Estimating the Size of Shadow Economy in Amhara Region, Ethiopia

Abstract Stable and sustainable economic growth depends on an effective domestic resource mobilisation strategy. Ethiopia’s tax share of gdp is relatively low. One possible explanation for such a low tax-to-gdp ratio is the existence of a substantial shadow economy. There is proof that the shadow economy is extremely prevalent in Ethiopia. Despite a few attempts, Ethiopia’s shadow economy has not been extensively examined. There are three ways to estimate the size of the shadow economy: the direct, indirect and model approaches. In this study, we estimate the size of the shadow economy using a direct survey method. Our analysis shows that 29.9% of the Amhara region’s gdp comes from the shadow economy. Contentment with the tax legislation and the likelihood of detection are both major predictors of businesses engaging in shadow economic activity. Policymakers should be concerned, since the estimate of the shadow economy in the Amhara region is still relatively high even though it is lower than the national average.