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

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  • Fayssal Ayad

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

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.

Suggested Citation

  • Fayssal Ayad, 2025. "The Jedi path to formal economy: untangling the causal effects of development on informality in Africa," Empirical Economics, Springer, vol. 69(6), pages 3251-3291, December.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:6:d:10.1007_s00181-025-02812-2
    DOI: 10.1007/s00181-025-02812-2
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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