POLITICAL REGIME, SHADOW ECONOMY AND INCOME INEQUALITY: Evidence from Pakistan

Tahir MUKHTAR*, Faiz BILQUEES** and Tahmina YASMIN***

There has been growing literature focusing on empirical evaluation of the key determinants of income distribution across the countries for the last three decades. The present study aims to assess the impact of political regime and shadow economy on income inequalities in Pakistan over the period 1975 to 2016. Two estimation techniques, namely, fully modified ordinary least squares (FMOLS) and autoregressive distributive lag (ARDL) model, have been used for estimation purposes. The findings indicate that democratic regimes and shadow economies significantly contribute to the worsening of income inequalities in the country. Furthermore, the results also reveal that democracy reinforces income inequalities promoting the impact of the shadow economy in Pakistan.

Keywords: Income Inequality, Democracy, Shadow Economy, ARDL, FMOLS