Harnessing DPI to Address Informality and Boost DRM: A Case of the Shadow Economy

This policy brief by the South African Institute of International Affairs examines how Digital Public Infrastructure (DPI)—comprising digital identity, payments, and data-sharing systems—can be used to reduce the shadow economy and improve domestic resource mobilisation (DRM) in Africa. It argues that while digital payments increase transaction visibility, they must be paired with structural reforms and strategic targeting of high-value tax evaders rather than vulnerable micro-vendors. The document highlights lessons from South Korea and India and suggests that South Africa use its 2025 G20 presidency to advocate for an 'Africa stack' and peer learning on DPI best practices.

• The shadow economy in Africa, which includes both informal and illicit activities designed to evade regulation and tax, represents a significant portion of economic activity. According to the IMF, this informal activity accounts for roughly 35% of GDP, estimated at $1–1.2 trillion. A separate EY study estimates the shadow economy in Northern, Southern, Central and Eastern Africa ranges from 24.1% to 41.6% of GDP.
• Cash transactions are a primary driver of the shadow economy because they do not create a formal audit trail, making it easier to hide activities from authorities. This contributes to the 'tax gap'—the difference between expected and actual tax collections—and is particularly evident in Sierra Leone, Niger, and Ethiopia, where tax-to-GDP ratios are below the regional average of approximately 16%.
• Digital payments can reduce the shadow economy by increasing the visibility of transactions, but adoption alone is insufficient for tax compliance. Evidence from Uruguay showed that increasing card usage via VAT rebates did not improve compliance because non-compliant firms avoided adopting point-of-sale (POS) systems, and compliant firms did not change their reporting behavior.
• South Korea successfully reduced its shadow economy from approximately 28% of GDP in 1999 to about 7.6% currently by shifting focus from seller deterrents to consumer incentives. The Tax Incentive for Electronically Traceable Payments (TIETP) encouraged the use of electronic payments in B2C transactions by allowing wage earners to claim tax deductions, thereby disrupting collusive cash-based tax evasion.
• India's experience with demonetisation and the 'India Stack'—which integrates Aadhaar (digital ID), the Unified Payments Interface, and data-sharing systems—increased the use of digital payments and provided tax authorities with better visibility into sales, leading to improved compliance under the Goods and Services Tax regime.
• Uganda's use of DPI shows mixed results: integrating taxpayer IDs with the national ID system registered over 350,000 informal participants by 2022, but revenue impact was limited by weak enforcement and lack of automated data updates. Conversely, the Electronic Fiscal Receipting and Invoicing System increased VAT revenues by 12% through real-time data collection.
• The document recommends that African tax authorities avoid a blanket approach to the informal sector. Instead, they should prioritize 'strategic compliance targeting' of registered actors who operate informally—such as construction firms and professional services—rather than small-scale micro-vending or subsistence work, which should be protected via social protection systems.
• South Africa is encouraged to use its 2025 G20 presidency to advocate for an 'Africa stack' using open APIs and modular technology to spur private sector innovation. The brief also suggests the G20 and African Union (AU) host peer learning workshops to share DPI best practices, with India and South Korea as potential partners.

APA

South African Institute of International Affairs (2025). Harnessing DPI to Address Informality and Boost DRM: A Case of the Shadow Economy. https://saiia.org.za/research/harnessing-dpi-to-address-informality-and-boost-drm-a-case-of-the-shadow-economy/

Chicago

South African Institute of International Affairs. Harnessing DPI to Address Informality and Boost DRM: A Case of the Shadow Economy. 2025. https://saiia.org.za/research/harnessing-dpi-to-address-informality-and-boost-drm-a-case-of-the-shadow-economy/.

Wikipedia

{{cite report |author=South African Institute of International Affairs |title=Harnessing DPI to Address Informality and Boost DRM: A Case of the Shadow Economy |date=15 September 2025 |url=https://saiia.org.za/research/harnessing-dpi-to-address-informality-and-boost-drm-a-case-of-the-shadow-economy/ |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{southafricaninstituteofinternationalaffairs2025harnessing, author = {{South African Institute of International Affairs}}, title = {{Harnessing DPI to Address Informality and Boost DRM: A Case of the Shadow Economy}}, institution = {South African Institute of International Affairs}, year = {2025}, month = sep, url = {https://saiia.org.za/research/harnessing-dpi-to-address-informality-and-boost-drm-a-case-of-the-shadow-economy/}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }