Informality and Economic Growth in Nigeria: 1980-2014

The paper examines the impact of informal sector activities on economic growth in Nigeria between 1980-2014. The contributions of informal sector activities to the growth of Nigerian economy cannot be over emphasized. It is the source of livelihood to the majority of poor, unskilled, socially marginalized and female population and is the vital means of survival for the people in the country lacking proper safety nets and unemployment insurance especially those lacking skills from formal sector jobs. The relationship between informality and economic growth is not clear because the sector is not regulated by the law also there is no concrete evidence that this sector enhances growth because the sector’s contributions to growth is not measured. The use of endogenous growth model becomes relevant in this study. The theory emphasizes the role of production on the long-run via a higher rate of technological innovation. The variables that were tested are official economy nominal GDP, informal economy nominal GDP, currency in circulation, demand deposit, ratio of currency in circulation to demand deposit, narrow money, informal economy as percentage of official economy. ADF test was conducted to establish that the data series of all variables are stationary t levels. Having established the stationarity test we also, conducted causality test of the response of official economy nominal GDP to informal economy nominal GDP. In conclusion, the impact of informal sector economy on economic growth in Nigeria is quiet commendable. Even though, the relationship between informality and economic growth is not straight. The paper recommended thus, the need for the government to integrate the activities of the informal economy into formal sector and size of the sector is measured and regulated because their roles are commendable. As it will improve tax collection and enhance fiscal policy.

are also traditional spiritualists who offer counseling services. These services are rendered for fees paid to those who render them.
(iii) Informal financial sub-sector: The activities of this sub-sector are mostly unofficial, irregular, informal, shadowy and parallel. The most predominant type of informal finance in Nigeria is the ESUSU. Among the Yoruba, it is called either ESUSU, Ajo. Among the Igbo, it is called Isusu or Utus.
Some groups operate with written laws while others operate with unwritten laws but on oath of allegiance and mutual trust.

Monetary Policy and Informal Financial Market in Nigeria
Monetary policy is one of the viable tools of macroeconomic management. It aims at controlling the growth of monetary aggregates and assists either policy tools to achieve macroeconomic goals and low inflation, balance of payments viability and sustainable output growth could be attained. It is generally believed that monetary policy works in concert with other policy tools to enhance the achievement of overall macroeconomic objectives. Therefore, monetary policy is central to macroeconomic management and is indeed supportive of other policy tools, especially fiscal policy. The integration between financial markets, economic growth and monetary policy is a crucial issue for Central Bank.
The continued integration and keeping of financial markets is a significant issue for policy-makers, and particularly for Central Bank, since the functioning and efficiency of the financial markets are crucial in ensuring smooth transmission of monetary impulses to the economy. It is also known that monetary policy helps to promote orderly development of the financial markets as well as share the behaviour of the market participants (Masha, 2004). reserves and short-run interest rates. Monetary base will influence changes in money supply, aggregate credit and long-run interest rates. The level of bank reserves balances has similar effect while short-run interest rates will influence long run interest rates, aggregate credit and money supply. Monetary policy influences the availability and cost of money in the economy. In ensuring monetary stability, the Central Bank through the deposit money banks implements policies that guarantee the orderly growth and development of the economy through appropriate change in the level of money supply. Monetary and primary auction of treasury bills. Also the central bank uses the discount window operations to influence the movement of bank reserves. All these activities affect the banks in their credit operations and thus influence the cost and availability of loanable funds. Thus, the financial markets provide a useful channel for the implementation of monetary policy. An efficient and well-organized market will therefore enhance the speed of monetary policy transmission.
However, the existence of a large informal financial market in an economy is detrimental to effective financial intermediation as well as hampers the effectiveness of monetary policy actions. When a large amount of money is outside the banking system, the ability of the central bank to influence financial and monetary conditions through the manipulation of deposit money bank's reserve balance using indirect monetary policy instruments is impaired. In this regard, Nnanna (2001) identifies the existence of dualistic financial markets as a serious constraint to monetary policy management in Nigeria. The best contribution that monetary policy can make to the smooth functioning of the financial markets and the economic growth is to maintain a steady medium-term price stability. Such a policy outcome will be beneficial as it will minimize the adverse effects of inflation price stability will not operate a climate for higher economic over the medium term, but also reduce the economic and social inequalities caused by the asymmetric distribution of the costs of inflation among the various economic agents.

