This study attempts to estimate the share of Sri Lankan shadow economic
activities as a percentage of official estimates, while revolving the wheel of
non-clarified zones and market functions through overstepping the
traditional official estimates. The methodology involves the estimation of
structural models to analyse a set of causes of the shadow economy and its
influence upon a series of indicators. The study introduces three Multiple
Indicator Multiple Cause (MIMIC) models namely MIMIC 5-1-2a, MIMIC 4-
1-2b and MIMIC 3-1-3a. The benchmark calculations for each model derives
a series of average values for the Sri Lankan shadow economy (SE) in the
period from 1990 to2012. Estimated data in model MIMIC 5-1-2a suggests
to evidence that the average size of shadow economy in the country is ranging
between 91% and 32% in the period from 1990 to 2012 with a decreasing
trend. By contrast, calculations for MIMIC 4-1-2b and MIMIC 3-1-3a
demonstrate a size of 14% and 52% with an increasing trend respectively.
In-depth analysis further reveals the facts that effect the share of tax on goods
and services to the government revenue and the level of public employments
tend to undermine the increasing pattern of shadow economy. Since the
unemployment rate and private employment is playing a charismatic role in
the economy, shadow economy tends to increase. Eradicating the workplace
enforcement crisis and underemployment issues may hinder the increasing
pattern. The results from re-examination of Okun’s law supports for the idea
that, less interdependence of the growth of shadow economy and official
economy and a parallel growth with shifting stages in market functions.