# **Appendix 2. Definitions and Sources of Variables Used in Regression Analysis**

|**Variable**|**Definition and Construction**|**Source**|
|---|---|---|
|Schneider Shadow<br>Economy index|Estimated shadow economy as the percentage of official GDP. Average of 2001-2002 by<br>country.|Schneider (2004).|
|Heritage Foundation<br>Informal Market index|An index ranging 1 to 5 with higher values indicating more informal market activity. The<br>scores and criteria are: (i) Very Low: Country has a free-market economy with informal<br>market in such things as drugs and weapons (score is 1); (ii) Low: Country may have<br>some informal market involvement in labor or pirating of intellectual property (score is<br>2); (iii) Moderate: Country may have some informal market activities in labor,<br>agriculture, and transportation, and moderate levels of intellectual property piracy (score<br>is 3); (iv) High: Country may have substantial levels of informal market activity in such<br>areas as labor, pirated intellectual property, and smuggled consumer goods, and in such<br>services as transportation, electricity, and telecommunications (score is 4); and (v) Very<br>High: Country’s informal market is larger than its formal economy (score is 5). Average<br>of 2000-2005 by country.|Miles, Feulner, and O’Grady (2005).|
|Self Employment|Self employed workers as the percentage of total employment. Country averages but<br>periods to compute the averages vary by country. Average of 1999-2006 by country, but<br>countries in Europe and Central Asia (ECA) are excluded (Loayza and Rigolini 2006).|ILO. Data retrieved from<br>laborsta.ilo.org.|
|Non-contributor to<br>Pension Scheme|Labor force not contributing to a pension scheme as the percentage of total labor force.<br>Average of 1993-2005 by country.|World Development Indicators,<br>various years.|
|Per Capita GDP Growth|Log difference of real GDP per capita (2000 US$).|World Development Indicators,<br>various years.|
|Initial GDP per capita|Real GDP per capita (2000 US$) in 1985, in logs.|World Development Indicators,<br>various years.|
|Initial Government<br>Expenditure|Ratio of general government final consumption expenditure to GDP in 1985.|World Development Indicators,<br>various years.|
|Poverty Headcount<br>index|The fraction of the population with income below a given poverty line. The poverty line<br>is $1 per person a day, converted into local currency using a PPP-adjusted exchange rate.<br>The latest/final year of each country’s poverty spell is used.|Loayza and Raddatz (2006).|
|Initial Gini index|A measure of income inequality ranging 0 to 100 with higher values indicating more<br>inequal income distribution. The initial year of each country’s poverty spell is used.|Loayza and Raddatz (2006).|
|Law and Order|An index ranging 0 to 6 with higher values indicating better governance. Law and Order<br>are assessed separately, with each sub-component comprising 0 to 3 points. Assessment<br>of Law focuses on the legal system, while Order is rated by popular observance of the<br>law. Average of 2000-2005 by country.|ICRG. Data retrieved from<br>www.icrgonline.com.|
|Business Regulatory<br>Freedom|An index ranging 0 to 10 with higher values indicating less regulated. It is composed of<br>following indicators: (i) Price controls: extent to which businesses are free to set their<br>own prices; (ii) Burden of regulation / Administrative Conditions/Entry of New Business;<br>(iii) Time with government bureaucracy: senior management spends a substantial amount<br>of time dealing with government bureaucracy; (iv) Starting a new business: starting a new<br>business is generally easy; and (v) Irregular payments: irregular, additional payments<br>connected with import and export permits, business licenses, exchange controls, tax<br>assessments, police protection, or loan applications are very rare. Average of 2000-2005<br>by country.|Gwartney, Lawson, Sobel, and Leeson<br>(2007), The Fraser Institute. Data<br>retrieved from www.freetheworld.com.|
|Average Years of<br>Secondary Schooling|Average years of secondary schooling in the population aged 15 and over. The most<br>recent score in each country is used, while figures are computed for countries data are not<br>available.|Barro and Lee (1993, 2001); and<br>authors’ calculations.|
|Sociodemographic<br>Factors|Simple average of following three variables: (i) Youth (aged 10-24) population as the<br>percentage of total population; (ii) Rural population as the percentage of total population;<br>and (iii) Agriculture as the percentage of GDP. All three variables are standardized before<br>the average is taken. Average of 2000-2005 by country.|Authors’ calculations with data from<br>World Development Indicators, ILO<br>and UN.|

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