pooled mean group estimator. International Journal of Business and Society, 18(1). https://doi.org/10.33736/ijbs.493.2017
[50] Tanzi, V. (1983). The underground economy in the United States: Annual estimates, 1930-80 (L’économie clandestine aux Etats-Unis: Estimations annuelles, 1930-80)(La" econom\’\ia subterránea" de Estados Unidos: Estimaciones anuales, 1930-80). Staff Papers-International Monetary Fund, 283–305. https://doi.org/10.2307/3867001
[51] Tedds, L. M., & Giles, D. E. A. (2002). Taxes and the Canadian underground economy. Taxes and the Canadian Underground Economy, Toronto: Canadian Tax Foundation. https://ssrn.com/abstract=1002475
[52] Wang, D. H.-M., Lin, J.-Y., & Yu, T. H.-K. (2006). A MIMIC approach to modeling the underground economy in Taiwan. Physica A: Statistical Mechanics and Its Applications, 371(2), 536–542. https://doi.org/10.1016/j.physa.2006.03.060
[53] Williams, C. C. (2005). The undeclared sector, self-employment and public policy. International Journal of Entrepreneurial Behavior & Research, 11(4), 244–257. https://doi.org/10.1108/13552550510603289
[54] Williams, C. C., & Schneider, F. (2016). Measuring the Global Shadow Economy: the prevalence of informal work and labour. Edward Elgar Publishing.
[55] Yoo, T., & Hyun, J. K. (1998). International comparison of the black economy: Empirical evidence using micro-level data. Unpublished Paper, 1930–1980. https://repository.kipf.re.kr/handle/201201/3704
[56] Zellner, A. (1970). Estimation of regression relationships containing unobservable Independent variables. International Economic Review, 441–454. https://doi.org/10.2307/2525323
[2] Bajada, C., & Schneider, F. (2009). Unemployment and the Shadow Economy in the OECD. Revue Économique, 60(5), 1033–1067. https://doi.org/10.3917/reco.605.1033
[3] Berdiev, A. N., & Saunoris, J. W. (2018). Does globalisation affect the shadow economy? The World Economy, 41(1), 222–241. https://doi.org/10.1111/twec.12549
[4] Berdiev, A. N., Saunoris, J. W., & Schneider, F. (2020). Poverty and the shadow economy: The role of governmental institutions. The World Economy, 43(4), 921–947. https://doi.org/10.1111/twec.12917
[5] Blanton, R. G., Early, B., & Peksen, D. (2018). Out of the shadows or into the dark? Economic openness, IMF programs, and the growth of shadow economies. The Review of International Organizations, 13, 309–333. https://doi.org/10.1007/s11558-018-9298-3
[6] Bordignon, M., & Zanardi, A. (1997). Tax evasion in Italy. Giornale Degli Economisti e Annali Di Economia, 169–210. https://www.jstor.org/stable/23248315
[7] Bosch, M., & Maloney, W. F. (2010). Comparative analysis of labor market dynamics using Markov processes: An application to informality. Labour Economics, 17(4), 621–631. https://doi.org/10.1016/j.labeco.2010.01.005
[8] Buehn, A., & Schneider, F. (2013). Shadow Economies in highly developed OECD countries: What are the driving forces? https://doi.org/10.2139/ssrn.2161228
[9] Chen, H., Schneider, F., & Sun, Q. (2020). Measuring the size of the shadow economy in 30 provinces of China over 1995–2016: The MIMIC approach. Pacific Economic Review, 25(3), 427–453. https://doi.org/10.1111/1468-0106.12313
[10] Chong, A., & Gradstein, M. (2004). Inequality, institutions, and informality. https://doi.org/10.18235/0010954
[11] Dell’Anno, R. (2007). The shadow economy in Portugal: An analysis with the MIMIC approach. Journal of Applied Economics, 10(2), 253–277. https://doi.org/10.1080/15140326.2007.12040490
[12] Dell’Anno, R., & Dollery, B. E. (2014). Comparative fiscal illusion: A fiscal illusion index for the European Union. Empirical Economics, 46, 937–960. https://doi.org/10.1007/s00181-013-0701-x
[13] Dell’Anno, R., & Mourao, P. (2012). Fiscal illusion around the world: an analysis using the structural equation approach. Public Finance Review, 40(2), 270–299. https://doi.org/10.1177/1091142111425226
[14] Dobre, I., Alexandru, A. A., & Lepas, O. (2010). The USA shadow economy and the unemployment rate: Granger causality results. Journal of Applied Quantitative Methods, 5(1), 98–104. https://www.jaqm.ro/issues/volume-5,issue-1/8_dobre.php
[15] Eilat, Y., & Zinnes, C. (2002). The shadow economy in transition countries: Friend or foe? A policy perspective. World Development, 30(7), 1233–1254. https://doi.org/10.1016/s0305-750x(02)00036-0
[16] Elgin, C., Oztunali, O., & others. (2012). Shadow economies around the world: model-based estimates. Bogazici University Department of Economics Working Papers, 5(2012), 1–48.
