Abstract
Given the increase in the informal economy in developing countries economies, a better understanding of the effect of the informal economy on environmental degradation is essential for policy makers. The aim of this study is to examine the impact of the informal economy (IFE) on the ecological footprint (EFP) in Saudi Arabia during the period 1981-2017. An autoregressive distributed lag model (ARDL) was used to test the long-term relationship between the examined variables. It determined which variable was causally related to the other using Granger causality analysis. The long-run coefficients of ARDL showed that the IFE had a positive influence on ecological footprint in Saudi Arabia in the long run. In contrast, EFP can increase the informal economy. The Granger causality based on VECM approach shows bi-directional causality between EFP and IFE in the short run and the long run. Therefore, the findings of this study can help policy makers in Saudi Arabia and a number of countries with a large informal sector to better understand the role of governance in reducing the IFE in order to improve the environmental quality.
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