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<p>The present study sheds light on the intricate relationship between economic complexity (EC) and institutional quality, and the effects that this relationship, as well as relevant socio-economic factors, provides to the shadow economy (SE) through the lens of a knowledge-based economy. This is an issue in fastest-growing emerging market countries such as the BRICS (Brazil, Russia, India, China and South Africa) block. As a result, the study aims at investigating the effect of EC, trade freedom (TF), economic freedom (EF), good governance (GG), foreign direct investment (FDI), and GDP growth (GDP) in these countries from 1996 to 2020. Through a Method of Moments Quantile Regression (MMQR) model, the study reveals that the effects of the above co-variates vary across different quantiles of SE. Main findings indicate that TF, EF, FDI, and GDP significantly decrease SE, as opposed to those obtained for EC. BRICS countries should prioritize strengthening institutions, improving fiscal compliance, and building taxpayer trust through simplified and digitized tax systems. Expanding trade and EF, paired with transparent governance and fair enforcement, is critical to encourage formalization. Policy reforms must be adapted to each country’s unique institutional and economic context to effectively reduce informality and support sustainable growth.</p>

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Economic complexity and institutional quality: new insights for the shadow economy in the BRICS block

  • 期刊论文

  • 发表日期：

    2026年2月18日

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  • Salah Uddin Muhammad,
  • Maria Shabir,
  • Caterina De Lucia,
  • Pasquale Pazienza,
  • Ali Kabasakal

摘要

The present study sheds light on the intricate relationship between economic complexity (EC) and institutional quality, and the effects that this relationship, as well as relevant socio-economic factors, provides to the shadow economy (SE) through the lens of a knowledge-based economy. This is an issue in fastest-growing emerging market countries such as the BRICS (Brazil, Russia, India, China and South Africa) block. As a result, the study aims at investigating the effect of EC, trade freedom (TF), economic freedom (EF), good governance (GG), foreign direct investment (FDI), and GDP growth (GDP) in these countries from 1996 to 2020. Through a Method of Moments Quantile Regression (MMQR) model, the study reveals that the effects of the above co-variates vary across different quantiles of SE. Main findings indicate that TF, EF, FDI, and GDP significantly decrease SE, as opposed to those obtained for EC. BRICS countries should prioritize strengthening institutions, improving fiscal compliance, and building taxpayer trust through simplified and digitized tax systems. Expanding trade and EF, paired with transparent governance and fair enforcement, is critical to encourage formalization. Policy reforms must be adapted to each country’s unique institutional and economic context to effectively reduce informality and support sustainable growth.