Informal sector, remittances, and political stability: A study of Granger-causality in four large geopolitical sets

This paper investigates the relationships between remittances, the informal sector, and political stability across various large geopolitical sets, including the Middle East and North Africa (MENA), Sub-Saharan Africa, Latin America, and the Organisation for Economic Cooperation and Development (OECD) countries. Employing Granger causality tests to determine the predominate direction of causality and panel vector autoregressive models, we explore the dynamics of these relationships over short, medium, and long-term periods.Our findings reveal a significant short-term impact of remittances on the growth of the informal sector in the MENA, Sub-Saharan Africa, and Latin America, suggesting that remittances directly influence economic activities within this sector, likely due to their use in undeclared activities and the funding of informal local businesses. However, the influence of remittances wanes over time, indicating their primary role in addressing immediate economic needs rather than fostering long-term sector growth. Political stability shows minimal direct causal interaction with the informal sector, hinting at the sector's role as an adaptive mechanism in politically volatile regions.In OECD countries, remittances maintain a persistent influence on the informal sector over longer periods, reflecting their role in more strategic economic decisions. Additionally, our study explores the complex dynamics in countries with high remittance-to-GDP ratios, identifying a strong predictive power of the informal sector size on remittance flows, which points to the sector's pivotal economic role. We have extended our analysis to OECD countries, using outward remittances as a proxy for inward migration. We found that the size of the informal sector can predict outward remittance flows and political stability, highlighting the crucial role of the informal economy in migration and political dynamics.The results underscore the need for region-specific policy interventions and highlight the importance of understanding the temporal dynamics of remittances. This study contributes to the discourse on economic development strategies, suggesting that leveraging remittances effectively requires comprehensive policy approaches that consider their varied impacts across different regional and economic contexts.