Shadow Economy and Environmental Pollution in West African Countries: The Role of Institutions

Abstract

This study deviates from extant studies by examining the effect of shadow economy (SE) on environmental pollution, and the role institutional indicators play in moderating the effect in West Africa between 1992 and 2015. Specifically, the study employed three institutional indicators (corruption control [COR], law and order [LAW], and bureaucratic quality [BUQ]) to mediate the effect and also determine its threshold values. SE is measured using Multiple Indicators Multiple Causes (MIMIC) while environmental pollution is proxy by carbon dioxide (CO2) per capita. Two step system Generalized Method of Moments (GMM) is used to drive out the conclusions of the study. The findings reveal that SE, COR and LAW contribute significantly to environmental pollution, while BUQ though not significant, reduces environmental pollution in the region. Further, the interactive effect of SE with all the institutional indicators shows that strong institutional indicators abate environmental pollution through reduction in the presence of SE. The threshold value of institutional indicators, which reduces SE and abates environmental pollution, are 3.8 and 3.7 for COR, and LAW, respectively, on an ordinary scale of 0–6, while 2.8 for BUQ on an ordinary scale of 0–4. Nevertheless, most of the countries in the region operate below the threshold level of institutional indicators in the region. The results are robust to different proxies of environmental pollution. The implications of the study are discussed.

Financial development–ecological footprint nexus in Malaysia: the role of institutions

“…Similarly, an increase in economic growth also comes with both production and consumption wastes which deteriorate long-run environmental quality. The short-run result of negative effect of economic growth on ecological footprint is supported by the finding of Danish et al (2019), while the long-run result is in tandem with the works of Uddin et al (2017), Mrabe et al (2017), Zafar et al (2019), Ibrahiem and Hanafy (2020), Usman et al (2021a, b), Yang et al (2021a) and Dada et al (2021b) whose findings conclude that economic growth degenerates the environment.…”

“…The positive effect of trade openness on EFP aligns with the submissions of Al-Mulali et al (2015), Le et al (2016) and Dada and Akinlo (2021) who conclude that trade openness spurs environmental degradation. Nevertheless, studies by Chen et al (2018), Fakher (2019) and Dada et al (2021a, b) found that trade openness improves environmental quality. Population (proxy by population growth rate) has different significant effects on EFP in the short run, while in the long run, the effects are not significant.…”

“…Second, previous studies fail to examine the role of institutional quality as an absorptive capacity in the relationship between financial sector development and ecological footprint. Institutions play a crucial role in maintaining environmental quality especially in developing countries (Panayotou, 1996; Deacon, 2003; Ibrahim and Law, 2015; Dada and Ajide, 2021; Dada et al , 2021a, b). Strong institutional environment and framework facilitate efficient allocation of resources to productive activities, thus promoting environmental sustainability (Haini, 2020; Fernández and Tamayo, 2017; Law et al , 2014; Olaniyi and Oladeji, 2021).…”

“…Third, most studies in the environment literature measure environmental quality using CO 2 emission (Akinlo and Dada, 2021; Dada et al , 2021a, b; Huynh and Ho, 2020; Hanif, 2018). This measure is limited and weak in measuring environmental quality since it only measures air contamination and not total human activities on the environment (Usman and Hammar, 2021; Usman et al , 2022).…”

The impact of ICT on shadow economy in West Africa

“…West Africa provides an interesting study area, being one of the regions with the highest level of shadow economy (Dada et.al. 2021b), and also ICT penetration has begun to gain momentum in the region (ITU 2018; Akinlo and Dada 2021). In addition, the prevalence of ICT in the region, especially internet penetration in terms of mobile and broadband connectivity, has become an important policy objective of the government in addressing the issue of crime and shadow economy.…”