Regulatory Efficiency and Informal Economy

Abstract

Unregulated activities in the informal sector contribute to governance and institutional challenges, ultimately impacting tax revenue collection. This study examined the role of regulatory efficiency in the effect of the size of the informal economy of tax revenue in West Africa. Panel regression analysis, employing both Fixed Effects and Random Effects models, was used to estimate the relationship in 13 West African Economies between 2011 to 2022, with the Hausman test guiding model selection. The results suggest that the informal economy indicator has a negative and significant effect on tax revenue with an average coefficient of -0.3 at a 5% significant level. Implying that informal economic activities undermine tax collection. Monetary efficiency was found to have a positive and statistically significant impact on tax revenue with an average coefficient of 0.08 at a 5% significant level, while business efficiency and labour efficiency were statistically insignificant. Furthermore, the interaction of monetary efficiency with the size of the informal economy signified a positive effect with a coefficient of 0.005 at a 5% significant level. Among other control variables, the unemployment rate exhibited a statistically significant negative effect, whereas trade openness had a statistically significant positive effect. Given the findings, the study recommends the gradual formalisation of the informal sector and the strengthening and simplifying of the regulatory frameworks by policymakers in this region.