Measuring the size and development of the informal economy in the countries of the Balkan peninsula using structural equation modelling approach

A thesis submitted to the University of Bedfordshire in partial fulfilment of the requirements for the degree of Doctor of PhilosophyThis thesis presents estimates and analysis of the informal economy for ten countries in the Balkan Peninsula region. It is the first attempt to study the size and development of the informal economy in these southeastern European countries from 1996 to 2014 using a special case of the Structural Equation modelling, which is the MIMIC model. There is currently a gap in the literature focusing on measuring the size of the informal economy in the Balkan countries especially after social, economic, political and judiciary reforms that the region has undergone. Such reforms are likely to influence the trend of the informal economy, and hence it is important to study the development of the informal economy. Different from existing literature, this research uses policy-driven indicators as well as macroeconomic variables in the model to estimate the size of the informal economy in this part of the world. The estimates indicate that there is a declining trend in the size of the informal economy in most of these countries. The yearly average size of the informal economy in these ten countries started from around 31 percent in 1996 and dropped to around 26 percent in 2014. However, the overall average size of the informal economy in these Balkan countries remains high relative to GDP, and it is just over 30 percent. The results indicate that countries, where the overall average size of the informal economy is found to be the highest as a proportion to their GDP, are FYR Macedonia, Bosnia and Herzegovina, Albania and Turkey with 38.4 percent, 33.3 percent, 33.0 percent, and 32.1 percent, respectively. Countries with the lowest informal economy, on the other hand, are Slovenia and Greece, with 25 percent and 26.9 percent, respectively. The average size of the informal economy in Serbia, Romania, Bulgaria, and Croatia approximates to slightly under or slightly over 30 percent. The analysis also reveals that the key driving causes of the informal economy in these countries are the regulation burden, level of corruption, the dominance of the agriculture sector, degree of urbanisation, macroeconomic developments and the size of the government. This research concludes with some recommendations