Economic Liberalization in Egypt: a way to reduce of the shadow economy?

Abstract This study examines the relationship between economic liberalization and the size of the shadow economy in Egypt. We use time series data from 1976 to 2013 and show that economic liberalization policies in Egypt have a statistically significant decreasing effect on the size of the shadow economy as a percent of Gross Domestic Product (GDP). This effect is confirmed for both short- and long-term oriented economic liberalization policies. Based on our results, policies which promote trade and economic liberalization can moderate the extension of the shadow economy in Egypt. Therefore, it is suggested to condition international development assistance to Egypt on demonstrable policy actions with respect to economic liberalization.