Sustainable development in Africa: the coexistence of shadow and formal economies under weak and strong institutional economies

Abstract This study examines how the coexistence of shadow and formal economies under strong and weak institutional quality affects sustainable development using 37 African economies covering an 18-year period, from 2010 to 2017. Employing a dynamic panel Generalized Method of Moments (GMM) model, the results show that (i) both shadow and formal economies individually contribute positively to sustainable development although the effect of the formal economy is higher compared to shadow economy and (ii) shadow and formal economies are substitutes although substituting shadow economy with formal economy yields more desirable outcome on sustainable development especially in the long-run and under strong institutional setups. The results imply that policymakers must endeavor to engage in policies that strengthen institutional quality to reinforce the replacement of shadow economies with the formal economy in order to ensure a positive and lasting effect on sustainable development in both the short-run and long-run in Africa. The results are robust to time, technological, and country effects. The originality of this study lies in its unique analysis of how shadow and formal economies interact to influence sustainable development in Africa, while considering the moderating role of institutional quality and using adjusted net national savings as a comprehensive sustainability measure.