Do Shadow Economy and Institutions Lessen the Environmental Pollution? Evidence from Panel of ASEAN-9 Economies

Southeast Asian countries have experienced a significant level of economic growth over the years but have not managed to safeguard their environmental attributes in tandem. The shadow economy is seen as one of the main factors which can significantly affect environmental quality. However, bringing the shadow economy in the picture, the institutional quality plays a critical role on environmental pollution. This study explores the effects of the shadow economy and institutions on environmental pollution in ASEAN-9 countries by applying the second-generation panel techniques using annual data. The second-generation panel unit root tests show the unique order of integration in series. The long-run cointegrating association exists among variables using Pedroni, Kao, and Westerlund panel cointegration tests. Moreover, the long-run elasticity is estimated using the ARDL approach and confirms an N-shaped EKC hypothesis in ASEAN-9 countries. Our empirical results also reveal that financial development and energy consumption significantly and positively effect environmental pollution. However, institution quality has an insignificant impact and the shadow economy significantly lessen environmental pollution. Finally, the causal interaction pathways are identified by using the D-H panel causality test. In addition, a unidirectional causality has been found from financial development to ecological footprint, shadow economy, and economic growth. Furthermore, institutional quality causes an ecological footprint. Consequently, robust regulating policies should be implemented to reduce the size of the informal economy to prevent environmental degradation. Furthermore, the ASEAN governments should finance energy infrastructure development to improve renewable production capacities with zero emissions.

Automated summary

Southeast Asian countries have experienced significant economic growth, but have not effectively protected their environment. The shadow economy is seen as a major factor affecting environmental quality, while institutional quality plays a critical role in environmental pollution. This study examines the impact of the shadow economy and institutions on environmental pollution in ASEAN-9 countries using panel data techniques. The findings suggest that financial development and energy consumption have a significant positive effect on environmental pollution, while institutional quality has an insignificant impact and the shadow economy actually reduces environmental pollution.