Shadow Economies and Sustainable Development in Africa: Exploring for Thresholds, Short‐Run and Long‐Run Effects Across Strong and Weak Institutional Economies

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ABSTRACT This study investigates the nonlinear relationship between the shadow economy and sustainable development in Africa, with particular emphasis on institutional heterogeneity. Using dynamic two‐step system GMM estimations for a panel of 37 African economies over the period 2010–2017, and employing adjusted net savings as a comprehensive measure of sustainable development, the analysis accounts for time effects and country‐specific heterogeneity. The results reveal a statistically significant inverted U‐shaped relationship in both the short run and the long run, indicating that while moderate levels of shadow economic activity may initially support sustainable development, expansion beyond a critical threshold undermines intergenerational wealth accumulation. Importantly, the estimated turning points differ across institutional regimes: economies with strong institutional quality exhibit lower threshold levels compared to weak institutional environments. This finding suggests that stronger institutions reduce the tolerance range within which informality exerts beneficial effects, thereby compressing the margin before adverse sustainability consequences emerge. The results are robust across alternative specifications and highlight the central role of institutional quality in shaping the shadow economy, sustainable development nexus. Policy implications emphasize the need for calibrated formalization strategies and sustained institutional strengthening to ensure that informality does not erode long‐term development outcomes.

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