The shadow economy and education in Uganda: Is there a long-run relationship?

Abstract

Using time series data from Uganda covering the period from 1991 to 2017, this paper applies auto regressive distributed lag bounds testing approach to examine the long- and short-run relationship between education and the shadow economy. We find evidence of the long-run relationship. The results indicate that an increase in both primary and secondary school enrolment significantly reduce the size of the shadow economy in the long run, all else equal. The above relationship is robust to alternative specification and estimation methods. We also uncover bidirectional causal relationship between education and the shadow economy. In the short run, increased school enrolment reduces the shadow economy but in an insignificant manner. At the policy level, the existence of a negative relationship between education and the shadow economy suggests that mitigating informality requires reforming education system to address issues of quality. Additionally, addressing informality may require improving the economic and financial environment so that the needs and obstacles faced by individuals and or businesses are handled. Furthermore, reforming the political and institutional environment may go a long way into mitigating the expansion of the shadow economy in Uganda and Africa in general.