Stylized Facts on Informality and Economic Growth
The nexus between economic growth and informality is always a thing of interest at different point in time. Before now Economic growth was noted to be growth of organized economic activities via speedy industrialization which aid capital formation and increase domestic output and enhance export of goods and services. Also, with this increase in per capita income, wealth creation and human capital development, economic activities were assumed to be organized. But has is actual on ground does not match with the vision of economic transition in the world. The market failed to recognize or take into account the ever growing number of people who were found largely in the activities outside the formal sector. Originally, informal sector was viewed as a temporary situation that would vanish with the take-off in economic growth.
The expansion of the informal economic over several years and the reduction in employment situation in many developing countries has believed to be associated with low GDP growth rates (ILO, 2004). As noted from many recent works or research, this view about informality and economic growth may not be entirely valid. For example, Latin America experienced economic recovery and growth in the 1990s but it is still faced with an increase in unemployment (Becker, 2004). Until the recent crises n the global economy, SSA experienced one of the fastest growth rates in the history and also in the world over the last six years, and get this did not affect negatively the size of the informal economy. There is indeed evidence of an ever expanding informal economic in this region. In 2014, Nigeria economic was debase indicating that all sectors of the economy has grown over the period and yet did not affect negatively the size of the informal economy, in fact the informal economy in Nigeria is main source of livelihood of people living in rural areas. In Ghana, real GDP growth has average 5.2% in the past two decades, rising to more than 6 percent since 2006 and yet the informal economy shape of total employment has increased from 80. 5% between 1987/1988 to 88.6% between 2005-2006. It is important to clear that since the late 1960s and 1970s, very significant of population in developing nations have suffered negligence of lack of gainful employment and are organized in informal activities.
Economic growth seems to be unable to reduce the sizes of the informal economy first among us.
This may be as result of increased population growth and urban migration. Hence, active labour force grows at a much faster rate than the availability of jobs in the organized or formal sector. Nigeria as a nation experience "youth bulges" a situation when young people or active people comprises at least 10 percent of the population. This is a serious concern to the policy makers and government as this may lead to frustration and social unrest if the preparations of the population (young men) are not gainful employed over time. The contribution of globalization to high unemployment rates in developing economies is quite evident. The disintegration of production and the integration of trade, whereby global buyers are out sourcing some of their activities in labour advantageous regions have led to the retrenchment of many low-skilled workers who had originally been involved in the activities being out sourced (Feenstra, 1998). Noting this analysis, there have been suggestions that in some countries the informal economy is proffered, and is entered voluntarily (Chen, 2004). The reason often given is that there are complementarities that exist between the formal and informal economies which make it impossible to completely transform the informal economy to a formal one. Chen (2004) argues that most informal enterprises and workers are indirectly linked to formal firms. There is believed that the nexus between economic growth and informality is driven to a large extent by how growth impacts the lives of the poor in an economy and what access the poor may have to the growth points in an economy.
Using the monetary approach (Guttman, 1977) have shown that income generated in the informal sector is a significant proportion of official GDP, especially in African countries. Two studies on

Is There Relationship between informality and Economic growth?
The issues regarding Economic growth and informality are not clear but are wide and varied. However, whether informality leads to economic growth or not is an issue that has been discussed and analyzed by many agents of government, policy-makers and or economist. There are those who advocate growth at all cost and those who suggest that the emphasis be placed on policies that directly affect informal sector activities. Yet, the impact of informality on economic growth depends on the nature, strength and other characteristics of the links that exist between informality and growth at a given point in time and in particular country. The issue of economic growth is a difficult concept to direct countries to follow a strategy of growth maximization.
Technically, different growth strategies induce different patterns of growth that differ in both the rate of economic growth and the resulting Distributing of income (Aryeetey & Hettige, 1997). The relationship between informality and economic growth can determine either growth strategy is pro-poor or broad-based growths. It is important to clear that pro-poor growth is targeted at all such of expenditure that directly serve the objective of poverty alleviation particularly at informal economy, and broad-based growth focuses on government expenditure by way of enhancing GDP in the first instance and the results of increased GDP can lead to thriftiness and hence poverty reduction. For the purpose of emphasis, the nexus between growth and informality cannot easily be measured because informal activities worldwide are not regulated by the government, particularly those that operate in the rural areas, they lacked social safety nets and managerial skills therefore, keeping records of sorts of transactions becomes difficult.

