Has the low level of economic growth spurred informal sector activities in Uganda? An empirical analysis

Abstract

Purpose – In this paper, the authors examine how economic growth shapes the shadow economy in the long and short run. Design/methodology/approach – Using annual time series data from Uganda, drawn from various data sources, covering the period from 1991 to 2017, the authors apply the ARDL modeling approach to cointegration. Findings – This paper finds that an increase in economic growth significantly reduces the size of the shadow economy, in both the long and short run, all else equal. However, the long-run relationship between the shadow economy and growth is non-linear. The results suggest that the rise of the shadow economy could partially be attributed to the slow and sluggish rate of economic growth. Practical implications – These findings imply that addressing informality requires addressing underlying factors of underdevelopment since improvements in economic growth also translate into a reduction in the size of the shadow economy in the short and long run. Originality/value – These findings reveal that the low level of economic growth is an issue because it spurs informal sector activities in the short run. However, as the economy improves, it becomes an incentive for individuals to operate in the informal sector. Additionally, tackling shadow activities in the short run could help improve tax revenue collection.