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.