What levels of informality tackle poverty in Africa? Evidence from dynamic panel threshold analysis

Abstract

Purpose: The paper validates the threshold argument in the informality–poverty nexus. Recent literature and policy have argued the existence of a threshold in the relationship. Design/methodology/approach: The study adopts dynamic panel threshold analysis, estimated within the framework of system Generalized Method of Moments (SGMM) to control for endogeneity and simultaneity. Data from 40 selected sub-Saharan African countries between 1991 and 2018 are used for the study. Findings: Empirical results confirm the existence of an average threshold of 31% share of informality in GDP. Also, the paper finds that threshold of informality that addresses mild and severe poverty varies between 24.32 and 36.75%. Research limitations/implications: The work is limited to African economies. Evidence from other emerging and developed economies is suggested for further research. Practical implications: Overall, the empirical results indicate a threshold in the informality–poverty nexus. Therefore, an excessive informality level does not benefit the African growth process. Policymakers and governments are advised to operate within the bounds of the threshold of informality that reduces poverty and improve the African economic growth process. Originality/value: The paper is the first study to provide empirical findings on the nonlinear and threshold argument in the informality–poverty nexus, as far as the authors know.