Regional spillovers of informal economic activities in the ECOWAS: a Bayesian Panel VAR approach

The informal economy is an important part of economic activity in ECOWAS countries, accounting for a sizable portion of employment and GDP. Earlier research focused on national-level informality, with little known about cross-border spillovers of informal economic activities. The regional transmission of informal economy shocks across ECOWAS countries is investigated in this study using a Bayesian Panel Vector Autoregression (VAR) framework on quarterly series from 2006 to 2021. The framework is ideal to account for parameter uncertainty, cross-country relationships, and limited data availability. Annual data for the informal economy series were obtained from the World Bank database and were transformed into quarterly series using the Chow-Lin temporal disaggregation method. Quarterly series for global commodity prices, an exogenous variable, were collected from the UNCTAD database. The study revealed some variations in informal economy spillovers across the region. While Nigeria, Ghana, and Côte d'Ivoire have strong links with neighbouring nations, smaller economies like Cabo Verde and The Gambia have limited or nonexistent spillover effects. Furthermore, Francophone-Anglophone asymmetries exist, with Francophone nations having larger informal economy linkages due to historical trade ties and a common currency. Border-sharing realities are particularly important, as shocks from Nigeria and Côte d’Ivoire significantly impact neighbouring economies. By implication, harmonising informal trade restrictions, enhancing cross-border financial integration, and building economic resilience reduce negative spillovers. Shifting the focus from national to regional informal economy interdependencies, this study improves understanding of informal sector dynamics and contributes to the development of coordinated ECOWAS policies that combine informality regulation with economic stability.