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Impact of the Informal Sector on Economic Growth in Nigeria: 1984-2014

Impact of the Informal Sector on Economic Growth in Nigeria: 1984-2014

 

Abstract: One of the most viable sectors that is perceived to significantly improve the livelihood of the majority is the informal sector. It not only provides business opportunities but also means of livelihood and income and this has led to the rapid growth of the informal sector in Nigeria. Since independence, Nigeria has experienced numerous challenges such as high levels of unemployment, poverty, and political instability and these challenges have adverse effects on informal sector operators. This study examined the impact of the informal sector on economic growth in Nigeria from 1985 to 2015, using the Error Correction Model (ECM). The variables that were tested are unemployment rate, population growth, and informal sector activities such as hairdressing, barbing, vulcanizing, commercial motorcycling, blacksmithing and pottery. The results demonstrate that informal sector activities have a positive relationship with economic growth but are statistically insignificant. Population growth, however has a positive relationship with economic growth and is statistically significant, while unemployment is inversely related to economic growth but is statistically insignificant. The study concludes that informal activities in Nigeria are a source of income and livelihood but it is difficult to ascertain their contributions to economic growth and development in the short run. Based on these findings, the study recommends among others fiscal regulation to enhance the performance of the informal sector, the regulation of the operations of the informal sector in Nigeria and ease of registration. There is also the need to formulate employment policies, educate entrepreneurs, and for government to provide an enabling environment for accelerated growth of the sector.

JEL classification: E24, E26

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