By Donasius Pathera, PhD:
In the pursuit of “a prosperous Africa based on inclusive growth and sustainable development”, as envisioned in the Agenda 2063, the continent stands at a crossroads; grappling with the need to transform economic growth into tangible improvements in living standards, reduced poverty rates and increased employment opportunities.
Despite being the second-fastest growing region globally since 2000, Africa faces persistent challenges, prompting a crucial examination of the factors influencing its growth trajectory.
Africa’s economic, social and political history plays a pivotal role in shaping its current development landscape.
The externally imposed structural adjustment programmes of the 1980s and 1990s failed to stimulate productivity, employment and poverty reduction. Recent growth, while commendable, has not effectively addressed inequality, raising questions about the capacity building required to foster sustainable and equitable economic performance.
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Examining financing sources, including debt, savings, revenue and foreign direct investment, reveals a critical need for sustainable debt management.
As traditional development partners reduce aid, debt becomes a crucial instrument for governments to fund development needs. Studies have emphasised the importance of channeling debt into growth-enhancing sectors, such as infrastructure, to ensure long-term economic stability.
Unpacking the growth determinants reveals the significance of past growth, human capital, trade openness, foreign direct investment and overseas development assistance. Acknowledging the diversity of the continent’s institutional quality, income growth and resource endowment the study provides valuable insights for tailored policy interventions.
Recognising the role of development states, studies underscore the importance of reinforcing institutional capacity.
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Economic governance improvements in some countries showcase the potential for positive change. Long-term capacity – building initiatives, particularly in human capital development, are deemed essential for enhancing efficiency and facilitating technology acquisition.
Africa’s growth story is complex, requiring comprehensive policy frameworks, sustainable financing and robust capacity – building initiatives. As the continent navigates the challenges of declining aid, youth unemployment, income inequality, rising external debt, strategic investments in institutional capacity and human development emerge as key drivers for a prosperous and inclusive future. However, the economic growth in Africa is plagued with the shadow economy.
Recent research indicates that the shadow economy plays a significant role in African economic activity.
Since pioneering studies by De Soto (1989) and Schneider and Enste (2000), discussions on the shadow economy’s role in the development process have been widespread. Some scholars propose that the shadow economy serves as a training ground for aspiring entrepreneurs, offering income opportunities with relaxed entry requirements and no regulations (Williams and Nadin, 2012; Awaworyi and Danquah, 2022).
Consequently, it is anticipated that the shadow economy can contribute to economic development paths (Hart, 1973; De Soto, 1989).
On the flip side, studies highlight the negative aspects of the shadow economy, pointing out that it hampers effective economic planning by causing substantial revenue losses through tax avoidance and evasion.
In some cases, it renders fiscal and monetary policies ineffective (Vanek et al., 2014). Another line of research suggests that the shadow economy results from poor economic policy performance, contributing to increased income disparities (Dada et al., 2023; Ajide et al., 2023) and is considered a by-product of non-inclusive economic growth (Rauch, 1991).
The shadow economy is a macroeconomic fundamental in developing nations, significantly impacting the formal economy (Schneider and Enste, 2000; Blackburn et al., 2012).
While extensive research has explored various causes of the growing shadow economy, from economic to sociodemographic factors, limited attention has been given to the effects of natural resource rents.
Furthermore, the roles of ethnic and religious diversity have been largely omitted from African literature.
The role of natural resources gained attention with the contribution of Blanton and Peksen (2021), indicating that abundant natural resources in Africa could influence the size of the shadow economy.
Ethnic and religious diversity, as another factor influencing the shadow economy, has socio-economic and political implications (Schneider et al., 2015; Berdiev et al., 2020).
Given Africa’s abundance of natural resources and high levels of ethnic and religious diversity, understanding their influence on the shadow economy is crucial for policymakers.
It is a fact that in the veins of our global economy, a clandestine player operates silently— unseen yet exerting a significant impact on financial landscapes worldwide. The shadow or underground economy, a realm encompassing both legal and illegal activities beyond the watchful eyes of taxmen and statisticians, is on the rise, prompting a closer examination of its implications.
The allure of a growing shadow economy poses strong incentives, drawing both domestic and foreign workers away from the official economy.
Studies show that burdensome tax and social security payments, coupled with restrictive labour market regulations, fuel the growth of the shadow economy. A delicate interplay between labour costs, tax rates and the lure of informal work shapes the decisions of economic actors, contributing to the expansion of this clandestine domain.
In the quest for sustainable economic development, African nations are faced with the pressing challenge of dealing with the shadow economy, a significant impediment to formalised growth. To combat this pervasive issue, a multi-pronged approach is essential.
