Prevalence of the Shadow Economy in Asia: Investigating Major Causes and Mitigation Strategies

ABSTRACT This study examines the determinants of the shadow economy across 35 Asian economies from 1995 to 2020 using an instrumental‐variables quantile regression approach. Unlike previous studies that largely focus on average effects, this analysis explores how the impacts of remittance inflows, economic globalization, financial development, information and communication technology (ICT) diffusion, and governance quality vary across different levels of informality. The findings indicate substantial heterogeneity across conditional quantile distributions. Remittance inflows and economic globalization are positively associated with the size of the shadow economy, with stronger effects observed in economies characterized by relatively high levels of informality. In contrast, the level of financial development is consistently associated with lower informality across all quantiles. Improvements in ICT diffusion and governance quality are also linked to reductions in the shadow economy, particularly in economies with larger informal sectors. These results highlight the complex role of global integration, suggesting that its benefits may be undermined in the absence of strong domestic institutions and inclusive financial systems. The study underscores the importance of strengthening financial and digital infrastructure, improving institutional quality, and implementing targeted reforms, such as support for small enterprises and labor market adjustments aligned with global standards, to facilitate the transition from informal to formal economic activity and promote sustainable development.