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Does digitalization limit the proliferation of the shadow economy in African countries? An in‐depth panel analysis

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  • Emmanuel Umoru Haruna
  • Usman Alhassan
Abstract
We investigate the relationship between digitalization and the shadow economy in 42 African countries using unbalanced panel data from 2003 to 2016. We begin by drawing on modernization theory to hypothesize that digitalization efforts in African economies represent an augmentation of public service delivery as well as a channel through which the size of the continent's informal economic activity might be reduced. We employ the fixed effects estimation technique as its baseline estimator while correcting for potential endogeneity concerns using an instrumental variable two‐stage least squares technique. We show compelling evidence that digitalization is associated with a decrease in the size of the shadow economy in Africa. However, evidence of a larger influence is driven by the availability of telecommunications infrastructure and the expansion of government online services. These findings suggest that policymakers should invest more in digital technology to formalize Africa's hidden economic activity, particularly to fill the post‐COVID‐19 financing gap.

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  • Emmanuel Umoru Haruna & Usman Alhassan, 2022. "Does digitalization limit the proliferation of the shadow economy in African countries? An in‐depth panel analysis," African Development Review, African Development Bank, vol. 34(S1), pages 34-62, July.
    • Handle: RePEc:bla:afrdev:v:34:y:2022:i:s1:p:s34-s62
    DOI: 10.1111/1467-8268.12653
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    Cited by:

    1. Emmanuel U. Haruna, 2023. "The multidimensional effect of financial development on the shadow economy in Africa: A dynamic panel analysis approach," International Economics and Economic Policy, Springer, vol. 20(2), pages 327-365, May.
    2. Awuni, Evans Tindana & Kemmerling, Achim, 2024. "Taking Gerschenkron to the Field: Attitudes towards Digitalization Hopes and Fears about the Future of Work in Ghana," Telecommunications Policy, Elsevier, vol. 48(2).
    3. BRICI Iulia & ACHIM Monica Violeta, 2023. "Does The Digitalization Of Public Services Influence Economic And Financial Crime?," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 18(2), pages 67-85, August.
    4. Olumide O. Olaoye & Mulatu F. Zerihun & Ali Shaddady & Mosab I. Tabash, 2024. "FinTech—A pathway to financial inclusion? Evidence from Southern African Development Community member states," African Development Review, African Development Bank, vol. 36(2), pages 252-265, June.
    5. Xu, Chang & Jin, Long, 2024. "Effects of government digitalization on firm investment efficiency: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 819-834.

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