Shadow Economy and Environmental Sustainability in Global Developing Countries: Do Governance Indicators Play a Role?

Yi Wang, Valentin Marian Antohi, Costinela Fortea, Monica Laura Zlati, Reda Abdelfattah Mohammad, Farah Yasin Farah Abdelkhair and Waqar Ahmad ()
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Yi Wang: School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710061, China
Valentin Marian Antohi: Department of Business Administration, Dunarea de Jos University, 800008 Galati, Romania
Costinela Fortea: Department of Business Administration, Dunarea de Jos University, 800008 Galati, Romania
Monica Laura Zlati: Department of Business Administration, Dunarea de Jos University, 800008 Galati, Romania
Reda Abdelfattah Mohammad: Business Administration Department, Applied College, King Khalid University, Khamis 62461, Saudi Arabia
Farah Yasin Farah Abdelkhair: Business Administration Department, College of Science & Arts, King Khalid University, Muhyel 63751, Saudi Arabia
Waqar Ahmad: School of Economics, International Islamic University Islamabad, Islamabad 44000, Pakistan

Sustainability, 2024, vol. 16, issue 22, 1-23

Abstract: Environmental sustainability has been a challenging issue all over the globe, with air pollution posing a significant threat. One main factor contributing to air pollution is the growth of the shadow economies. This study investigates the effect of the shadow economy on air pollution and explores how these effects depend on the levels of governance indicators. We utilize key air pollution indicators: carbon dioxide (CO 2 ) and nitrous oxide (N 2 O) emissions. Furthermore, we examine the role of key governance indicators: corruption control, the rule of law, and regulatory quality. The study utilizes an annual panel dataset of 107 selected developing countries worldwide, spanning from 2002 to 2020, and employs the System GMM technique, which effectively tackles the omitted variable bias, potential endogeneity, and simultaneity issues in the model. The estimation results indicate that a sizeable shadow economy significantly increases the levels of CO 2 and N 2 O emissions. Moreover, the results reveal that robust governance frameworks, evidenced by enhanced corruption control, a stronger rule of law, and superior regularity quality, mitigate the adverse effects of the shadow economy on CO 2 and N 2 O emissions. This highlights a significant substitutability between the shadow economy and governance indicators, indicating that improvements in governance formworks will not only reduce the size of the shadow economy but also weaken its harmful impact on air pollution. Policy initiatives should thus focus on strengthening governance mechanisms, particularly enhancing control of corruption and the rule of law to effectively reduce the environmental impact of the shadow economies in developing countries. Additionally, governments should prioritize reforms in regulations and legal frameworks to limit the expansion of the shadow economy, thereby decreasing their contribution to air pollution.

Keywords: shadow economy; air pollution; environmental sustainability; corruption control; rule of law; regulatory quality; developing countries; system GMM (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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