The impact of conflicts on shadow economy: evidence from Tunisia and the Arab Spring

While the effects of conflicts on formal economy have been extensively studied, how conflicts impact shadow economy is not well understood. This raises a concern that estimates of the economic consequences of conflicts may be incomplete. We employ synthetic control method to estimate the effect of the Arab Spring on Tunisia’s shadow economy. We find evidence that conflicts mitigate the decline of the shadow economy. Estimates indicate that the Arab Spring causes Tunisia’s shadow economy to be 6.617% (of GDP) larger than it would have been without the event, and this positive effect lasts for eight years or even longer after the onset of the conflict. The demonstrated resilience of the shadow economy highlights the imperative for post-conflict economic policies to fully account for informal dynamics to ensure more comprehensive and effective recovery.