INEQUALITY AND INFORMAL ECONOMY: THE MODERATING ROLE OF FINANCIAL TECHNOLOGY
DOI:
https://doi.org/10.2478/eoik-2025-0004Keywords:
inequality, income distribution, informal economy, finan- cial technology, shadow economy, institutional qualityAbstract
Increasing income distribution gaps have become a global socio-eco-
nomic problem accentuating economic and social exclusion with a
potential of generating declining social cohesion and political sta-
bility. This study examines the relationship between the informal
economy and income inequality, alongside the moderating effect of
financial technology (fintech). The persistent prevalence of informal
economies in emerging markets and developing economies (EMDE)
is often associated with elevated income inequalities. Utilizing data
from 2012 to 2022 across 18 African countries, this study employs the
two-step system Generalized Method of Moments (GMM) to address
potential endogeneity biases and to robustly estimate the relationship
between the size of the informal economy and income distribution.
The results indicate that a larger informal economy correlates with
reduced income inequalities, acting as a buffer for marginalized com-
munities by providing economic opportunities. Conversely, fintech
initially indicates an increase in income disparities due to skill and
access discrepancies. However, when functioning as a moderating
factor between informal economies and income inequality, fintech
demonstrates a potential to reduce the inequality gap. This study sug-
gests that policy interventions geared towards economic formalisation
need to account for the dual role of financial technologies. Further
research is required to explore other socio-economic factors, includ-
ing political dynamics and labour market policies, which influence
income inequalities. Prominent policy decision confronting African
governments is the role of the informal economy. The findings of the
study advocate for a nuanced approach to addressing structural re-
forms within informal sectors and carefully utilise fintech as a tool for
promoting equitable income distribution.
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