Shadow Economy and Environmental Pollution Nexus in Developing Countries: What is the Role of Corruption?

Abstract

The objective of this study is to investigate the effects of the shadow economy on environmental pollution and how this effect depends on the levels of corruption. The study utilizes an annual panel dataset of 127 selected developing countries worldwide, spanning from 2002 to 2018, and employs the Generalized Method of Moments (GMM) technique, which effectively addresses potential endogeneity issues in the model. The estimation results reveal that the shadow economy increases the level of environmental pollution. Furthermore, the results indicate that corruption intensifies the impacts of the shadow economy on environmental pollution. This highlights a significant complimentary between the shadow economy and corruption, indicating that an increase in the levels of corruption will lead to an increase the shadow economy and will also strengthen its harmful impact on environmental pollution through the channel of corruption. Additionally, the estimates remain robust when using alternative measure of the shadow economy.