[17] Elgin, C., & Schneider, F. (2016). Shadow economies in OECD Countries: DGE vs. MIMIC approaches. Bogazici Journal, 30(1), 51–75. https://doi.org/10.21773/boun.30.1.3
[18] Elijah, O. A., & Uffort, L. (2007). Comparative analysis of the relationship between poverty and the underground economy in the highly developed, transition, and developing countries. https://mpra.ub.uni-muenchen.de/2054/
[19] Feige, E. L., Alm, J. R., Reuter, P., Portes, A., Witte, A. D., & Freeman, R. B. (1994). The
underground economy. Tax Evasion and Information Distortion. https://www.jstor.org/stable/2983159
[20] Feld, L. P., & Larsen, C. (2009). Undeclared Work in Germany 2001–2007–Impact of Deterrence, Tax Policy, and Social Norms: An Analysis Based on Survey Data. Springer, Berlin. https://doi.org/10.1007/978-3-540-87401-0_9
[21] Feld, L. P., & Schneider, F. (2010). Survey on the shadow economy and undeclared earnings in OECD countries. German Economic Review, 11(2), 109–149. https://doi.org/10.1111/j.1468-0475.2009.00466.x
[22] Gyomai, G., & de Ven, P. (2014). The non-observed economy in the system of national accounts. Statistics Brief, 18(1), 1–12.
[23] Habibullah, M. S., Baharom, A. H., Din, B. H., & Furuoka, F. (2017). Mitigating Shadow Economy Through Dual Banking Sector Development in Malaysia. In Islamic Economies (pp. 41–62). Springer International Publishing. https://doi.org/10.1007/978-3-319-47937-8_4
[24] Hassan, M. K. (2011). The shadow economy of bangladesh: size estimation and policy implications. Transparency International Bangladesh, 1–21.
[25] Igudia, E., Ackrill, R., Coleman, S., & Dobson, C. (2016). Determinants of the informal economy of an emerging economy: a multiple indicator, multiple causes approach. In Int. J. Entrepreneurship and Small Business (Vol. 28, Issue 3). https://doi.org/10.1504/ijesb.2016.076643
[26] Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (1998). Regulatory discretion and the unofficial economy. The American Economic Review, 88(2), 387–392. https://www.jstor.org/stable/116953
[27] Jöreskog, 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. https://doi.org/10.2307/2285946
[28] Kartiasih, F., Djalal Nachrowi, N., Wisana, I. D. G. K., & Handayani, D. (2023). Inequalities of Indonesia’s regional digital development and its association with socioeconomic characteristics: a spatial and multivariate analysis. Information Technology for Development, 29(2–3), 299–328. https://doi.org/10.1080/02681102.2022.2110556
[29] Kartiasih, F., Nachrowi, N. D., Wisana, I. D. G. K., & Handayani, D. (2023a). Potret Ketimpangan Digital dan Distribusi Pendapatan di Indonesia: Pendekatan Regional Digital Development Index (1st ed.). UI Publishing.
[30] Kartiasih, F., Nachrowi, N. D., Wisana, I. D. G. K., & Handayani, D. (2023b). Towards the quest to reduce income inequality in Indonesia: Is there a synergy between ICT and the informal sector? Cogent Economics and Finance, 11(2). https://doi.org/10.1080/23322039.2023.2241771
[31] Kaufmann, D., & Kaliberda, A. (2016). Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence. In The International Politics of Eurasia: v. 8: Economic Transition in Russia and the New States of Eurasia (pp. 81–120). Routledge. https://doi.org/10.1596/1813-9450-1691
[32] Langfeldt, E. (1982). The unobserved economy in the federal republic of Germany: A preliminary assessment. Vortragsmanuskript Für Die International Conference on the Unobserved Economy, Netherlands Institute for Advanced Study, Wassenaar. https://doi.org/10.1017/cbo9780511571749.010
[33] Lemieux, P. (2007). The underground economy. Causes, extent, approaches. Montreal Economic Institute Research Paper.
[34] Mankiw, N. G. (2021). Principles of economics. Cengage Learning.
[35] Medina, L., & Schneider, F. (2018). Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, WP/18/17, January 2018. https://doi.org/10.5089/9781484338636.001
[36] Mughal, K. S., & Schneider, F. G. (2018). Shadow Economy in Pakistan: Its Size and Interaction with Official Economy. https://mpra.ub.uni-muenchen.de/87812/
[37] Naylor, R. T. (1995). From underworld to underground: Enterprise crime, “informal
sector” business and the public policy response. Crime, Law and Social Change, 24, 79–150. https://doi.org/10.1007/bf01298379
[38] Nguyen, T. M. H., Nguyen, T. H. G., Vu, T. M. N., & Nguyen, V. D. (2013). Whether or not the informal economy is an engine for poverty alleviation in Vietnam. https://mpra.ub.uni-muenchen.de/48378/
[39] OECD, P. (2002). Measuring the non-observed economy: A handbook. Paris (France) OECD.
