Estimating the underground economy, illegal money and tax evasion in Qatar. Evidence from currency demand function
| Pages | 1048-1064 |
| Date | 07 October 2019 |
| DOI | https://doi.org/10.1108/JFC-05-2018-0050 |
| Published date | 07 October 2019 |
| Author | Awadh Ahmed Mohammed Gamal,Jauhari Dahalan,K. Kuperan Viswanathan |
Estimating the underground
economy, illegal money and tax
evasion in Qatar
Evidence from currency demand function
Awadh Ahmed Mohammed Gamal
Department of Economics, Faculty of Management and Economics,
Sultan Idris Education University (UPSI), Tanjong Malim, Perak, Malaysia and
Othman Yeop Abdullah Graduate School of Business, Universti Utara Malaysia,
Sintok, Kedah, Malaysia
Jauhari Dahalan
School of Business, Universiti Kuala Lumpur, Malaysia, Wilayah Persekutuan,
Kuala Lumpur, Malaysia, and
K. Kuperan Viswanathan
Othman Yeop Abdullah Graduate School of Business, Universti Utara Malaysia,
Sintok Kedah, Malaysia
Abstract
Purpose –Up to now a country-specific study on Qatar with respect to underground economy, illegal
money and tax evasion has not been undertaken.This paper aims to contribute by separately estimating the
magnitude of the underground economy in Qatar from 1980 to 2010 using adjusted currency demand
function.
Design/methodology/approach –The study uses the Zivot–Andrewsunit root test for the stationarity
analysis and applies the Gregory and Hansen long run cointegrating technique for estimating the
underground economybased on the latest form of the currency demand function model. While the general to
specific techniqueis used to estimate the short run errorcorrection model.
Findings –The results show that the average size of the underground economy in Qatar is about 17.03
per cent of the officialgrossdomesticproducts(GDPs).Theaverage level of tax evasion as a per cent of
the total non-oil tax revenues is estimated at around 16.50 per cent and is about 2.12 per cent of the
official GDP. The average level of illegal money to the total money from banking sector is estimated at
26.70 per cent.
Originality/value –This study is the first to separately estimatethe extent of the underground economy,
illegal currency and tax evasion in Qatar. It overcomes the methodological errors and spurious estimation
problems encounteredin the previous studies that includedQatar with other countries based on cross-country
data without taking into consideration the economic differencesbetween countries. The authors believe that
the findings may help the governmentof Qatar to re-formulate its economic policies, thus,enabling it to curb
the growing undergroundeconomic activities.
Keywords Underground economy, Illegal money, Tax evasion, Currency demand function model
Paper type Research paper
JEL classification –E26, H26, E41
JFC
26,4
1048
Journalof Financial Crime
Vol.26 No. 4, 2019
pp. 1048-1064
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2018-0050
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
1. Introduction
The phenomenon of the underground economy is seen as both distressing and desirable by
policymakers in many countries of the world. While some countries are facing the negative
effects of the underground economy, other countries are using it to achieve their political
goals. The positive and negative effectsof the underground economy on the macroeconomic
policy variables and the interventions of politicians in influencing the economic policy
decisions are important for understanding this phenomenon (Trebicka, 2014). The
magnitude of the activities of the underground economy (legal and illegal) differs from
country to country (Asiedu and Stengos, 2014;Putninšand Sauka, 2011).
Although the studies on the undergroundeconomy have received considerable attention
among the economists very few have been carried out for less-developed countries or
emerging economies (Torgler and Schneider, 2009;Schneider, 2006;Feld and Schneider,
2010;Dreher and Schneider,2010;Schneider, Buehn and Montenegro, 2010).
The countries of the Gulf Cooperation Council (GCC), which is the focus here are
classified as high income and important in the global energy market in terms of oil
production and exportation. Nevertheless, studies on the underground economy in these
countries are still lacking.
Qatar, a member of the GCC countries is experiencing high growth of the underground
economy. Financial restrictions for sending money out of the country by the foreign workers
contribute to the use of illegal means to send their money to their home countries (Naufal and
Termos, 2010). Foreign workers in Qatar are not allowed to transfer money that exceeds their
total salaries received for a period of six months (Shah, 2013)[1]. The tight regulations imposed
on the foreigners in Qatar have forced them to use relatives and friends or unlicensed financial
intermediaries to send money home (Shah, 2009;Naufal and Vargas-Silva, 2010).
The illegal transfers of money from the country to abroad are predominantly practiced
among illegal workers. By resorting to illegalchannels, they avoid paying taxes and higher
processing fees (Naufal and Vargas-Silva, 2010). Specifically, Qatar had a big number of
foreign workers who constituted,on average, 86.5 per cent of its national population in 2010
and they have been working for many years there. However, the foreign workers had no
right to citizenship; they are not allowed to access freely the official financial institutions.
With respect to this situation,it is rational to assume that illegal outflow of money mirrored
predominantly the needfor people to increase their use of cash. Illegal outflow is also used to
settle transactions or to hold and send money back to their home countries. Much of these
financial transactionsare largely done illegally.
Applying the multiple indicators,multiple cause’s model, which is based on the currency
demand approach, Schneider et al. (2010) found that the weighted average volume of the
underground economy (as a per cent of official GDP) in Qatar was 14.4 per cent. The
estimation is consideredas weak and biased because of the assumption of the equal velocity
of money in both underground and formal economies (Ahumada, Alvaredo and Canavese,
2009). Therefore, the main drawback of the study is that the estimated coefficients are
biased and unreliable. In the same vein, the estimatedvalues may bring about a meaningful
understanding of the actual phenomenonof the underground economy in Qatar.
So far, a country-specific study on Qatar per say with respect to the underground
economy’s phenomenon behind tax evasion and illegal money has never been conducted
before. By using the adjusted currency demand approach used by Ahumada et al. (2007),
this study aims to separately measure the extent of the underground economic activities
behind tax evasion through a behavioral pattern of financial variable, namely, the tax
burden, which is measured by aggregate non-oil tax revenues, as well as the illegal money
that are used to perform illegal economic transactions. This study overcomes the
Currency
demand
function
1049
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