Shadow Economy and Economic Growth in Romania. Cons and Pros

Shadow economy (SE) represents a complex phenomenon, which is having undoubtedly many negative sides and undesirable implications upon economy and society, but might also have some good effects, offering social self-protection and alternative solutions for unemployment, insufficient consumption and investment in the official economy, etc. Since the attempts to analyze SE based on only one indicator may be misleading, we developed a new synthetic index of SE that includes three relevant indicators: SE measured in euro per inhabitant, SE as percentage of GDP and SE of each EU member state as percentage of the total EU-28 shadow economy. We analyse these three indicators, as well as the synthetic index of SE, for Romania, over 1999-2012. The synthetic index of shadow economy is further introduced into an econometric model in order to assess its impact on the Romania's economic growth. We have tested the links between shadow economy and economic growth in Romania and found a cointegrating relationship, suggesting that SE is consistently related to the official economy and they display similar trends on the long-run.