Illicit financial outflows, informal sector size and domestic resource mobilization in selected African countries

Abstract

PurposeThe growth of both the informal sector and illicit financial outflows necessitated this study, in order to investigate how countries in Africa respond to these realities in terms of mobilization of domestic resources. These are the main motivation for the current study to the extant literature in conjunction with the adoption of employing second-generation econometric techniques which take into account cross-sectional dependence and country-specific heterogeneity.Design/methodology/approachThis study therefore examined the capacity of Africa to mobilize domestic resources amidst rising illicit financial outflows and informal sector size in selected African countries between 2000 and 2018. Second-generation econometric techniques such as cross-sectional dependence tests, slope homogeneity tests, Westerlund (2007) long-run co-integration tests, Eberhardt and Teal (2010) augmented mean group estimations and Kónya (2006) panel causality testing were employed.FindingsFindings revealed the existence of cross-sectional dependence and slope homogeneity in the data series. Findings also supported the existence of depressing long-run impacts of IFOs and ISS on domestic savings. Causality test results were not uniform across variables among countries. Policy recommendations favour formalizing the largely informal African economies through budgetary policy adjustments and commitment to building stronger institutions.Practical implicationsThe fragility of the African countries economy and its macroeconomic indicators is suggestive for more policy construction.Originality/valueThis economic reality about the nature of the informal sector is one that has negated the traditional view which holds that economic reforms would make the informal sector shrink as it transits to formal sector. Experiences from Latin America and Africa in fact indicate that the informal sector is actually on an expansionary path in the wake of adjustment and policy reforms. It is often called the unobserved, unorganized or unprotected economy. With this sector growing in size, the possibility of a reverse may not be in sight, owing to the increasing poverty levels and unemployment prevalent in most African countries. Uncertain foreign investment and aid inflows coupled with lower export revenues and high levels of indebtedness have created new impetus to examine the capacity of Africa's fiscal policy regime to mobilise domestic resources for the development of the region. Surprisingly, the last decade witnessed continued rise in Africa's illicit financial outflows amidst large informal sector size (ISS).

Trade misinvoicing and domestic resource mobilization in Nigeria

“…This result follows conventional knowledge and corroborates theoretical expectations. It also lends support to the studies of L epissier et al (2021), Thiao (2021) and Uzoechina et al (2021), who found that trade misinvoicing reduces government revenue and undermines domestic resource mobilization in developing countries.…”

“…Empirical studies have shown that trade misinvoicing is a major deterrent to domestic resource mobilization (Lépissier et al , 2021; Thiao, 2021; Uzoechina et al , 2021), thus its coefficient is expected to be negative to depict its adverse impact on domestic resource mobilization in Nigeria. The inclusion of other explanatory variables is based on evidence of their effect on domestic resource mobilization.…”

“…Given the growing volume of illicit financial outflows from Africa, Uzoechina et al (2021) evaluated the capacity of governments in selected African countries to mobilize domestic resources. The result showed that illicit financial outflows and informal sector size adversely affect domestic savings in the sampled countries, suggesting the need for African countries to make concerted efforts at formalizing the informal sector to reduce the incidence of illicit financial outflows and raise domestic savings.…”

Can co-ordination advancement of two-way FDI improve resource misallocation? Evidence from 285 cities in China

“…Improving and developing the financial sector in districts can alleviate financing constraints to some extent, providing investment opportunities for enterprises and encouraging the co-ordination advancement of two-way FDI foreign direct investment. Lastly, at the macro level, outbound direct investment and foreign direct investment should be controlled to curb illegal capital outflow and provide a better environment for optimizing the allocation of domestic resources [ 39 ].…”

Does public debt moderate government spending – informal economy nexus? Evidence from the Asian countries

“…The informal economy includes all economic activities not covered by law or formal arrangement (OECD/ILO, 2019). The informal economy is a highly persistent and ubiquitous phenomenon in many developing countries despite high economic growth in the past decades (Uzoechina et al ., 2023). While the informal economy accounts for one-fifth of the gross domestic product (GDP) and 16% of employment in the advanced economies, it accounts for one-third of the GDP and 70% of employment on average in emerging markets and developing economies (World Bank, 2020).…”