Interactions between the Informal Economy and Income Inequalities: The Influence of Political Commitment in Africa

The objective of this work is to explore the complex links between the informal economy, income inequality and the role of state political will in 32 African countries by analyzing secondary panel data from 1995 to 2018. Using econometric models based on the Driscoll-Kraay method, we highlighted several significant results: the increase in informal employment has a direct correlation with the increase in economic inequality, suggesting that a one-percentage-point increase in informal employment leads to a 0.011-point increase in inequality. At the same time, the political will of the state, captured by the efficiency of public administrations, appears to be a factor in reducing inequalities, because when administrations are more efficient, they are able to implement policies that promote a more equitable distribution of resources. In addition, the analysis of the interaction between informal employment and government efficiency indicates a coefficient of −0.499. This underscores that the negative impact of the informal economy on inequality can be reduced by improving the effectiveness of public policies, hence the importance of effective governance to counter the adverse effects of the informal economy on income inequality in Africa.