[40] O’Neill, D. M. (1983). Growth of the underground economy, 1950-81: Some evidence from the current population survey: a study (Vol. 98). US Government Printing Office.
[41] Rocque, M., Saunoris, J. W., & Marshall, E. C. (2019). Revisiting the Relationship Between the Economy and Crime: The Role of the Shadow Economy. Justice Quarterly, 36(4), 620–655. https://doi.org/10.1080/07418825.2018.1424230
[42] Rothenberg, A. D., Gaduh, A., Burger, N. E., Chazali, C., Tjandraningsih, I., Radikun, R., Sutera, C., & Weilant, S. (2016). Rethinking Indonesia’s Informal Sector. World Development, 80, 96–113. https://doi.org/10.1016/j.worlddev.2015.11.005
[43] Russo, F. F. (2018). Informality: the doorstep of the legal system. Open Economics, 1(1), 49–70. https://doi.org/10.1515/openec-2017-0004
[44] Safuan, S., Habibullah, M. S., & Sugandi, E. A. (2021). Mitigating the shadow economy through financial sector development in Indonesia: some empirical results. Heliyon, 7(12). https://doi.org/10.1016/j.heliyon.2021.e08633
[45] Schneider, F., & Enste, D. H. (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38(1), 77–114. https://doi.org/10.1257/jel.38.1.77
[46] Schneider, M. F., & Enste, D. (2002). Hiding in the shadows: the growth of the underground economy. International Monetary Fund. https://doi.org/10.5089/9781589061538.051
[47] Sibagariang, F. A., Mauboy, L. M., Erviana, R., & Kartiasih, F. (2023). Gambaran Pekerja Informal dan Faktor-Faktor yang Memengaruhinya di Indonesia Tahun 2022. Prosiding Seminar Nasional Official Statistics 2023, Vol.1 2023, 151–161. https://doi.org/10.34123/semnasoffstat.v2023i1.1892
[48] Tafenau, E., Herwartz, H., & Schneider, F. (2010). Regional estimates of the shadow economy in Europe. International Economic Journal, 24(4), 629–636. https://doi.org/10.1080/10168737.2010.526010
[49] Tan, Y.-L., Habibullah, M. S., Kaliappan, S. R., & Radam, A. (2017). Some new estimates of shadow economy for 80 countries using pooled mean group estimator. International Journal of Business and Society, 18(1). https://doi.org/10.33736/ijbs.493.2017
[50] Tanzi, V. (1983). The underground economy in the United States: Annual estimates, 1930-80 (L’économie clandestine aux Etats-Unis: Estimations annuelles, 1930-80)(La" econom\’\ia subterránea" de Estados Unidos: Estimaciones anuales, 1930-80). Staff Papers-International Monetary Fund, 283–305. https://doi.org/10.2307/3867001
[51] Tedds, L. M., & Giles, D. E. A. (2002). Taxes and the Canadian underground economy. Taxes and the Canadian Underground Economy, Toronto: Canadian Tax Foundation. https://ssrn.com/abstract=1002475
[52] Wang, D. H.-M., Lin, J.-Y., & Yu, T. H.-K. (2006). A MIMIC approach to modeling the underground economy in Taiwan. Physica A: Statistical Mechanics and Its Applications, 371(2), 536–542. https://doi.org/10.1016/j.physa.2006.03.060
[53] Williams, C. C. (2005). The undeclared sector, self-employment and public policy. International Journal of Entrepreneurial Behavior & Research, 11(4), 244–257. https://doi.org/10.1108/13552550510603289
[54] Williams, C. C., & Schneider, F. (2016). Measuring the Global Shadow Economy: the prevalence of informal work and labour. Edward Elgar Publishing.
[55] Yoo, T., & Hyun, J. K. (1998). International comparison of the black economy: Empirical evidence using micro-level data. Unpublished Paper, 1930–1980. https://repository.kipf.re.kr/handle/201201/3704
[56] Zellner, A. (1970). Estimation of regression relationships containing unobservable Independent variables. International Economic Review, 441–454. https://doi.org/10.2307/2525323
Published
2025-04-25
How to Cite
Lukman, R., & Kartiasih, F. (2025). Estimating the shadow economy at the provincial level in Indonesia: A MIMIC model approach. Jurnal Ekonomi Indonesia, 14(1), 54-68. https://doi.org/10.52813/jei.v14i1.561
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Articles
