Article section

Article title
Contributor
Abstract
About article
DOI
Citation style
Copyright
Open access
References
Research Article

The Dual Impact of the Informal Economy on Formal Growth in Nigeria: Evidence from ARDL Bounds Testing

Authors

Abstract

Nigeria’s informal economy (IE) employs a sizable portion of the labour force. It contributes more than half of the nation’s gross domestic product (GDP), but little is known about how it interacts with the formal economy. This study aims to bridge that gap by examining the short-term and long-term effects of informality on Nigeria’s formal economy. The autoregressive distributed lag (ARDL) model and annualized data analysis were used to establish a nuanced interaction between informality and the formal economy. According to the findings, a one percent increase in the size of the IE is associated with a 0.38 percent increase in long-run formal GDP per capita, but a 0.03 percent decrease in the short run. The IE has a significant impact on the formal economy over the long run, promoting growth through job creation, increased demand, and entrepreneurial endeavors. Conversely, IE activities typically have a negative impact in the short term, highlighting issues such as unfair competition, limited access to financing, and tax evasion. These results underscore the importance of policymakers to distinguish between short-term and long-term impacts when developing policies. Based on the study, policymakers should consider a dual-horizon strategy that addresses short-term issues while leveraging long-term growth prospects, supported by institutional reforms, financial inclusion, and the gradual integration of informal enterprises into the formal economy, rather than striving for total eradication.

Keywords:

ARDL Formal Economy Informal Economy Nigeria JEL Classification C32 E24 E26 J46 O17 O55

Article information

Journal

Journal of Economics, Business, and Commerce

Volume (Issue)

2(2), (2025)

Pages

101-111

Published

12-09-2025

How to Cite

Chukwu, C. (2025). The Dual Impact of the Informal Economy on Formal Growth in Nigeria: Evidence from ARDL Bounds Testing. Journal of Economics, Business, and Commerce, 2(2), 101-111. https://doi.org/10.69739/jebc.v2i2.931

References

Andrews, D., Sánchez, A. C., & Johansson, Å. (2011). Towards a better understanding of the informal economy.

Asllani, A., Dell'Anno, R., & Schneider, F. (2024). Mapping the Informal Economy Around the World with an Enhanced MIMIC Approach: New Estimates for 110 Countries from 1997-2022.

Awoyemi, B. O., Makanju, A. A., Mpapalika, J., & Ekpeyo, R. S. (2023). A time series analysis of government expenditure and health outcomes in Nigeria. Journal of public health in Africa, 14(7), 1409.

Ayeni, A. O., & Omobude, O. F. (2018). Educational expenditure and economic growth nexus in Nigeria. Journal for the Advancement of Developing Economies, 7(1), 2161-8216.

Badiru, A. (2016). Human Capital and Economic Growth Nexus: An Ardl Model for the Case of Nigeria. Available at SSRN 3026954.

Batini, N., Levine, M. P., Kim, Y.-B., & Lotti, E. (2010). Informal labour and credit markets: a survey.

Boitano, G., & Abanto, D. F. (2019). The informal economy and its impact on tax revenues and economic growth. The case of Peru, Latin America and OECD countries (1995–2016). 360: Revista de Ciencias de la Gestión, 4, 128-157.

Bouriche, L., & Bennihi, A. (2020). Estimating the informal economy in Algeria from 1980 to 2019: Currency Demand Approach. Strategy and Development Review, 10(4), 471-490.

Castells, M., & Portes, A. (1989). World underneath: The origins, dynamics, and effects of the informal economy. The informal economy: Studies in advanced and less developed countries, 12.

Chen, M. A. (2003). Rethinking the informal economy. Paper presented at the SEMINAR-NEW DELHI.

Chen, M. A. (2012). The informal economy: Definitions, theories and policies.

Chukwu, C., Vasilev, A., & Saha, S. (2024). Measuring Business Cycle Stylized Facts in Selected Oil-Producing Economies: A Comparative Study. Journal of Business Cycle Research, 20(1), 89-121.

Clement, C. (2015). The formal-informal economy dualism in a retrospective of economic thought since the 1940s.

Dabla-Norris, E., Gradstein, M., & Inchauste, G. (2008). What causes firms to hide output? The determinants of informality. Journal of Development Economics, 85(1-2), 1-27.

Dell'Anno, R. (2022). Theories and definitions of the informal economy: A survey. Journal of Economic Surveys, 36(5), 1610-1643.

Dell'Anno, R., & Adu, O. (2020). The size of the informal economy in Nigeria: a structural equation approach. International Journal of Social Economics, 47(8), 1063-1078.

Elgin, C., & Oztunali, O. (2014). Institutions, informal economy, and economic development. Emerging Markets Finance and Trade, 50(4), 145-162.

Fields, G. S. (1990). Labour market modelling and the urban informal sector: Theory and evidence.

Gerxhani, K. (2004). The informal sector in developed and less developed countries: A literature survey. Public choice, 120(3), 267-300.

Godfrey, P. C. (2011). Toward a theory of the informal economy. Academy of Management Annals, 5(1), 231-277.

Guha-Khasnobis, B., & Kanbur, R. (2006). Linking the formal and informal economy: concepts and policies. OUP Oxford.

Gwaison, P. D., Maimako, L. N., & Mwolchet, P. S. (2021). Capital market and economic growth in Nigeria: An autoregressive distributed lag (ARDL) bounds testing approach. International Journal of Finance Research, 1(2), 74-92.

