Government Effectiveness, Rule of Law and Informal Economy in Asian Developing Countries

In this article we use government effectiveness and rule of law, affect the informal economy, using Asian country data. We use 37 countries data for 8 years from 2000-2007, that measure governance indices. We find strong support that increase government effectiveness leads to a smaller informal economy. However, the limited number of studies uses cross-sectional country data with a relatively few number of observations, and hardly any paper has investigated governance provides evidence using within country data. The empirical results of this study indicate that in Asian countries, increasing GDP grows and Bureaucracy Quality leads to decrease informal economy. Furthermore, an increase in rule of law decreases the size of the informal economy.