Quantifying the Malaysian shadow economy and analysing its impact on the official economy of Malaysia

Amer Amera Mohammed Ahmed

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Type :	Thesis
Subject :	HF Commerce
Main Author :	Amer Amera Mohammed Ahmed
Title :	Quantifying the Malaysian shadow economy and analysing its impact on the official economy of Malaysia
Hits :	21

Place of Production :	Tanjong Malim
Publisher :	Fakulti Pengurusan dan Ekonomi
Year of Publication :	2025
Corporate Name :	Perpustakaan Tuanku Bainun
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Abstract : Perpustakaan Tuanku Bainun

The primary aim of this study is to assess the magnitude of the shadow economy (SE) in Malaysia through the lens of public expenditure during the period from 1970 to 2022, employing the modified currency demand approach introduced by Pickhardt and Sarda (2006). Using the autoregressive distributed lag (ARDL) technique to estimate the Currency Demand Function Model (CDFM), the findings reveal that the SE accounts for an average of 24.225 percent of Malaysia_s official GDP over the study period, with its size ranging between 22.435 percent and 25.741 percent. Moreover, the application of the non-linear ARDL technique highlights that both positive and negative changes in the SE are positively linked to economic growth in the short and long term. However, the long-term effects of positive SE shocks on economic growth are found to be more significant compared to the impacts of negative shocks. Additionally, the results establish a _U-shaped_ relationship between public expenditure (PE) and the SE, whereby an increase in SE initially reduces PE up to a trough (estimated at RM454.589 billion of PE and RM68.167 billion of SE), after which further SE growth corresponds with an increase in PE levels. The Toda-Yamamoto causality test further uncovers a unidirectional causal link running from SE to financial development, inflation, and economic uncertainty, with no evidence of reverse causality. Additionally, a unidirectional relationship is observed between monetary uncertainty and SE, while a bidirectional causal relationship exists between SE and urban population growth. Based on these findings, it is recommended that the government address the underlying drivers of SE, including poverty, unemployment, and income inequality, as well as reduce barriers to participation in the formal economy, such as high taxation and burdensome regulatory requirements. Furthermore, the government is urged to prioritize investments in both human and physical capital to mitigate the growth of the shadow economy._

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