Estimating the Effect of Tourism Development on the Informal Economy

Although links between the tourism sector and the informal economy are fairly well documented, this paper is one of the first which provides an in-depth quantitative analysis of how the development of the tourism industry impacts on the size of the shadow economy of a destination at national level. The paper employs time series techniques and annual data from 1960 and 2018 from Turkey. In a first instant the size of the shadow economy is estimated using the electricity consumption method. Then, the effect of tourism development on the size of the shadow economy is assessed using the estimates. The findings show that there is a negative relationship between the two. A one percent increase in international tourism arrivals leads to a 0.21% and 0.316% fall in the size of the shadow economy in the short-run and long-run respectively.