In the Dark or Out of the Shadows? Trade Liberalization and Underground Economies in Sub-Saharan Africa

Abstract

This article contributes to the understanding of other understudied effects of international trade by analyzing its impact on the informal economy in 24 countries in Sub-Saharan Africa (SSA) over the period 2000-2020. This article employs various estimation methods, including ordinary least squares, fixed effects, instrumental variables, and the system generalized method of moments. The results indicate that international trade significantly reduces the size of the SSA's informal economy across various parameters. In addition, the results demonstrate that governance is a mechanism by which international trade reduces the size of the informal economy. Therefore, SSA countries undertake more economic reforms in favor of free trade so that they can not only reap the benefits of globalization but also alleviate their thorny problem of informality.