Do remittances moderate financial development–informality nexus in North Africa?

Abstract

The prevalent informality and sheer size of international remittances characterize the North African countries. This study primarily aims at investigating how remittances moderate the effects of financial development on the informal economy in North African countries. Employing pool mean group (PMG)/panel ARDL approach and a balanced panel data set over the period 1980-2015, we find that remittances moderate the negative relationship between financial development and informal economy. This finding suggests that remittances bolster financial development, which, in turn, decreases the informal economy. Based on this result, we recommend that tailored policies and interventions are needed to promote financial development and international remittances in the North African region. 1 | INTRODUCTION Informality, or the informal economy, defined as "all economic activities by workers and economic units that are-in law or practice-not covered or insufficiently covered by formal arrangements" (OECD & ILO, 2019, p. 155), is a common issue that countries face all over the world, particularly developing countries. From the definition, it is clear that informality mainly manifests itself in production and employment. Indeed, according to Loayza (2016), over 70% of employment and 30% of production take place in the informal sector in a typical developing country. On a global scale, the informal economy accounts for 13% of world GDP, corresponding to US$10 trillion (Lewis, 2016). In terms of employment, two billion people, equivalent to about 62.1% of the working-age population, are informally employed in the world (ILO, 2018, p. 13). Finally, OECD and ILO (2019) estimates that 81% of all enterprises operate in the informal sector in the world. High levels of informal economy place an increasing strain on the formal economy and impede economic development and inclusive economic growth, particularly in developing countries. That said, the informal economy adversely affects a developing economy in several ways. First, it erodes the tax base and therefore undermines fiscal sustainability (

Remittances and income inequality in the Philippines

“…First, given that the nexus between inequality and remittances is inverse U-shaped, policymakers in the Philippines should pinpoint the fundamental causes of why remittances initially exacerbate income inequality and introduce relevant policies accordingly. Second, as argued in Akçay and Karabuluto glu (2021), confirming that remittances ameliorate income inequality after a threshold level is reached, authorities should consider policies and strategies that will promote remittance inflows, such as (1) reducing the transfer cost of remittances, (2) reducing the risks involved in remittances transfers and, (3) improving the financial literacy of remittance-recipient families. Third, policymakers should continue their policies to ease financial constraints, reduce credit market imperfections, and reduce the cost of obtaining a passport and red tape, which will amplify the emigration opportunities for low-income families.…”

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

“…For instance, Njangang et al (2020) found that financial development is instrumental in reducing the shadow economy in Sub‐Saharan Africa while Akçay and Karabulutoğlu (2021) found that international remittances modulate the financial development–shadow economy nexus in North African countries. Moreover, given that the share of the shadow economy moves in the opposite direction to the formal economy, improving the latter's productivity shrinks the shadow economy (Elgin, 2013).…”

The Nexus Between Remittance Inflows and Financial Development in India: Substitutes or Complements?

“…Kakhkharov and Rohde (2020), based on dynamic GMM estimation, found a positive impact of remittances on financial development. More recently, Akçay and Karabulutolu (2021) investigated the nexus between remittances and financial development for a panel of North African countries. Their findings show that remittances strengthen financial development and moderate the negative relationship between financial development and the informal economy.…”