Abstract:
The informal economy phenomenon has been on the discussion table since the early
1970s. In recent years, however, the informal economy has come under attack. The
main criticism is that a large informal economy worsens human development (health
(longevity), education, and income), distorts governance frameworks, and thwarts
efforts toward achieving inclusive growth. These concerns outweigh any advantages it
offers as a safety net for the poor. Consequently, one of the targets of Sustainable
Development Goals (SDG 8.3) is to promote the formalisation of the informal
economy through the promotion of the decent work agenda.
Therefore, this study attempts to investigate the claims and counterclaims of the
association between the informal economy, human development, and governance using
panel data of 32 out of 54 African countries from 2000 to 2017. The study was
conducted under the lenses of modernisation, institutional, structuralist and neoliberal
theories. Four panel estimation regression models were estimated, including multiple
imputation techniques, moderated hicrarchical analysis, two-step system generalised
method of moments (SGMM), and the pooled mean group (PM G). The study relied on
data from the World Development Indicators and the W orIdwide Governance Indicators
from W orId Bank (2019).
Based on the regression analysis, the study found that:
1. Human development has a long-tun negative causality impact on the size of the
informal economy at the 1 % significance level, ceteris paribus.
2. Governance also has a long-run negative causality impact on the Informal
economy at the 1 % significance level, ceteris paribus. ,
3. The interaction of human development and governance has a negative joint
causality impact on the size of the informal economy at the 1 % significance
level, in the long run, ceteris paribus.
Therefore, human development and governance can be used as policy variables to
reduce the 'size of the informal economy in Africa. By implication, health (longevity),
education income (command over resources), and governance are instruments that can
be used to minimise the size of the informal economy in Africa. In terms of policy and
development practice implications, African countries can reduce the size of the informal
economy by:
• Making the education system more inclusive, high-quality, and efficient,
• Making health care more accessible, of a higher quality and more efficient,
• Making income-generating opportunities (command over resources) more
inclusive and sustainable,
• Institutionalising public participation in local and national governance,
• Formulating and delivering' a fornlalisation strategy guided by recommendation,
2015 (No. 204) and based on the four pillars of decent work.
