This paper investigates the relationship between institutionalized democracy and the shadow economy in both the long- and short-run using time series data from Uganda (1991-2015). The autoregressive distributed lag (ARDL) method reveals a negative correlation between the shadow economy and institutionalized democracy in both the short and long run. Improved democracy significantly hinders shadow activities, suggesting that strong institutions regulate economic agents and improve resource allocation, thus reducing the incentive to participate in the informal sector. Policy implications emphasize governance reform for efficient resource allocation and a shift from addressing proximate causes of informality to democratic reforms.

Stephen Esaku