Informality and energy efficiency in Africa: Evidence from symmetric and asymmetric (nonlinear) panel ARDL cointegration approaches

Abstract Energy efficiency is a key component of sustainable and inclusive growth for African countries. However, the informal economy which is prevalent in Africa, affects the continent’s energy efficiency performance. This study therefore investigates the asymmetry in the nexus between the informal economy and energy efficiency. The study employs data on 46 African countries spanning 1990-2017. To measure energy efficiency, the study estimates an energy distance function using Stochastic Frontier Analysis instead of the commonly used energy intensity measure in previous studies. The symmetric and asymmetric panel auto-regressive distributed lag (PARDL) models and the Panel Quantile Regression methods are used to examine the nexus with emphasis given to the asymmetric effects. First, we find considerable variability in energy efficiency performance in African countries. We also find a declining trend in efficiency scores. The results point to a large scope for energy efficiency improvements, showing that the elimination of all types of energy inefficiencies could realise energy savings of up to 58%. Second, the asymmetric PARDL regressions show a decline in energy efficiency performance in response to a positive shock that increases the size of the informal economy and an increase in performance in response to a negative shock that shrinks the size of the sector. Third, we find a positive association between technical innovation and an effect of foreign direct investment on energy efficiency that varies with the method of estimation. Among other things, the study recommends a policy focus aimed at incentivising businesses to formalize operations. JEL classification: Q43, Q48, O17, O13