Coups d’état and the informal economy

This paper analyzes the effect of coups d'état on the size of the informal economy in a large sample of 98 developing countries observed over the period 1993–2020. Using a matched difference-in-differences approach that combines a two-way fixed effects model with entropy balancing, we find that the occurrence of a coup d'état significantly increases the size of the informal economy. This result is robust across a variety of tests, including event-study analysis, propensity score matching, treatment effect methods based on inverse probability weighting, generalized method of moments estimation, fixed-effects regressions, a falsification test, checks for potential omitted variables, alternative data sources for coups d'état, the exclusion of nonmilitary coups, and accounting for coup d'état spillover effects. Heterogeneity analysis shows that the detrimental effect of coups d'état holds for both successful and failed coups and is influenced by structural factors. Specifically, the effect decreases with higher levels of domestic credit to the private sector, remittances, quality of regulation, and net official development assistance received. Conversely, the effect increases with higher real GDP per capita, democracy, unemployment, oil rents, and income inequality. Higher external debt, lower gross fixed capital formation, and erosion of democracy are the main channels through which coups d'état expand the informal economy in developing countries.