The Shadow Economy of Armenia: Size, Causes and Consequences

Over the past decade or so the problems caused by the shadow economy have become a major concern for policy makers, researchers, as well as the donor community in Armenia. The shadow economy has had some negative consequences during the past transition period, but it also has played some positive stabilizing role. The paper discusses various factors that have contributed to the development of the shadow economy in Armenia. The main causes for the existence of the shadow economy are argued to be the tight and unfair tax administration and regulations, and the corruption. Many of the shadow activities in Armenia relate to the problem of non-reporting and/or underreporting by business entities. International experience and various methods of estimation of shadow economies are presented in the paper. Two of them, namely currency demand approaches of Tanzi and Gutman, are adopted and used for the estimation of the shadow economy in Armenia for the period of 1994-2004. The findings of the estimation by these two methods suggest that there is a significant amount of economic activities that are not captured by the official statistics. Some policy implications and recommendations are presented at the end of the paper. The views expressed in this Working Paper are those of the author(s) and do not necessaril