Bridging the Formality Divide: A Cross-National Analysis of Economic Informality Determinants

Abstract

This article investigates the determinants that underpin cross-national disparities in the scale of economic informality, with particular emphasis on the divergence between African states and their advanced or emerging counterparts. The empirical scope embraces eighty-four economies, of which forty-four are situated on the African continent, thereby permitting both intra-regional and inter-regional comparison. Multivariate decomposition techniques reveal that raising average living standards, tightening anticorruption controls, and deepening financial-sector development would narrow the portion of the informality gap that can be statistically attributed to observable characteristics. Conversely, greater fiscal autonomy, expanded trade openness, enhanced digital infrastructure, and heightened political stability appear to widen the explained component of the divide, suggesting that these factors, in the absence of complementary reforms, may encourage informal activity to persist. When attention shifts from the explained to the overall differential, a more nuanced pattern emerges: improvements in human-capital endowments and in technological infrastructure exert a moderating influence, jointly compressing the total gap between African and non-African economies. The dual role of technological assets magnifying the explained gap yet mitigating the aggregate disparity highlights the importance of contextual interactions, such as differential absorption capacities and regulatory quality, in shaping ultimate outcomes. Moreover, gender-inclusive financial services amplify these gains. The findings imply that public strategies aiming to formalise African economies should prioritise inclusive growth, vigilant governance, and robust financial intermediation, while simultaneously calibrating trade, fiscal, and technological policies to local institutional realities. Such a balanced agenda could accelerate convergence toward the formal-sector benchmarks observed in more advanced economic systems.