Public debt, corruption and shadow economy in Africa: an empirical analysis

Abstract

PurposeThe purpose of this paper is to examine the effect of corruption and shadow economy on public debt in 51 African countries. In addition, the study explores the causal linkage between corruption, shadow economy and public debt.Design/methodology/approachThe study employs vector error correction model and Kao cointegration test to examine the long-run relationship between corruption, shadow economy and public debt in Africa.FindingsThe study finds a positive and statistically significant relationship between corruption and public debt. Further, the study reports a positive and statistically significant effect of shadow economy on public debt. In the short run, the study finds a unidirectional causal relationship between corruption, shadow economy and public debt with the direction of causality running from corruption and shadow economy to public debt, respectively.Practical implicationsThis study recommends that countries should pursue policies and programs that would provide resources to agencies tasked with the responsibility of fighting corruption. This would ensure that countries have effective institutions that curb vulnerabilities to corruption and reduce the size of the shadow economy and public debt.Originality/valueThis study contributes to the literature by showing how corruption and shadow economy affects public debts of African countries. To the best of the author's knowledge, this is the first attempt to examine this relationship in the context of Africa.