Does natural resource wealth hinder or promote activity of the shadow markets in africa?

Abstract

This paper examines the role of natural resource wealth on shadow economy (SE) for 42 African economies for which these twin phenomena seem prevalent over the period, 1991–2015. Using the dynamic system Generalized Method of Moments, the following salient findings are established. First, the effect of natural resource wealth on shadow economy is found to be mixed across different measures of resource rents. Specifically, the coal rents, natural gas rents and oil rents have magnifying impacts on SE on one hand, while the forest rents, mineral rents as well as the composite natural resource rents act as mitigating tools for SE on the other hand. Second, we also examine the non-linear relationship between natural resource rents and the shadow economy. We find an inverted U-shaped relationship between coal, natural gas, oil rents and SE. The results show varying thresholds around 28%, 2%, and 26% shares of GDP of coal, natural gas, and oil rents respectively below which shadow economy is expanded. However, we find a U-shaped relationship between forest, mineral, composite natural resource rents and shadow economy. The thresholds at which these occur are around 18%, 2%, and 34% shares of GDP for forest, mineral, composite natural resource rents respectively showing that beyond these thresholds resource rents tend to expand the shadow economy. Third, the influential roles of other confounding variables such as the log of per capita GDP, financial development, unemployment, government expenditure, trade openness, and lagged value of the shadow economy have both economic and statistical relevance across the estimated models. On the policy ground, the need to factor in varying impacts of the different measures of natural resource wealth together with their associated threshold values are key to solving the policy syndrome of shadow economy in Africa.