The Impact of the Illegal Economy on Economic Growth

Document Type : Original Article

Authors
Siamak ShokouhiFard 1
Ali Salmanpour 2
Iraj Lotfi 3
Morad Nasiri Moghanloo 4
1 Postdoctoral in Economics, Young Researchers and Elite Club, Ardabil Branch, Islamic Azad University, Ardabil, Iran.
2 Associate Professor, Department of Economics, Marand Branch, Islamic Azad University, Marand, Iran.
3 PhD Student, Department of Law, Tabriz Branch, Islamic Azad University, Tabriz, Iran.
4 Instructor, Department of Law, Payame Noor University, Tehran, Iran.
10.48300/jfel.2025.505429.1054
Abstract
In a general classification, a country’s economy can be divided into two sectors: legal and illegal. The basis for this division lies in the ability to formally record and report economic activities within a legal framework. The illegal economy encompasses a wide range of activities that are not recognized or approved by society, the judiciary, or government authorities. One of the pressing challenges many countries face today is the growing expansion of the illegal economy and its impact on overall economic performance. According to empirical studies, in some countries, the illegal economy may exert a positive effect on economic growth; however, in most cases, the impact is negative and detrimental. This study aims to evaluate the effects of the illegal economy on economic growth in selected Islamic countries. First, using the currency demand approach, the size of the illegal economy in each country is estimated. Then, by applying panel data analysis over the period 2000–2023, the relationship between the illegal economy and economic growth is examined. The findings indicate that an increase in the size of the illegal economy leads to a decrease in economic growth among the selected countries. Accordingly, it is recommended that these countries take measures such as combating illegal economic activities, implementing population control policies, promoting education and public awareness, and improving conditions to attract foreign investment. Such steps can help reduce corruption and unlawful practices, ultimately fostering stable and sustainable economic growth.
Keywords
Illegal Economy
Legal Economy
Economic Growth
Panel Data
Selected Islamic Countries

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Financial and Economic Law Research
Volume 1, Issue 2
March 2025
Pages 433-464