Informal Economy and Financial Development in West African Economic and Monetary Union Countries (WAEMU): Role of Institutions

Aicha Tiendrebeogo

doi:10.11648/j.jbed.20200503.19

Abstract

Informal economy is highly developed in sub-Saharan African countries, particularly, in West African Economic and Monetary Union Countries (WAEMU). In fact, the size of informal economy has been around 50% of GDP in recent years, despite the efforts made by international institutions (IMF and the African Union (AU)) to contain its development. It should be noted that informality increase has consequences on economy. On the one hand, a thriving informal economy can cause serious difficulties for policymakers because official indicators on unemployment, labor force, income, and consumption are unreliable. A policy based on wrong official indicators may be ineffective or even worse. On the other hand, a large amount of informality is found to be detrimental to economic growth. Notwithstanding these facts, this large size of informality is accompanied by a financial sector that is struggling to develop, despite the various efforts of the authorities in charge of this sector. Added to this is the low quality of public institutions in these countries. Based on these facts, the aims of this research is to analyze the effect of financial development on the development of informality, but also the non-linear relationship between informal economy, financial development and the quality of institutions, in of the West African Economic and Monetary Union countries (WAEMU), over period of 1991 to 2017. For this purpose, pooled mean group (PMG) model is used to analyze the effect of financial development on the informal economy. And for the non-linear analysis, threshold model specification (Panel Threshold Regression: PTR) is used. The results show that for financial development to contribute to reducing the size of the informal economy, the quality of institutions must reach a threshold of 0.575 on a scale of 0 to 1. It also shows that real GDP per capita and education attainment have a negative effect on informality. On the other hand, the unemployment rate, the rate of urbanization and the share of agriculture in GDP have a positive effect on informality.

Highlights

Informal economy is an important component of the economy in developing countries
Despite the efforts made by international institutions (IMF and the African Union (AU)) and those of governments, the size of the informal sector remains very high in developing countries, those of the West African Economic and Monetary Union Countries (WAEMU) [13, 39]
Financial development and the size of the informal economy in the WAEMU zone are moving in the opposite direction

Summary

Introduction

Informal economy is an important component of the economy in developing countries It has become an issue of concern since [26] work on urban economic activities in Ghana and the work of the World Employment Program undertaken by the International Labor Office in the 1970s. It is in this vein that this topic was discussed at the Sixth Ordinary Session of the African Union Commission on Labour and Social Affairs in 2008 in Addis Ababa, Ethiopia. The size of the informal sector represented on average 42.07% of GDP in 2017 for the zone, according to some author [40]. The most important and most often cited are: increased taxes [51, 55] and social security contributions; increased regulation of the formal economy [55, 9], of labor markets; forced reduction of weekly working hours; early retirement; unemployment, etc.; and the growth of the informal economy

Objectives

Methods

Results

Conclusion