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Introduction
Since ages, researchers and policymakers have explored several determinants of economic growth. The factors that assist in generating economic growth and those that impede the progress of economic activities are analysed from multiple perspectives using diverse data sets, samples, and methodologies. In this vein, existing literature exhibited several crucial determinants of economic growth, for instance, income [1], employment [2], productivity [3], economic uncertainties [4], international relations [5], foreign trade and exchange [6], financial stability [7], governance indicators [8], etc. Alongside the aforementioned factors, various studies have also investigated additional dynamic determinants of economic growth, for instance, environmental sustainability [9], emissions [10], financial innovations [11], so on and so forth. Recently, the ongoing discourse surrounding the regulation of informal activities, alongside the perspective that such informal activities serve as a buffer for the formal economic system, particularly in developing and transition economies during financial crises, has prompted an examination of the influence of informal activities on economic growth across various income-group countries.
The shadow economy refers to legal economic activities that are intentionally hidden from the formal system to evade taxes, social contributions, and regulatory compliance [12, 13–14]. Several theoretical arguments have developed over time regarding the shadow economy’s positive or negative contribution to economic growth. A strand of literature posits that the shadow economy hinders economic growth by constraining government revenue derived from income taxes, which ultimately hinders government spending [15]. Moreover, studies also conclude that the shadow economy lowers productivity, as evidenced by data from developed nations that exhibit high productivity and a reduced proportion of the shadow economy. Developing and lower-income countries, on the other hand, exhibit lower productivity and a greater prevalence of the shadow economy [16]. In contrast to the above arguments, another strand of literature highlights that the shadow economy positively contributes to economic development by increasing competitiveness and effectiveness in the formal economic system [17]. The literature asserts that a positive correlation between the informal and formal sectors through budgetary policy on expenditure stimulates a positive impact on both the formal and informal sectors [18]. Recently, in light of diverse theoretical arguments, developed countries have taken drastic measures to curb the share of the shadow economy, leading to lower corruption, higher taxable revenues, and confidence in the formal...