Does economic complexity reduce the size of the shadow economy in African countries?

Following the 2019 World Development Report which essentially advocates for the provision of stable formal jobs for the poor and vulnerable, this paper contributes to the literature by answering the important question of whether economic complexity matters for the shadow economy in Africa. Using data on 24 African countries over the 1996–2016 period, results from the system generalized method of moments suggest that improvements in economic complexity reduce the size of the shadow economy in African countries. Moreover, governance and economic growth are identified as channels through which economic complexity reduces the rate of shadow activities in the region. Furthermore, results from quantile regression reveal that countries with high size of informal sector located at the 90th percentile are more likely to experience greater impacts of economic complexity than others. The findings are consistent after a battery of robustness checks (inclusion of additional control variables, the use of alternative proxies of economic complexity, and shadow economy). Based on these findings, economic complexity should be promoted for policies aiming to reduce the size of the shadow economy in Africa since the sophistication of production leads to productivity growth and offers better opportunities in the formal sector.