Analysis of the South African underground economy : an econometric estimation from the currency demand approach

Abstract

The study aimed to investigate the South African underground economy from 2000-2022 by conducting an impact analysis between the selected independent variables and the demand for currency. The study was concerned with increased unlawful and informal economic activity, which has effects of preventing the South African government from receiving prospective tax money. Since the phenomenon of the underground economy cannot be observed directly, the study employed the currency demand approach (CDA) by Tanzi (1983). The study used a time series from the South African Reserve Bank (SARB) for analysis by the EViews 9 statistical package. The study discovered that, in the long-run, an increased tax burden and rising unemployment rates influence the underground economic activities in South Africa. However, an increase in GDP will not reduce underground economic activity in the long-run. An acceleration of the inflation rate acts as a tax, as it negatively affects agents of the underground economy in the short- and long-run. Its long-run effects are not significant. The outcomes showed that the dynamics of the underground economy could matter for economic policymaking purposes. The study contributes to the research gap and knowledge of academia about using underground economy estimates in analysis and policy design.