Shadow Economies and Sustainable Development in Africa: Exploring for thresholds, Short-run and Long-run Effects Across Strong and Weak Institutional Economies

Abstract The study examines the nonlinear effect of shadow economies (SEs) on sustainable development (SD) under strong and weak institutional quality economies of 37 Africa economies between 2010 and 2017. Employing a dynamic two-step GMM panel of 37 African economies and controlling for time/year, technological and country effects, the results offer new and interesting insights. First, a nonlinear short-run and long-run inverted U-shape effects of SE on SD is reported in the full sample implying that shadow economies are injurious to sustainable development when shadow economies grow beyond a certain threshold. While similar nonlinear inverted U shape effect of SE on SD is obtained for economies with weak and strong institutions, the threshold points for which SE may hurt SD in economies with strong institutional quality is lower compared to economies with weak institutional quality suggesting that economies with strong institutional quality can low the size of SEs that dangers/injures SD in Africa. The results imply policymakers can rely on improving institutional quality to suppress/lower the size of SEs that derail/hurt SD in the present and future times.