On the nonlinear relationships between shadow economy and the three pillars of sustainable development: new evidence from panel threshold analysis

Abstract

Most previous studies that examined the relationship between the size of shadow economy and the pillars of sustainable development maintained that this relationship is linear. This paper provides an empirical contribution to the literature by arguing that this relationship is likely to be nonlinear, and it might be subject to threshold effects. For this purpose, in addition to the static threshold panel model of Hansen (1999. “Threshold Effects in Non-dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93 (2): 345–68), the dynamic panel threshold model suggested by Seo and Shin (2016. “Dynamic Panels with Threshold Effect and Endogeneity.” Journal of Econometrics 195 (2): 169–86) has been applied to a larger panel-data set covering 83 developed and developing countries over the 1996–2017 period. Empirical results from both models yield evidence advocating the existence of threshold effects of the shadow economy on the economic, social, and environmental dimensions of sustainable development for the global sample as well as the sub-samples of developed and developing countries. Moreover, for the global sample and developing countries, our findings show that shadow economy would spoil the three sustainable development pillars only when its size exceeds a certain threshold critical size. While, the impact for developed countries was found negative even for low levels of underground activities. These finding are shown to be robust to alternative proxies for the size of the shadow economy and have important policy implications, especially for developing countries. In these countries, a moderate size of the shadow economy might have positive spillovers on long-term growth and sustainable development. Our research also suggests that, for developing and developed countries to achieve sustainable goal 8.3, the extent of the shadow activities should be taken into account.

Are democratic regime and the magnitude of the informal economy robust determinants of human impacts on the environment? An extreme bounds analysis

“…The literature is indeterminate at this point. The most recent academic contribution describes the relationship between the shadow economy and the environment as heterogeneous, implying the existence of threshold effects (i.e., the shadow economy is only effective above a certain critical size) that lead to an inverted U‐shaped curve (Chu & Hoang, 2022; Saafi et al, 2023). If this is the case, STRIPAT is not well‐suited to handling nonlinearities, making it a poor model for analyzing the function of the shadow economy.…”

Unlocking Africa's potential: The transformative power of foreign direct investment for sustainable development

“…However, despite the myriad interpretations and perspectives, there is a remarkable convergence and agreement among scholars and practitioners on the key three pillars that universally underpin the concept of sustainable development [ 33 , 36 ]. These pillars, namely the economic, social, and environmental dimensions, provide a comprehensive framework for understanding and promoting an inclusive approach to development that meets the needs of the present without compromising the ability of future generations to meet their own needs [ [37] , [38] , [39] , [40] , [41] ].…”

How does governance quality affect the shadow economy-sustainable development nexus: New insights from a dynamic threshold analysis

“…The nexus between the shadow economy and sustainable development has been the subject of an ongoing debate among academic researchers over the past few decades. As mentioned by Saa et al (2022) and Sultana et al (2022b), the extant literature could be roughly categorized into three broad strands. The rst strand focus on shadow economy's impact on the economic dimension of sustainable development, i.e., economic growth.…”