Shadow economy, institutions and environmental pollution: insights from Africa

Abstract

PurposeThis study investigates the effect of shadow economy on environmental pollution and the role of institutional quality in moderating the impact in African countries between 1991 and 2015.Design/methodology/approachThe study employs three pollutant variables namely: carbon dioxide emissions per capita, methane emission and nitrous oxide emission as robustness check. Also, battery of methodologies; ordinary least squares, fixed effects and system generalised method of moments are used to drive out the conclusions of this study.FindingsThe findings reveal that shadow economy and institutional quality contribute significantly to environmental pollution in Africa. Further, the interactive effect of shadow economy and institutional quality worsens environmental quality in the region. This reveals that weak institutional quality recorded in the region increases the level of shadow economy, thereby intensifying environmental pollution.Practical implicationsThe study concludes that weak institutional framework in the region reinforces shadow economy and environmental pollution. Hence, findings from this study can help policymakers in the region to better understand the role of institutional quality in reducing shadow economy and environmental pollution.Originality/valueThis study enriches one’s understanding on the role of institutional quality in the relationship between environmental quality and shadow economy in African context. It investigates the direct and indirect impact of institutions and shadow economy on environmental quality. The study also uses three different robust variables to measure environmental pollution (carbon dioxide (CO2) emissions per capita, methane emission and nitrous oxide emission) for sensitivity analysis.

The moderating role of institutional quality in shadow economy–pollution nexus in Nigeria

“…This reveals that shadow economy has negative long-run impact on the environment by worsening the environmental quality. The outcome of this study is in tandem with both the theoretical and empirical studies by Baksi and Bose (2010), Biswas et al (2012), Yu and Gao (2015), Chen et al (2018), Swain et al (2020) and Dada et al (2021). On the hand, institutional quality has a negative impact on environmental quality both in the short and long run; however, the coefficient of institutional quality is not significant in the short run.…”

“…Huynh (2020) empirically reveals that air pollution has a positive impact on size of shadow economy while expansionary fiscal policy decreases the detrimental impact of air pollution through shadow economy. Further, Dada et al . (2021) examine the effect of shadow economy on environmental degradation in the presence of institutional quality in Africa between 1991 and 2015.…”

“…From equation (3), there are three basic channels through which institutional quality ( INST ) could affect environmental pollution. First, strong institutional quality motivates investors (local and foreign), promotes equity and fairness in the distribution of resources (North, 1990; Jutting, 2003), lessens the prevalence of shadow economy (Johnson et al , 1998; Friedman et al , 2000); and thus abating pollution emission (Biswas et al , 2012; Huynh and Ho, 2020; Dada et al , 2021). Second, strict institutional quality, which translates to strict environmental laws and regulation, could make firms transfer their productions to firms in the underground economy in order to avoid pollution emission tax rate, consequently, worsens environmental quality in the long run (Gupta, 2006; Chaudhuri and Mukhopadhyay, 2006; Biswas et al , 2012; Mazhar and Elgin, 2013).…”

“…One of the shortcomings of EKC lies on the orientation that it strips down the analysis to the relationship between environmental and economic indicators. However, new development in the literature has provided an extension by incorporating institutional and structural variables including quality of institutions and size of shadow economy (Swain et al , 2020; Dada et al , 2021). Pollution may correlate with corruption and bureaucratic quality in government system, thereby reducing the effectiveness of governance system (Elgin and Oztunali, 2014; Huynh, 2020; Pang et al , 2020; Huynh and Ho, 2020; Nkengfack et al , 2020).…”

The impact of informal economy on technological innovation–ecological footprint nexus in OECD countries: new evidence from panel quantile regression

“…The review of existing literature indicates that although the technology-shadow economy-environmental quality nexus has been examined by several studies, such inter-relationships are more than complicated. Although technological innovations are often found to help control environmental degradation in most empirical studies (Álvarez-Herránz et al, 2017;Balsalobre-Lorente et al, 2019;Hsu et al, 2021), several studies indicate that their effectiveness cannot be achieved or depends on many decisive factors (Cheng et al, 2019;Dada et al, 2021;Huynh, 2020;Koçak and Ulucak, 2019;Wang and Wei, 2020). First, developing and deploying technologies for environmental problem solving involve a broad range of activities that are to be taken by different "external" stakeholders, including enterprises, households, and governments.…”