The Underground Economy and Tax Evasion in Bangladesh: Consequences for Economic Growth
DOI:
https://doi.org/10.48165/sajssh.2026.7305Keywords:
MIMIC, Tax Revenue, Labour Participation Rate, Trade Openness, OLS, WDI.Abstract
The objective of the study was to determine the extent of “tax evasion” and the size of the “underground economy” in Bangladesh, which comprises criminal activities and other actions that endanger the economy and society at large. The study also assessed how the “underground economy” and “tax evasion” impact Bangladesh's economic growth. The “Multiple Indicator Multiple Cause (MIMIC)” model was utilised to approximate the extent of “underground economy” and tax avoidance in Bangladesh, using data from World Development Indicators (WDI), Macrotrends (MT), Tax Foundation (TF) and Bangladesh Bureau of Statistics (BBS) from 1990 to 2023. The analysis indicated that, on average, the underground economy in Bangladesh accounts for around 34% of the country’s official GDP, and that tax evasion stemming from this sector accounts for 10.87% of GDP. Furthermore, the study also found that a negative relationship between the “underground economy”, “tax evasion”, and economic growth in Bangladesh. Therefore, the study recommended that the government ease certain business regulations that force private enterprises to go underground solely because of government involvement. It also suggested creating a favourable business environment by legalising activities that were previously considered underground. Additionally, the study proposed that efforts should be made to formalise individuals involved in the underground economy by ensuring proper documentation and registration, as this could provide job security for some people in the country. Furthermore, through thorough tax audits, the government should improve its mechanisms for identifying instances of tax evasion.
References
Anwar, S., Akbar, R., Akbar, M. W., & Azhar, A. (2017). Measuring the size of underground economy in Pakistan: A microeconomic approach. Journal of Applied Environmental and Biological Sciences, 7(8), 84–93.
Ahamed, S. U. (2016). Tax culture: The Bangladesh perspective. Journal of Bangladesh Studies, 18(2), 56–63.
Christopoulos, D. K. (2003). Does underground economy respond symmetrically to tax changes? Evidence from Greece. Economic Modelling, 20.
Omodero, C. O. (2019). The financial and economic implications of underground economy: The Nigerian perspective. Academic Journal of Interdisciplinary Studies, 8(2), 155–167. https://doi.org/10.2478/ajis-2019-0027
Tanzi, V. (1999). Uses and abuses of estimates of the underground economy. The Economic Journal, 109(456), F338–F347. https://doi.org/10.1111/1468-0297.00437
Schneider, F. (2005). Shadow economies around the world: What do we really know? European Journal of Political Economy, 21(3), 598–642. https://doi.org/10.1016/j.ejpoleco.2004.10.002
Srinivasan, T. N. (1973). Tax evasion: A model. Journal of Public Economics, 2(4), 339–346. https://doi.org/10.1016/0047-2727(73)90024-8
Reza, S. (1989). The black economy in Bangladesh: Some preliminary observations. Savings and Development, 13(1).
Yitzhaki, S. (1974). A note on income tax evasion: A theoretical analysis. Journal of Public Economics, 3. North-Holland Publishing Company.
Giles, D. E. A. (2002). Taxes and the Canadian Underground Economy. Canadian Tax Foundation.
Asiedu, E., & Stengos, T. (2014). An empirical estimation of the underground economy in Ghana. Economics Research International, 2014, 1–14. https://doi.org/10.1155/2014/891237
Rahman, A. F. M. A., & Rahman Khan, A. (2012). Measuring underground economy of Bangladesh: Transaction approach.
Yesmin, B., & H., R. (2003). Measuring the underground economy and its impact on the economy of Pakistan. The Lahore Journal of Economics, 9(2), 93–103.
Nchor, D., & Adamec, V. (2016). Investigating the stability of money demand in Ghana. Procedia – Social and Behavioral Sciences, 220, 288–293. https://doi.org/10.1016/j.sbspro.2016.05.501
Schneider, F., & Enste, D. (2000). Shadow economies: Size, causes, and consequences. Journal of Economic Literature, 38(1), 77–114. https://doi.org/10.1257/jel.38.1.77
Hu, L. T., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling, 6(1), 1–55. https://doi.org/10.1080/10705519909540118
Dell’Anno, R., Gómez-Antonio, M., & Pardo, A. (2007). The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empirical Economics, 33(1), 51–84. https://doi.org/10.1007/s00181-006-0084-3
Nchor, D., Adamec, V., & Kolman, P. (2015). Comparison of shadow economies: The case of Ghana, Nigeria and UK. Mediterranean Journal of Social Sciences. https://doi.org/10.5901/mjss.2016.v7n1p248
Wiafe, P. A., Armah, M., Ahiakpor, F., & Tuffour, K. A. (2024). The underground economy and tax evasion in Ghana: Implications for economic growth. Cogent Economics & Finance, 12(1). https://doi.org/10.1080/23322039.2023.2292918
Reports
Pyle, D. J. (1989). Tax Evasion and the Black Economy.
Mironov, M. (2010). Tax evasion and growth: Evidence from Russia. SSRN. http://ssrn.com/abstract=1571616
Dell’Anno, R., & Schneider, F. (n.d.). The shadow economy of Italy and other OECD countries: What do we know?
Hassan, M., & Schneider, F. (2016). Size and development of the shadow economies of 157 countries worldwide: Updated and new measures from 1999 to 2013.
Schneider, F., & Buehn, A. (2016). Estimating the size of the shadow economy: Methods, problems and open questions.
Crane, S. E., & Nourzad, F. (1986). Inflation and tax evasion: An empirical analysis. The Review of Economics and Statistics, 68(2). https://www.jstor.org/stable/1925500
Bhuiyan, M. F., & Bhuiyan, M. O. F. (n.d.). Estimating the size of the shadow economy: A case study on Bangladesh.
Kabir Hassan, M., & Suk-Yu, J. (2010). A re-examination of the U.S. underground economy: Size, estimation, and policy implications. SSRN. http://ssrn.com/abstract=1705303
Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years? (WP/18/17). International Monetary Fund.
Books
OECD. (2004). OECD Annual Report 2004. OECD Publishing.
Book Chapter
Aigner, D. J., Schneider, F., & Ghosh, D. (2010). Me and my shadow: Estimating the size of the U.S. hidden economy from time series data. In Dynamic Econometric Modeling (pp. 297–334). Cambridge University Press. https://doi.org/10.1017/CBO9780511664342.015
Aigner, D. J., Schneider, F., & Ghosh, D. (1988). Me and my shadow: Estimating the size of the U.S. hidden economy from time series data. In W. A. Barnett, E. R. Berndt, & H. White (Eds.), Dynamic Econometric Modeling.
Kenny, D. A., Kaniskan, B., & McCoach, D. B. (2015). The performance of RMSEA in models with small degrees of freedom. Sociological Methods & Research, 44(3), 486–507. https://doi.org/10.1177/0049124114543236
Downloads
Published
Issue
Section
License
Copyright (c) 2026 South Asian Journal of Social Sciences and Humanities
This work is licensed under a Creative Commons Attribution 4.0 International License.
