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The informal economy in Algeria: New insights using the MIMIC approach and the interaction with the formal economy

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  • Bennihi, Aymen Salah
  • Bouriche, Lahcene
  • Schneider, Friedrich

Abstract

This article aims first to investigate the main determinants of the informal economy (IE) in Algeria using the Multiple Indicator Multiple Causes (MIMIC) approach, second to estimate its size and development, third analyse the relationship in the short and long run between the informal and formal economy, and finally to explore the causality direction by employing the Granger causality test from 1980 to 2017. The results showed that the tax burden, the agricultural sector, the quality of institutions, and the GDP per capita are the main determinants of the IE in Algeria. The average IE size is 33.48% of official GDP, and it has been increasing in size over the past 15 years. Furthermore, it has been found that the IE positively affects the formal economy in the short run, while in the long run, this effect is reversed. Moreover, unidirectional Granger causality from GDP to IE is found. As for policy implications, in order to lower the size of IE in Algeria, the government needs to reconsider its tax policies, including the re-examination of policies implemented to stimulate the agricultural sector, which half of their effects are absorbed by the IE, and the generalization of the use of electronic transactions in economic activities.

Suggested Citation

  • Bennihi, Aymen Salah & Bouriche, Lahcene & Schneider, Friedrich, 2021. "The informal economy in Algeria: New insights using the MIMIC approach and the interaction with the formal economy," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 470-491.
    • Handle: RePEc:eee:ecanpo:v:72:y:2021:i:c:p:470-491
    DOI: 10.1016/j.eap.2021.09.010
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    More about this item

    Keywords

    Informal economy; Multiple indicators multiple causes (MIMIC); Formal economy; Granger causality; Algeria;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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