The Jedi path to formal economy: untangling the causal effects of development on informality in Africa

Fayssal Ayad ()
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Fayssal Ayad: National Higher School of Statistics and Applied Economy, Econometrics

Empirical Economics, 2025, vol. 69, issue 6, No 9, 3291 pages

Abstract: Abstract Informality poses significant hurdles, hindering efforts for development in Africa. While it is recognized that informality is negatively associated with development, it is less clear how development is causally impacting informality. This paper aims to isolate the causal effect of development on informality in Africa. Leveraging a dataset on measures of informality as a share of GDP over the period 1995–2018 for African countries, derived from the two-sector dynamic general equilibrium and the multiple indicators-multiple causes models, the empirical strategy for causal identification encompasses a large range of econometric methodologies including, inter alia, instrumental variable regression, Bayesian inference, and causal machine learning. The results suggest: (i) a persistent negative causal impact of development on the size of informality in Africa, confirming that as African countries progress in their development trajectories, levels of informality tend to decline; (ii) the existence of heterogeneous effects across the African nations that significantly shrink the magnitude of the average causal impact of development on informality.

Keywords: Development and informality; Instrumental variable; Double/debiased machine learning; Causal random forests; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C01 C11 C21 C23 C26 O10 O11 O55 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02812-2

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