Exploring the nonlinear effect of shadow economies on sustainable development in Africa: does the level of financial market development matter?

Purpose - This study aims to examine the nonlinear threshold effect of shadow economy on sustainable development in Africa while providing additional evidence on how this nonlinear threshold effect play out in economies with high and low developed financial/credit markets. Design/methodology/approach - This study uses 37 African economies between 2009 and 2017 in a dynamic GMM panel model that controls for country, year and technological effects to ensure consistency and reliability of results and findings. Findings - The results reveal that there is an inverted nonlinear U-shape nexus between the size of shadow economy and sustainable development in both short run and long run in Africa and across economies with high and low developed credit/financial market. Also, the threshold points beyond which the size of shadow economies dampens sustainable development is lower for economies with high financial/credit market development and higher in the long run. Practical implications - These results have policy implications and recommendations and suggest that shadow economies can be beneficial to sustainable development particularly when the size of shadow economies are restrained from increasing beyond certain thresholds/levels. Moreso, to restrict the adverse effect of shadow economies on sustainable development, policymakers can rely on developing their financial/credit markets to tame the destructive nature of shadow economies on sustainable development. These results are robust to technological, year/time and country effects. Originality/value - To the best of the author’s knowledge, this study examines for the first in the context of Africa, the nonlinear effect of shadow economies on sustainable development under low and high developed financial markets.