The Impact of Informal Economy on Poverty in Sub‐Saharan Africa. Does Institutional Quality Matter?

Abstract

ABSTRACT The informal economy is often seen as marginalized and thought to aggravate the poverty situations of the agents within the sector. However, in sub–Saharan Africa, the informal economy is a dominant feature which can help reduce poverty, provided the sector is moderated by institutional quality, which is a knowledge gap. The study's novelty lies in the moderating effect of quality of institutions in the informal economy‐poverty debate. The paper uses cross‐country panel data from 41 sub‐Saharan African countries from 2005 to 2019 and the two‐step system generalized method of moments estimation technique. Principally, the results indicate that in both the short and the long run, improvement in the quality of institutions is not only crucial for poverty reduction but is also important in complementing informality to reduce poverty in sub‐Saharan Africa.