Does financial development reduce the size of the informal economy in Sub-Saharan African countries?

Njangang, Henri and Ndeffo Nembot, Luc and Ngameni, Joseph Pasky (2018): Does financial development reduce the size of the informal economy in Sub-Saharan African countries? Published in: African Developoment Review , Vol. 32, No. 3 (September 2020): pp. 375-391.

Abstract

This paper contributes to the understanding of the other neglected effects of financial development by investigating the relationship between financial development and the size of the informal economy using an unbalanced panel data of 41 Sub Saharan African countries over the period 1991-2015. Empirical evidence is based on Ordinary Least Squared, Fixed effects and system Generalized Method of moment. The results show that financial development measured by broad money and domestic credit to private sector have a negative and statistically significant effect on the informal economy. This clearly suggests that financial development reduces the size of the informal economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial development, the informal economy, panel data, SSA
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

References

Abosedra, S., Shahbaz, M., & Nawaz, K., 2016. Modeling causality between financial deepening and poverty reduction in Egypt. Social Indicators Research. 126(3), 955-969.

Adeniyi, O., Oyinlola, A., Omisakin, O., & Egwaikhide, F. O., 2015. Financial development and economic growth in Nigeria: Evidence from threshold modelling. Economic Analysis and Policy. 47, 11-21.

Asteriou, D., & Spanos, K., 2018. The Relationship between Financial Development and Economic Growth during the recent Crisis: Evidence from the EU. Finance Research Letters.

Baiardi, D., & Morana, C., 2018. Financial development and income distribution inequality in the euro area. Economic Modelling. 70, 40-55.

Beck, Thorsten and Hoseini, Mohammad, Informality and Access to Finance: Evidence from India (September 4, 2014). CentER Discussion Paper Series No. 2014-052. Available at SSRN: https://ssrn.com/abstract=2491466 or http://dx.doi.org/10.2139/ssrn.2491466

Berdiev, A. N., & Saunoris, J. W., 2016. Financial development and the shadow economy: A panel VAR analysis. Economic Modelling. 57, 197-207.

Blackburn, K., Bose, N., & Capasso, S., 2012. Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization. 83(2), 243-253.

Bose, N., Capasso, S., & Andreas Wurm, M., 2012. The impact of banking development on the size of shadow economies. Journal of Economic Studies. 39(6), 620-638.

Capasso, S., & Jappelli, T., 2013. Financial development and the underground economy. Journal of Development Economics. 101, 167-178.

Coulibaly, D., 2015. Remittances and financial development in Sub-Saharan African countries: A system approach’, Economic Modelling. 45, 249-258.

Dabla-Norris, E., Gradstein, M., & Inchauste, G., 2008. What causes firms to hide output? The determinants of informality. Journal of development economics. 85(1-2), 1-27.

De Haan, J., & Sturm, J. E., 2017. Finance and income inequality: A review and new evidence. European Journal of Political Economy. 50, 171-195.

Dell’Anno, R., 2016. Analyzing the determinants of the shadow economy with a “separate approach”. An application of the relationship between inequality and the shadow economy. World Development. 84, 342-356.

Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H., 2017. Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling. 39(2), 290-306.

Ferreira, D., Manso, G., & Silva, A. C., 2012. Incentives to innovate and the decision to go public or private. The Review of Financial Studies. 27(1), 256-300.

Goel, R. K., & Nelson, M. A., 2016. Shining a light on the shadows: Identifying robust determinants of the shadow economy. Economic Modelling. 58, 351-364.

Hsu, P. H., Tian, X., & Xu, Y., 2014. Financial development and innovation: Cross-country evidence. Journal of Financial Economics. 112(1), 116-135.

Ibrahim, M., & Alagidede, P., 2017. Nonlinearities in financial development–economic growth nexus: Evidence from sub-Saharan Africa. Research in International Business and Finance.

Jauch, S., & Watzka, S., 2016. Financial development and income inequality: a panel data approach. Empirical Economics. 51(1), 291-314.

Joo, D., 2011. Determinants of the Informal Sector and their Effects on the Economy: The Case of Korea. Global Economic Review. 40(1), 21-43.

López, J. J., 2017. Financial frictions and productivity: Evidence from Mexico. The Quarterly Review of Economics and Finance. 66, 294-301.

Medina, L., Jonelis, M. A. W., & Cangul, M., 2017. The informal economy in Sub-Saharan Africa: Size and determinants. International Monetary Fund.

Moretti, L., 2014. Local financial development, socio-institutional environment, and firm productivity: Evidence from Italy. European Journal of Political Economy. 35, 38-51.

Nickell, S., 1981. Biases in dynamic models with fixed effects. Econometrica: Journal of the Econometric Society. 1417-1426.

Uddin, G. S., Shahbaz, M., Arouri, M., & Teulon, F., 2014. Financial development and poverty reduction nexus: A cointegration and causality analysis in Bangladesh. Economic Modelling. 36, 405-412.

Uddin, G. S., Sjö, B., & Shahbaz, M., 2013. The causal nexus between financial development and economic growth in Kenya. Economic Modelling. 35, 701-707.