Economic complexity and shadow economy in Africa: An assessment of nonlinearity and asymmetry

Recent literature reveals that economic complexity (EC) has important implications for shadow economy and has generated mixed empirical conclusions. This paper contributes to this debate by investigating the nonlinear and asymmetric effects of EC on shadow economy in 28 Africa countries between 1995 and 2020. Granger and Yoon’s (2002) approach is used to decompose the EC into positive and negative components, while the dynamic panel threshold regression, two-step system generalised method of moments, pooled mean group, augmented mean group, and common correlated mean group are employed as the estimation techniques. The results indicate that positive EC shocks reduce the size of the shadow economy, whereas negative shocks contribute to the growth of informality, thus suggesting the presence of asymmetry. The threshold of economic complexity was found to be 0.41.