What is Hidden in the Hidden Economy of Pakistan? Size, Causes, Issues, and Implications

There is a worldwide contemporary debate about the role of the hidden economy in achieving the goal of sustained and inclusive economic growth and development, especially in the context of its spillover effects on the formal economy. For this purpose, policy-makers and academicians have made concerted efforts to estimate the size of the hidden economy and to analyse its causes, issues, and implications for key macroeconomic variables. However, there is a consensus among the policy-makers that a better macroeconomic policy formulation and its true implementation are subject to proper management of the associated issues of the hidden economy with suitable policy measures. In Pakistan, it is generally assumed that the hidden economy contributes about 30 percent to 50 percent to the overall GDP. The study investigates the potential determinants of the hidden economy and various interrelated socio-economic issues in the perspective of achieving the national goal of inclusive growth and development. Five statistical and structural modelling approaches are used to estimate the size of the hidden economy and to analyse the characteristic nature of its growth over time: the simple monetary approach, the modified monetary approach using dynamic ordinary least squares (DOLS), the multiple-indicators multiple-causes (MIMIC) approach, the electricity consumption approach, and the labour market survey approach. Policy implications are viewed in the context of the 18th Amendment and the 7th NFC Award in Pakistan.