THE SHADOW ECONOMY AND ECONOMIC GROWTH IN NIGERIA

Abstract

The Shadow Economy (SE) includes economic activities operating outside relevant government regulations. These activities are expected to wane as the economy grows, but, continue to exist. Thus, the effects of SE on economic growth remain unsettled. Factors influencing SE had been examined extensively in the literature. However, less attention had been paid to factors responsible for various dimensions of SE in Nigeria. These dimensions include non-compliance with government regulations (taxes), cash-based transactions, and concealment of transactions. This study, therefore, was designed to investigate the drivers of dimensions of the SE, its size and implications for economic growth in Nigeria. The Endogenous Growth Theory provided the framework for both the micro and macro models adopted by this study. The methodology consisted of a survey approach, and macro-based models, which were represented by Currency Demand (CD), Multiple Indicators, Multiple Causes (MIMIC) and growth models. Purposive sampling was used to select 206 and 204 owners of microenterprises in Lagos and Kano states, respectively. These states are commercial hubs where significant SE activities exist. A structured questionnaire was administered to obtain information on the dimensions of the SE. Aspects of SE that were explored included incomplete records, cash-based transactions, non-registration of businesses, and concealment of activities from official scrutiny. Probit technique was employed to examine the micro-based factors of SE participation. The CD and MIMIC models were used to examine macro-based factors influencing SE and size. The tax burden was identified as the key variable of interest in these models. The growth model was used to evaluate the effects of size of SE on economic growth. The CD, MIMIC, and growth models were estimated using Ordinary Least Squares, Maximum Likelihood, and parsimonious Error Correction techniques, respectively. Data were obtained from World Bank Development Indicators, and regression estimates analysed at p≤0.05. The age of respondents was 32.8±10.0 years, 68.3% were males, 75.4% were sole-proprietors, 68.5% were in the trade sector, and 62.0% earned less than N30,000 monthly. Vocational education (β=0.369), funding by government/non-governmental organisation (β=0.412), tax morale (β=-0.311), earning less than N30,000 (β=0.243), and working between 36 to 40 hours (β=0.170) were significant micro-based drivers of the SE. Cash-based transactions yielded the highest incidence (91.0%), while concealment generated the lowest incidence (22.6%) of SE. Income generation (46.3%), poverty reduction (44.4%) and tax revenue (50.3%) were perceived as channels through which the SE influenced the economy. Tax burden (β=0.589) was a major macro-based factor influencing SE. Estimates of the size from the currency demand model and MIMIC model were 44.2% and 60.5%, respectively. On the average, the micro-based approach yielded higher estimates of the size of SE relative to those from macro-based approaches. In addition, increases in the size of the SE (percentage of GDP) were associated with increases in GDP growth (β=0.655). The size of the shadow economy in Nigeria is large and has a favourable impact on the economy. Therefore, challenges associated with education, credit provision, low tax morale, low incomes, and tax burden should be addressed by the government.