Estimating the Size and Dynamics of Informal Economy in the Southern African Development Community (SADC) Countries: A Theoretical and Empirical Approach

This paper uses a two-sector dynamic general equilibrium model that deterministically accounts for the trends among time-series variables to estimate the size of the informal economy for 15 Southern African Development Community (SADC) countries from 1990 to 2019. Among the countries, Mauritius, on average, maintains the smallest informal economy at 23 percent of GDP, followed by South Africa, averaging 25 percent of GDP, while the largest informal economies as a percent of GDP are Zimbabwe and Tanzania at 60.8 percent and 53 percent, respectively. In addition, this paper explores the determinants of this informal economy measure using a panel vector autoregressive model (PVAR), and the nonlinear relationships among dependent variables from the impulse-response functions show that, on average, countries with larger real GDPs, higher levels of control of corruption, higher regulatory barriers, and higher levels of economic freedom have smaller informal economies. While countries with higher tax burdens, on average, exhibit increasing informal economies. Hence, this confirms the dynamics of informality vary across SADC countries, and their governments should relax some restrictions, enforcements, and projections based on the dynamics of the informal sectors.