The effect of the shadow economy on social development. A comparative study on advanced and least developed countries

Abstract: The shadow economy remains one of the slowdown evidences for achieving economic and social development. An analysis of the extensive literature enables to consider a level of the shadow economy as one of the obstacles of social development. Therefore, the aim of the thesis is to research the effect of the shadow economy on social development and compare magnitudes of the effects among advanced and least developed countries. In line with the purpose, a deductive approach and quantitative research methods are used in the paper. The literature review is focused on a discussion of consequences of the shadow economy which enabled to formulate hypotheses. Four indicators were selected in order to determine the level of social development. All of them characterise social development through changes in individual`s lives instead of changes in public institutions, that is one of contributions of this paper to the existing literature. In order to test the hypotheses, four empirical linear models with interaction terms were presented: with life expectancy, HIV prevalence, under-5 mortality and school enrolment as dependent variables. Estimation of models was based on data for 58 least developed and advanced countries within the course of 39 years period. Conducted empirical analysis proves that the shadow economy has mainly negative effect on social development and this effect is dependent on the level of development of country and it is more adverse for least developed countries then for advanced countries.