Informality and Multidimensional Poverty in Sub‐Saharan Africa

Abstract

ABSTRACT This study examines the relationship between the size of the informal economy and multidimensional poverty in Sub‐Saharan Africa, as well as the moderating role of government effectiveness in this relationship. While existing literature has primarily focused on the effects of informality on monetary poverty, its implications for broader dimensions of well‐being remain relatively underexplored. Using a panel of 40 Sub‐Saharan African countries over the 2010–2023 period, we estimate fixed‐effects models with Driscoll and Kraay robust standard errors. The analysis is complemented by several robustness checks, including alternative measures of informality and poverty, instrumental variable estimations, and the treatment of outliers. The results show that a higher prevalence of the informal economy is associated with higher multidimensional poverty. They also indicate that this relationship is attenuated as government effectiveness improves. Furthermore, economic growth, financial development, urbanization, and globalization are associated with lower multidimensional poverty. This study contributes to the literature by showing that the implications of the informal economy extend beyond the monetary dimensions of well‐being and by highlighting the role of government effectiveness in moderating the relationship between informality and multidimensional poverty.