Linking country stability and informality: empirical evidence from developing countries

The economic and social consequences of the shadow economy proliferation have been well documented, yet its reduction remains a major challenge in developing countries. This paper empirically examines the effect of country stability on informality. Empirical results resilient to a set of robustness checks consistently show that improving country stability is a necessary condition for reducing informality. Through mediation analysis, financial development, globalisation, and human capital are identified as key channels through which country stability contributes to informality reduction in developing countries. These findings carry important implications for policymakers, inviting them to strengthen national and regional initiatives aimed at guaranteeing country stability and reducing informality. To achieve this, it is essential to prioritise human capital development, build a more efficient financial system, and foster greater globalisation, as these represent the most effective levers for tackling informality in developing economies.