Harris, J. R., & Todaro, M. P. (1970). Migration, unemployment and development: a two-sector analysis. The American Economic Review, 60(1), 126-142.

Hassan, M., & Schneider, F. (2016). Size and development of the shadow economies of 157 countries worldwide: Updated and new measures from 1999 to 2013.

Heintz, J., & Slonimczyk, F. (2007). Beyond dualism: Multisegmented labor markets in Ghana.

Holmes Jr, R. M., Miller, T., Hitt, M. A., & Salmador, M. P. (2013). The interrelationships among informal institutions, formal institutions, and inward foreign direct investment. Journal of Management, 39(2), 531-566.

Hussmanns, R. (2004). Measuring the informal economy: From employment in the informal sector to informal employment (Vol. 53, p. 32). Geneva: Policy Integration Department, Bureau of Statistics, International Labour Office.

Islam, M. T., & Alam, M. J. (2019). The relationship between informal economy and GDP growth: a study on south-asian developing countries. Canadian Journal of Business and Information Studies, 1(5), 01-09.

Iyakwari, A. D. B., Awujola, A., & Ogwuche, D. D. (2023). Effect of health expenditure on life expectancy in Nigeria. Lafia Journal of Economics and Management Sciences, 8, 105-118.

Kiaga, A., & Leung, V. (2020). The transition from the informal to the formal economy in Africa. Global Employment Policy Review, Background Paper, 2.

Kim, B.-Y., & Kim, M.-J. (2016). The evolution of the informal economy in North Korea. Seoul Journal of Economics, 29(4), 457-480.

Klapper, L., & Love, I. (2011). The impact of the financial crisis on new firm registration. Economics Letters, 113(1), 1-4.

Kraemer-Mbula, E., & Wunsch-Vincent, S. (2016). The informal economy in developing nations. Cambridge University Press.

Lewis, W. A. (1954). Economic development with unlimited supplies of labour.

Luque, A. (2021). Analysis of the concept of informal economy through 102 definitions: legality or necessity. Open Research Europe, 1.

Maloney, W. F. (2004). Informality revisited. World development, 32(7), 1159-1178.

Meagher, K. (2013). Unlocking the informal economy: A literature review on linkages between formal and informal economies in developing countries. Work. ePap, 27, 1755-1315.

Medina, L., & Schneider, F. (2017). Shadow economies around the world: New results for 158 countries over 1991-2015.

Mejebi, D. A., Ugbogbo, S. N., & Iyoha, S. O. (2023). Determinants of Capital Formation in Nigeria. International Journal of Research and Innovation in Social Science, 7(3), 1475-1488.

Mughal, K. S., & Schneider, F. G. (2020). How informal sector affects the formal economy in Pakistan? A lesson for developing countries. South Asian Journal of Macroeconomics and Public Finance, 9(1), 7-21.

Nwobia, C. E., Nnachi, D. N., Eze, C. J., & Onwe, C. R. (2023). Government expenditure on healthcare, education and economic growth in nigeria: an autoregressive distributed lag model (ARDL) approach. South East Political Science Review, 8(2).

Oduh, M., Eboh, E., Ichoku, H., & Ujah, O. (2008). Measurement and explanation of informal sector of the Nigerian economy. AIAE Research Paper, 3(1), 1-64.

Ogbuabor, J. E., & Malaolu, V. (2013). Size and causes of the informal sector of the Nigerian economy. Evidence from error correction mimic model.

Oladosu, A. O., Chanimbe, T., & Anaduaka, U. S. (2022). Effect of public health expenditure on health outcomes in Nigeria and Ghana. Health Policy OPEN, 3, 100072.

Pesaran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the Existence of a Long-run Relationship'.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.

Satchi, M., & Temple, J. (2009). Labor markets and productivity in developing countries. Review of Economic dynamics, 12(1), 183-204.

Schneider, F. (2016). Out of the shadows: measuring informal economic activity. Index of economic freedom, 35-49.

Schneider, F. (2022). Estimation of informal Economy: figurEs for DEvElopED anD unDErDEvElopED countriEs arounD thE WorlD. Revista de economía mundial, 60, 41-65.

Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New estimates for the shadow economies all over the world. International economic journal, 24(4), 443-461.

Schwens, C., Eiche, J., & Kabst, R. (2011). The moderating impact of informal institutional distance and formal institutional risk on SME entry mode choice. Journal of Management Studies, 48(2), 330-351.

Temple, J. (2005). Dual economy models: A primer for growth economists. The Manchester School, 73(4), 435-478.

Thai, M. T. T., & Turkina, E. (2014). Macro-level determinants of formal entrepreneurship versus informal entrepreneurship. Journal of business venturing, 29(4), 490-510.

Tonuchi, J. E., & Idowu, P. (2020). How large is the size of Nigeria’s informal economy? A MIMIC approach. International Journal of Economics, Commerce and Management. SSRN.

Venn, D. (2008). Measuring informal employment in OECD countries. Measuring Informal Employment in Developed Countries, Harvard University, WIEGO, Cambridge, MA, USA, October.

Webb, J. W., Bruton, G. D., Tihanyi, L., & Ireland, R. D. (2013). Research on entrepreneurship in the informal economy: Framing a research agenda. Journal of business venturing, 28(5), 598-614.

Downloads

Views

48

Downloads

30