In terms of ranking, Nepal has 76th largest shadow economy (p.31) among the 120 countries considered by Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010). The size of Nepal’s shadow economy is equal to about 37.5 percent of GDP, according to new estimates in WDR 2011. It is increasing since 2002. The average size of informal economy in South Asia is 34 percent of its GDP.
The latest WDR 2011 notes: “Shadow economies are a near universal phenomenon throughout the world. The shadow economy is commonly defined to refer to all market-based legal production of goods and services that is deliberately concealed from public authorities. The empirical method used in this paper is based on the statistical theory of unobserved variables, which considers multiple causes and indicators of the phenomenon to be measured, i.e. it explicitly considers multiple causes leading to the existence and growth of the shadow economy, as well as the multiple effects of the shadow economy over time. In particular, we use a Multiple Indicators Multiple Causes (MIMIC) model – a particular type of a structural equations model (SEM) – to analyze and estimate the shadow economies of 162 countries around the world. These estimates over the period 1999 to 2006/2007 suggest that shadow economies accounted for as much as 35 percent of official gross domestic product, on average, in 98 developing countries, 38 percent in 21 Eastern European and Central Asian countries, and 18 percent in 25 high-income countries in 2006. The major driving force toward informal economies seems to be high taxes (direct and indirect), combined with labor market regulations, the quality of public goods and services, and the condition of the “formal” economy. Across a broad set of countries, the model suggests that reducing taxes followed by a reduction in fiscal and business regulation will enhance of the appeal of work in the formal sector. However, the relative importance of these driving forces differs significantly across country groups.” [Source for WDR 2011: Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010), Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007, Background paper for the World Bank study of the informal sector in Central, Southern Europe and the Baltic countries (Task number P112988).]