Globalization and shadow economy: a panel analysis for Africa

Abstract

PurposeThe study's objective is to examine the relevance of globalization in affecting the size of the shadow economy in selected African nations.Design/methodology/approachTo do this, the authors employ the KOF globalization index and implement both static and dynamic common correlated mean group estimators on a panel of 24 African nations from 1995–2017. This technique accommodates the issue of cross-sectional dependence, sample bias and endogenous regressors. Panel threshold analysis is also conducted to establish the nonlinearity between globalization and the shadow economy. To examine the causality between the variables, the study employs Dumitrescu and Hurlin's panel causality test.FindingsThe results show that globalization reduces the size of the shadow economy. The results of the nonlinear analysis suggest a U-shaped relationship. Overall globalization has a threshold impact of 48.837%, economic globalization has 45.615% and political globalization has 66.661% while social globalization has a threshold value of 35.744%. The results of the panel causality show that there is a bidirectional causality between the two variables.Practical implicationsThe results suggest that the government and other relevant authorities need to introduce capital controls and other policy measures to moderate the degree of social, political and cultural diffusion. Appropriate policies should be formulated to monitor the extent of African economic openness to other continents to maximize the gains from globalization.Originality/valueApart from being the first study in the African region that evaluates the relevance of globalization in controlling the shadow economy, it also analyzes the dynamics and threshold analysis between the two variables using advanced panel econometrics which makes the study unique. The study suggests that globalization tools are useful for affecting the size of the shadow economy in Africa. This study provides fresh empirical evidence on the impact of globalization on the shadow economy in the case of Africa.

Impacts of financial development and green trade on the shadow economy: An insight of eagle countries using Bayesian approaches

“…In the case of control variables, we find that GDPgr, FDI, and EXPEND have a strong and negative influence on the magnitude of activities in the shadow economy, whereas the variables URBA, and KOFGI seem to exert a strong positive effect on the growth of activities in the shadow economy. Earlier research identified associations between the shadow economy and similar variables, such as Ajide and Dada [ 15 ], Tran, Tran [ 73 ], Huynh and Nguyen [ 86 ], Ajide and Adeniyi [ 87 ] and Kireenko and Nevzorova [ 88 ].…”

“…(4) Government expenditure (EXPEND), measured as the general government’s final consumption expenditure as a percentage of GDP [ 73 ]. (5) KOF Globalization Index (KOFGI) so as to measure globalization [ 15 , 17 , 77 ]. (6) Social progress is measured by the Human Development Index (HDI) [ 3 , 78 ].…”

“…These covert transactions, not factored into the official Gross Domestic Product (GDP), result in a misrepresentation of macroeconomic indicators crucial for the country’s economic policymaking [ 6 – 8 ]. Researchers have investigated factors affecting the activities of the shadow economy, for example, foreign direct investment [ 9 , 10 ]; institutional quality [ 11 – 14 ]; and globalization [ 15 – 17 ].…”

Trade Based Money Laundering Evidence from Indonesia: Cigarette Import Customs Smuggling and Money Laundering

“…Former research related to the Trade Based Money Laundering that relevant to this research is presented as follows Globalization and shadow economy: a panel analysis for Africa (Ajide & Dada, 2023), research results showed that globalization reduces the size of the shadow economy. The results of the nonlinear analysis showed that there was a U-shaped relationship.…”