Why do Developing nations have a larger Shadow Economy than the 21 advanced nations?



Answer:
Developing nations simply do not have banks on every street corner, and use mostly cash or barter in their transactions.
They also HATE taxation and consider it stealing by government.
Many developing nations have survived for thousands of years with only tribal type governments, and will continue to do so.
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Shadow Economies are by definition just business transactions that occur outside government knowledge (usually through taxation and/or reporting controls.) Almost by definition developing nations have less pervasive control and enforcement structures than developed nations. These things occur hand-in-hand via evolution and maturation. IE, as a country's economy grows, tax base broadens and more revenue is collected. Therefore, the government can spend more on enforcement - bringing more economy out of the shadows. Tax base continues to grow and enforcement continues to increase.

Also, the increased compliance of any group of individuals is more likely to result in compliance by other groups. IE, if I know that my landlord is reporting my rent payments to the government, I'm far less likely to try and operate a business without telling the government I even have one. But if compliance is low for established businesses (IE, the landlord) then the compliance is less likely for newly formed businesses.

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