Title: Economic freedom and financial development: do they reduce the shadow economy? A case study of Southeast Asian countries

Authors: Buu Kiem Dang

Addresses: Faculty of Finance and Accounting, Saigon University, 273 An Duong Vuong Street, Ward 3, District 5, Ho Chi Minh City, Vietnam

Abstract: This study aims to assess the impact of economic freedom, financial development, and various macroeconomic factors on the scale of the shadow economy. The research sample includes ten countries in the Southeast Asian region (excluding Timor-Leste) for the period from 1995 to 2018. The author employs various estimation methods on panel data, including the fixed effect model, Driscoll and Kraay estimation, and two-step system GMM. The results indicate that economic freedom and financial development play significant roles in reducing the size of the shadow economy. This study suggests that: 1) governments should consider improving economic freedom, particularly through substantial enhancements in trade freedom; 2) governments need to implement more measures to facilitate access to credit for businesses and individuals in the private sector; 3) governments should maintain political stability in a stable and robust manner to contribute to reducing the size of the shadow economy.

Keywords: economic freedom; trade freedom; financial development; shadow economy; Southeast Asian; political stability; credit for businesses; Driscoll and Kraay estimation; system GMM; fixed effect model; FEM.

DOI: 10.1504/IJSE.2025.147190

International Journal of Sustainable Economy, 2025 Vol.17 No.3, pp.255 - 275

Received: 06 Dec 2023
Accepted: 07 Mar 2024
Published online: 11 Jul 2025 *

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