The underground economy-financial inclusion relationship in West African countries: Evidence from dynamic heterogeneous panel estimation technique

Abstract:

We employ dynamic heterogeneous panel estimation techniques which include Dynamic Fixed Effects (DFE), Mean Group (MG), and Pooled Mean Group (PMG) estimators to explore the underground economy (UE) and financial inclusion (FI) relation for ten West African nations during the 2004-2021 period. Applying Pedroni cointegration test, the results present evidence of a long-term relation between UE and FI (alongside corruption, inflation rate, money supply, agricultural output, and trade). The results of panel estimation portray a long-term significant positive influence of FI on UE, but a short-term significant negative relation between FI and UE. In addition, corruption, money supply, and international trade have a long-term significant negative influence on UE, while inflation supports long-term expansion of UE. Also, a short-term significant negative relation exists between inflation (and trade) and UE, while a short-term significant positive relation is found between money supply and UE. The results of Dumitrescu-Hurlin causality test signal a one-way causality from FI to UE. Therefore, policies geared towards enhancing FI, reducing corruption and money supply, and improving international trade are recommended to reduce UE.

Before the analysis, the Principal Component Analysis (PCA) was adopted to generate a multidimensional Financial Inclusion Index (FII). The Stata codes for the PCA and the DFE, MG, and PMG estimation techniques are presented here for replication.

Data Sources:

• World Bank World Development Indicators
• World Bank's World Governance Indicator
• International Monetary Fund’s (IMF) Financial Access Survey (FAS)  

Description:

• Data.dta - The panel data of the 10 countries
• Estimation DO FIle.do - The do file for PURT, cointegration test, DFE, MG, and PMG estimation, and D-H causality test
• FI development data.dta - The panel data used for generating the FII
• PCA DO File.do - The do file for performing the PCA

Research report

The research project has been accepted for publication by Economic Change and Restructuring

Please cite: Sakanko, M.A., David, J., Abu, N., & Gamal, A.A.M. (2023). Financial inclusion and underground economy nexus in West Africa: Evidence from dynamic heterogeneous panel techniques. Economic Change and Restructuring.