Informal economies and energy efficiency: Empirical evidence from African countries

Pervasive informal economies can significantly hinder efforts to improve energy efficiency. This study investigates the complex relationship between informality and energy efficiency in African countries, focusing on linear, nonlinear, and asymmetric effects. The research aims to clarify how varying levels of informality affect energy efficiency and the intervening roles of foreign direct investment (FDI) and institutional quality. Employing a panel dataset of 46 African countries from 1990 to 2017, the study utilizes Stochastic Frontier Analysis to derive energy efficiency scores. It applies panel autoregressive distributed lag and the dynamic panel threshold models to assess the effects of informality. Findings from the linear model reveal that informality may have some initial beneficial effects on energy efficiency. Further evidence of nonlinearity is strongly supported, showing that informality may improve energy efficiency only up to a threshold of between 41 and 42 % of GDP, beyond which it becomes detrimental to its performance. Similarly, compelling evidence of asymmetric effects is reported: positive and negative shocks have increasing and decreasing effects on energy efficiency, respectively. Additional evidence indicates that FDI lowers energy efficiency, whereas governance quality is associated with improved energy efficiency. Lastly, FDI mitigates the negative effect of informality in line with the halo effect. These results reflect the heterogeneous effects of informality that have been reported by prior studies. Policy recommendations based on these findings are discussed.