Munich Personal RePEc Archive

The impact of the shadow economy on aid and economic development nexus in Egypt

Hassan, Mai (2017): The impact of the shadow economy on aid and economic development nexus in Egypt.

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Abstract

Egypt suffers from low growth rates, increasing unemployment, poverty and a persistent shadow economy. Yet, Egypt is among the top 10 recipients of aid to promote economic development. Given this controversy, the purpose of this study is to examine the impact of the shadow economy on economic development and on aid effectiveness in Egypt from 1976 to 2013. There is a limited number of studies focusing on aid-development nexus for the case of Egypt which are inconclusive of the main channels that influence this nexus. Therefore, this paper adds to the literature by intersecting the shadow economy as an indirect channel affecting the aid-development nexus in Egypt. To this end, the fully modified OLS methodology is applied. The results indicate that the shadow economy has a negative impact on economic development and a diminishing effect on aid effectiveness. Because the effect of a change in aid on income is conditional on the size of the shadow economy in Egypt, it is important to calculate the marginal effect of aid on income for different values of the shadow economy. Based on the calculation of the marginal effect, one can conclude that the effect of aid on income is reversed given the presence of the shadow economy. The persistent existence of the shadow economy poses a major challenge for policy makers due its depressing effect on economic development and on aid effectiveness.

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