Rationale for Informal Sector Economy
The importance of informal economy to domestic production cannot be emphasized. The sector was noted as a means of livelihood in developing countries particularly the rural dwellers. They have the prowess to create job opportunities and alleviating poverty. Evidence has showed that large number of consumer demand in the economy is catered by the informal economy; the problem is what are the quantities of goods and services they are to produce? The degree of production in stimulating consumption? This problem arises because the sector is not regulated. The medium of communication or interaction amongst other economic agents in a typical African economy is outmoded.

Informal Sector Activities and Inclusive Growth
The concept of inclusive growth demands analysis of how employment opportunities arise and change with growth process. Economic growth can enhance by the increase in the activities of informal economy or employment. For example, in Nigeria the role of informal economy activities is quite commendable even though, there are bottlenecks in terms of size and measurement, but informal wage employment or sub-contracted self-employment has shown clear supportive evidence to economic growth by reducing the cost of labour and improving competitiveness; since large number of this category are unskilled they also serve as a raw materials in a formal industrial sector, but keeping unskilled workers in a "formal" industrial sector for a long-term period will lead to low levels of productivity and dismal earnings and this will put the growth in to a standstill. In order to enhance productivity there is need to integrate labour out of low-quality employment into more productive activities. This could also mean there is a reduction in the proportion of people informally employed would constitute an important element of an employment focused approach to inductive growth (Aryeeteey, 2015).
This paper proposes operational definition of the informal sector activities and also provides a relationship between informality and economic growth in Nigeria using some macroeconomic variables.

Methodology and Theoretical Framework
This section presents the analytical procedure adopted in this study which includes source of data, model specification, method of analysis and a priori expectation on the study "informality and the economic growth in Nigeria. The use of endogenous and Lucas growth models becomes relevant.

Model Specification
We proceed to specify the baseline empirical model which captures the hypothesized relationship among the core variables under investigation. The endogenous growth theory is considered. The theory of course emphasizes the role of production on the long-run growth via a higher rate of technological innovation Lucas (1988); Romer (1986). Thus we adapt Lucas (1986). The model is specified thus: OFECON t = f(IFECON t , IFEGDP t , CIC t , DD t , CDD t , M1 t , μ t ) The functional equation (1) is represented in an explicit form as equation (2) below: OFECON t = β 0 + β 1 IFECON t + β 2 IFEGDP t + β 3 CIC t + β 4 DD t + β 5 CDD t + β 6 M1 t + μ t (2) Where: Official

Empirical Analysis and Policy Implications of the Result
The analysis is based on time series data. This therefore requires some specific approaches to the analysis. It is generally known that the econometric estimation of a model based on time series data demands that the series be stationary, as non-stationarity series usually results in misleading inferences.
Engle and Granger (1987)  Having established the stationarity level of the variables, we proceed to establish causality test.   is explained by the regressed model. The F-statistics which measures the worthiness of the R-squared is statistically significant at 5% significant level (critical value of F-statistic at 5% significant level is 2.47), implying that the estimated model is fit for prediction and forecasting. Nevertheless, the estimated model is found to have positive autocorrelation problem (DW = 1.33).  Source: Authors computation, 2015.

Conclusion and Recommendations
The impact of informal sector economy on economic growth in Nigeria is quite commendable. Even though, the relationship between informality and economic growth is not straight. Still, its contributions on growth are enormous as it serves as the bases of livelihood for rural dwellers in developing economies. We found endogenous growth model and monetary approach more relevant in our findings.
However, informal economy has a significant and positive impact on official economy nominal GDP.
It's evident that the currency in circulation to demand deposit, currency in circulation plus demand deposit, ratio of currency in circulation to demand deposit have positive impact on official economy nominal GDP.
The paper recommended thus, the need for the government to integrate the activities of the informal economy into formal sector and the size of the sector is measured and regulated because their roles are commendable. As it will improve tax collection and enhance fiscal policy.
The need for the government to provide enable environment for effective monitoring and supervision of the sector because most illegal activities operate in the informal sector where there is no or less regulation. This can influence the sector policy-wise if it knows what is happening in the informal sector which can be made possible through proper record keeping, documentation, accounting and regulation.