Energy poverty and shadow economy: evidence from Africa

Abstract

Purpose Energy poverty is a global phenomenon, but its prevalence is enormous in most African countries, with a potential impact on quality of life. This study aims to investigate the impact of energy poverty on the shadow economy. Design/methodology/approach The study uses panel data from 45 countries in Africa over a period of 1996–2018. Using panel cointegrating regression and panel vector auto-regression model in the generalized method of moments technique. Findings This study provides that energy poverty deepens the size of the shadow economy in Africa. It also documents that there is a bidirectional causality between shadow economy and energy poverty. Therefore, the two variables can predict each other. Practical implications The study suggests that lack of access to clean and modern energy services contributes to the depth of the shadow economy in Africa. African authorities are advised to strengthen rural and urban electrification initiatives by providing adequate energy infrastructure so as to reduce the level of energy poverty in the region. To ensure energy sustainability delivery, the study proposes that the creation of national and local capacities would be the most effective manner to guarantee energy accessibility and affordability. Also, priorities should be given to the local capital mobilization and energy subsidies for the energy poor. Energy literacy may also contribute to the sustainability and the usage of modern energy sources in Africa. Originality/value Previous studies reveal that income inequality contributes to the large size of shadow economy in developing economies. However, none of these studies analyzed the role of energy poverty and its implications for underground economic operations. Inadequate access to modern energy sources is likely to deepen the prevalence of informality in developing nations. Based on this, this study provides fresh evidence on the implications of energy deprivation on the shadow economy in Africa using a heterogeneous panel econometric framework. The study contributes to the literature by advocating that the provision of affordable modern energy sources for rural and urban settlements, and the creation of good energy infrastructure for the firms in the formal economy would not only improve the quality of life but also important to discourage underground economic operations in developing economies.