Institutional quality and the shadow economy in Africa: Effect and transmission channels

Abstract

The present work investigates the effect of institutional quality on Africa's underground economy, as well as the mechanisms that modulate this effect. Considering cross-sectional dependency between panels, this study considers data of 41 African countries from the period 1996 to 2017 and the system generalized method of moment is used. The results of this investigation propose that institutional quality has a considerable detrimental impact on Africa's underground economy. The interactive effect findings reveal that modulating institutional quality through natural resource rents and trade has an adverse net effect on the size of Africa's shadow economy up to the threshold values of 37.14843 for natural resource rents (% GDP) and 40.55319 for trade (% GDP), after which the negative effect is nullified. Policy implications are discussed.