Determinants of the informal economy of an emerging economy: a multiple indicator, multiple causes (MIMIC) approach

The debate about the best way to tackle the problems (both perceived and real) in the informal economy is on-going. In this study, we argue that, if the informal economy is to be tackled successfully, policies should focus on evidence-based factors that influence participation in the sector. We posit that although several factors have been identified in the literature as determinants, not all are relevant in every economy. This underscores the need for country-specific studies. In this study, we focus on Nigeria. To identify and/or confirm the determinants specific to the Nigerian informal economy, our paper employs, in a novel way, the multiple-cause, multiple-indicator model, and primary data. Building on previous literature[1,2], relevant determinants of the informal economy were constructed from participants’ responses to questions designed to solicit such information. While all literature-defined determinants were included in the questionnaire, not all were identified as important by participants in our survey. Particularly, we found the factors that determine the origin and expansion of the Nigerian informal economy to include: unemployment, need to be autonomous/self-employed, corruption of government officials/agencies, participants’ desire to pay less tax, and participants’ need to survive. The greatest influence, in terms of magnitude and impacts, comes from the ‘participants’ need to survive’ factor. This is followed by corruption. Our policy recommendations follow these identified factors, and recognise the positive important role played by the informal economy in emerging economies. Also, there are suggestions that, though country-specific, findings and recommendations from this study may be used to inform policy in other countries with similar economic structures as Nigeria. However, the differences in magnitudes and impacts of the reported determinants of the Nigerian informal economy strengthen our assertion that a country-specific study is necessary, if the most appropriate policies are to be implemented.