E-Government and the Shadow Economy: Smaller in Share, Slower to Shrink
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Drawing on 148 countries over nearly two decades, this study re-affirms that e-government development reduces the shadow economy as a share of GDP — but the gain arrives in the long run, and the informal sector does not simply disappear along the way.
Context
Governments across income levels have invested heavily in digital public services on the expectation that online registration, filing, and payment make formality cheaper and evasion harder. Whether that expectation holds up across a wide cross-section of countries — and through which channel it operates — has remained contested.
The question matters for sequencing. If digitalisation lowers informality only after a transition period, then the short-run readings that policymakers see soon after a reform can be misleading, and the case for staying the course rests on evidence about the longer horizon rather than the first few years.
Methods
The analysis covers a panel of 148 countries observed from 2003 to 2020, relating measures of e-government development to the size of the shadow economy. Beyond the average global relationship, the study decomposes e-government into its components to identify which one carries the effect, tests whether the relationship differs across country characteristics — economic uncertainty, government size, the weight of the services sector, and institutional and historical traits such as a socialist history, a civil law system, one major religion, or a strong state history — and applies a panel autoregressive distributed lag estimator to separate short-run from long-run dynamics.
Key findings
The core result holds worldwide: more developed e-government is associated with a smaller shadow economy measured as a percentage of GDP.
The effect appears to run mainly through connectivity rather than through the online-service or human-capital dimensions of e-government.
The reduction is weaker where economic uncertainty is high, where government is large, or where services make up a bigger share of the economy.
Timing matters: e-government may enlarge the shadow economy in the short term, while delivering a significant reduction over the long term.
Keywords:
E-Government
Shadow Economy
Telecommunication Infrastructure
Informal Economy
Panel ARDL
Digital Public Services
Link:
Citation:
Doan, N., Nguyen, C. P., & Nguyen, B. Q. (2025). How e-Government Affects the Shadow Economy: A Further Analysis. International Economic Journal, 39(2), 274-314.
