Crime and the Underground Economy in Malaysia:

The underground economy (UE) also known as the shadow economy is a phenomenon known throughout the world. The growth of the UE is a matter of increasing concern, at least, throughout the developed nations. Researchers have recognized that the underground economy and crime are linked. Studies on the US, Canada and the transition economies indicate that crime and the shadow economy are facts of live. Given the important implication of UE, in this study, we use fuzzy set theory and fuzzy logic to construct an annual time-series for the (unobservable) Malaysia‟s UE over the period 1973-2003. Two input variables are used-the tax burden and government regulation. The resulting UE time-series is then tested for long-run relationship with the crime rate in Malaysia. Using the vector error-correction model, we are able to show that underground economy Granger causes the criminal activity in Malaysia. One policy implication from this study is that the government of Malaysia must take proactive measures to curtail the development of the underground economy, for example, policies to attract unofficial activities back to the official sector.