The econometric analysis of the underground economy in selected Gulf Cooperation Council (GCC) countries: Saudi Arabia, Qatar, The United Arab Emirates, Kuwait and Oman

The growing expansion of the underground economic activities has become a serious concern to many countries as it is viewed as a challenge to the economies in the world. Using the currency demand approach model, this study embarks on analyzing the underground economy particularly in the estimation of its size., and its related issues such as illegal money and tax evasion in selected Gulf Cooperation Council (GCC) countries; United Arab Emirate, Kuwait, Oman, Saudi Arabia and Qatar. The analysis in the study is based on time-series quarterly data over the period of 1991:Q1 to 2010:Q4 for the UAE, Kuwait and Oman; and annual data for Saudi Arabia and Qatar over the period of 1980-2010. The analysis of data begins with stationarity test using the recent techniques that account for structural break in addition to the traditional unit root test. It follows by the Gregory and Hansen cointegration test in the presence of structural break for long-run estimates based on currency demand function. Also, the General to Specific (GETS) technique is employed to estimate the short-run dynamic error correction model. The results of data analysis indicate that the estimated size of the underground economy to Gross Domestic Product (GDP) for Saudi, Qatar, UAE, Kuwait and Oman are 62.80%, 17.03%, 10.34%, 24.95% and 32.35% respectively. While, the estimated average size of the illegal money to the money outside banks for Saudi, Qatar, UAE, Kuwait and Oman are 18.18%, 26.70%, 59.68%, 59.51% and 49.78% respectively. The findings also indicate that the rate of tax evasion to the official GDP is estimated at an average of 5.15%, 2.12%, 0.63%, 2.82% and 2.92% for Saudi, Qatar, UAE, Kuwait and Oman respectively. Given the empirical results obtained from the research, the governments of GCC should formulate rules and regulations; and economics policy that are able to curb the growing size of the underground economic activities