Informality and poverty in Africa: Which comes first?

Abstract Existing empirical work has investigated the relationship between informality and poverty. However, most of this work has neglected the feedback effect. This empirical paper explores the bi‐directional causality between poverty and informality within the SGMM‐PVAR framework among 40 selected high‐income and low‐income Sub‐Saharan countries between 1991 and 2018. Our results support the heterogeneity argument, suggesting that sub‐Saharan African informality is demand and supply‐led. The income level of the country mediates the direction of effect. Bi‐direction causality is observed for low‐income countries. Causality in middle‐income countries runs from poverty to informality. The results suggest that a certain level of informality may be desirable, especially in low‐income countries.