Working Papers

Research on the relationship between oil wealth and economic growth has shown that the impact of oil can depend on various factors or conditions. However, the role of the underground economy in this relationship remains underexplored. This study aims to fill this gap by examining how the underground economy influences the oil wealth-growth nexus in Nigeria from 1990 to 2022, using the bootstrap autoregressive distributed lag (ARDL) bounds-testing technique. The empirical findings reveal that the effect of oil wealth on economic growth varies with the size of the underground economy. Specifically, the results indicate that the marginal impact of oil wealth on growth is positive when the underground economy is relatively small, but becomes negative as the underground economy expands. This suggests that the underground economy serves as a channel through which oil wealth negatively affects long-term economic growth. The economic implication of this finding is that for sustained long-term growth, increases in oil wealth must be accompanied by significant efforts to reduce the size of the underground economy.

This study employs the recently proposed bootstrap autoregressive distributed lag (ARDL) model augmented with a Fourier function and the dynamic ARDL simulation procedures to examine whether the oil price-economic growth relationship is dependent on the level of corruption in an oil-dependent economy. Using Nigerian quarterly data during the 1996Q1-2021Q4 period, the results of the bounds-testing present evidence for cointegration between the variables. In addition, the results indicate that oil price and corruption are growth-enhancing, but the effect of oil price on growth is contingent on the level of corruption. Moreover, evidence suggests that the marginal effect of oil price on economic growth varies with the level of corruption; the lower the level of corruption, the higher the growth-enhancing effect of oil price on economic growth, and vice versa. The dynamic ARDL simulations plots demonstrate the significant increase (decrease)in predicted growth in the short-term due to a counterfactual rise in the price of oil price (corruption), which gradually deflates (increase) after the shock in the long-term. Therefore, policies geared toward diversifying the economy away from oil, reducing corruption in the oil and gas industry and the security sector, improving agricultural output, and reducing unemployment rate are recommended to enhance growth.