SIZE AND CAUSES OF INFORMAL ECONOMY IN ETHIOPIA

Abstract

In this paper MIMIC model is applied to study the size and causes of informal economy in Ethiopia and it covered from 1980 to 2016. This study tried to estimate the size of informal economy in Ethiopia and analyze what caused it to exist and expand. Informal economy in Ethiopia is very high and the average size of it is 43.3%. The highest level of informal economy is recorded in 2012 which is 54.54% and the lowest is in 2013 and it is 30.94%. All the cause variables are statistically significant in the short run except interest rate and they have the expected sign. In the long run tax burden, trade openness, unemployment and government final consumption are statistically significant in affecting the informal economy in Ethiopia. Inflation rate and interest rate are not statistically significant in the long run even though they have the expected sign.