Financial Deepening and Shadow Economy Transformation in Belt and Road Economies: Pathways to Inclusive Growth

The purpose of this paper is to examine the direction of the connection between financial deepening (FD) and shadow economy in Belt and Road Initiative economies (BRI). The financial deepening is captured via the comprehensive financial development index based on the depth, access, and efficiency of financial institutions. Whereas, the shadow economy is measured via the informal economy. The finding reveals the strong negative impact of inclusive financial development on the shadow economy in BRI countries. The results are consistent across the alternative proxies of financial deepening. These outcomes enrich modernization and inclusion theories and offer recommendations for legislatures who wish to advance the formal structured economic action and decrease informal employment, tax evasion, and unauthorized businesses in BRI countries.