Skip to main content

Advertisement

SpringerLink
Log in

Shadow economy and air pollution in developing Asia: what is the role of fiscal policy?

  • Research Article
  • Published:
Environmental Economics and Policy Studies Aims and scope Submit manuscript

Abstract

Asian developing countries face challenges of serious air pollution and large shadow economy. Fiscal policy is anticipated as a solution to cope with these obstacles. This paper empirically examines the impact of shadow economy on air pollution and the role of fiscal policy in moderating the impact through the two tools of government expenditure and taxation in 22 Asian developing countries during 2002–2015. The estimation results from the fixed effects and the system generalized method of moments show that air pollution is positively affected by the shadow economy; and expansionary fiscal policy can reduce air pollution through abating shadow economy, and can lessen the detrimental effect of shadow economy on the environmental quality. Specifically, the increase in government expenditure reduces the positive effect of shadow economy on air pollution, but a tax-hike intensifies it. It is also found a stronger negative impact of government expenditure, compared to positive impact of taxation, and a dominant impact of shadow economy on air pollution. The findings imply that policy-makers can use appropriate fiscal policies to control air pollution and to reduce the destructive effect of the informal economy on the environmental quality in developing countries. Especially, governments in developing countries should allocate more budgets on environmental projects in their fiscal reforms for the sake of moving to greener and more inclusive economies with low-carbon activities.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For more details: https://www.who.int/news-room/detail/02-05-2018-9-out-of-10-people-worldwide-breathe-polluted-air-but-more-countries-are-taking-action.

  2. https://www.environmentalpollutioncenters.org/air/.

References

  • Alm J, Embaye A (2013) Using dynamic panel methods to estimate shadow economies around the world, 1984–2006. Public Financ Rev 41(5):510–543

    Article  Google Scholar 

  • Akbostanc E, Tunç G, Türüt-Aşık S (2011) CO2 emissions of Turkish manufacturing industry: a decomposition analysis. Appl Energy 88(6):2273–2278. https://doi.org/10.1016/j.apenergy.2010.12.076

    Article  Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

    Article  Google Scholar 

  • Atkinson AB, Andrea B (2001) Promise and pitfalls in the use of “secondary” data-sets: income inequality in OECD countries as a case study. J Econ Lit 39(3):771–799

    Article  Google Scholar 

  • Bajada C, Schneider F (2005) The shadow economies of the Asia-Pacific. Econ Rev 10(3):379–401

    Google Scholar 

  • Baksi S, Bose P (2010) Environmental regulation in the presence of an informal sector. Departmental Working Papers 2010-03. The University of Winnipeg, Department of Economics

  • Barra C, Zotti R (2017) Investigating the non-linearity between national income and environmental pollution: international evidence of Kuznets curve. Environ Econ Policy Stud 20(1):179–210. https://doi.org/10.1007/s10018-017-0189-2

    Article  Google Scholar 

  • Bernauer T, Koubi V (2013) Are bigger governments better providers of public goods? Evidence from air pollution. Public Choice 156(3–4):593–609. https://doi.org/10.1007/s11127-012-9916-1

    Article  Google Scholar 

  • Bilen K, Ozyurt O, Bakırcı K, Karslı S, Erdogan S, Yılmaz M, Comaklı O (2008) Energy production, consumption, and environmental pollution for sustainable development: a case study in Turkey. Renew Sustain Energy Rev 12(6):1529–1561. https://doi.org/10.1016/j.rser.2007.03.003

    Article  Google Scholar 

  • Biswas AK, Farzanegan MR, Thum M (2012) Pollution, shadow economy and corruption: theory and evidence. Ecol Econ 75:114–125. https://doi.org/10.1016/j.ecolecon.2012.01.007

    Article  Google Scholar 

  • Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143

    Article  Google Scholar 

  • Borregaard N, Dufey A (2002) Environmental effects of foreign versus domestic investment in the mining sector in Latin America. OECD Global Forum on International Investment, Conference on Foreign Direct Investment and the Environment, Lessons to be Learned from the Mining Sector

  • Cervero R (2000) Informal transport in the developing world. UN-Habitat

  • Cole MA (2004) Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the linkages. Ecol Econ 48:71–81. https://doi.org/10.1016/j.ecolecon.2003.09.007

    Article  Google Scholar 

  • Contini B (1981) Labor market segmentation and the development of the parallel economy—the Italian experience. Oxf Econ Papers 33(4):401–412

    Article  Google Scholar 

  • Dilnot A, Morris C (1981) What do we know about the black economy in the United Kingdom? Fiscal Stud 2:163–179

    Google Scholar 

  • Elgin C, Oztunali O (2012) Shadow economies around the world: model based estimates. Working papers 2012/05, Bogazici University, Department of Economics

  • Elgin C, Oztunali O (2014) Pollution and informal economy. Econ Syst 38:333–349

    Article  Google Scholar 

  • Feige E (1979) How big is the irregular economy? Challenge 12:5–13

    Google Scholar 

  • Feige EL (1989) The underground economies. Tax evasion and information distortion. Cambridge University Press, Cambridge

    Book  Google Scholar 

  • Ferman P, Ferman L (1973) The structural underpinning of the irregular economy. Poverty Hum Resour Abstr 8:3–17

    Google Scholar 

  • Fredriksson PG (2001) How pollution taxes may increase pollution and reduce net revenues. Public Choice 107(1–2):65–85

    Article  Google Scholar 

  • Galinato GI, Galinato SP (2016) The effects of government spending on deforestation due to agricultural land expansion and CO2 related emissions. Ecol Econ 122:43–53

    Article  Google Scholar 

  • Galinato GI, Islam A (2017) The challenge of addressing consumption pollutants with fiscal policy. Environ Dev Econ 22(5):624–647. https://doi.org/10.1017/S1355770X17000237

    Article  Google Scholar 

  • Gerlagh R, van den Bijgaart I, Nijland H (2018) Fiscal policy and CO2 emissions of new passenger cars in the EU. Environ Resour Econ 69(1):103–134. https://doi.org/10.1007/s10640-016-0067-6

    Article  Google Scholar 

  • Giles DE (1999) Measuring the hidden economy: implications for econometric modelling. Econ J 109:370–380

    Article  Google Scholar 

  • Giles D, Tedds L (2002) Taxes and the Canadian underground economy. Canadian Tax Foundation, Toronto

    Google Scholar 

  • Grossman GM, Krueger AB (1991) Environmental impacts of a North American free trade agreement. National Bureau of Economic Research No. 3914. http://www.nber.org/papers/w3914.pdf

  • Haigner S, Jenewein S, Schneider F, Wakolbinger F (2013) Driving forces of informal labour supply and demand in Germany. Int Labour Rev 152(3–4):507–524

    Article  Google Scholar 

  • Halkos GE, Paizanos EA (2013) The effect of government expenditure on the environment: an empirical investigation. Ecol Econ 91:48–56. https://doi.org/10.1016/j.ecolecon.2013.04.002

    Article  Google Scholar 

  • Halkos GE, Paizanos EA (2016) The effects of fiscal policy on CO2 emissions: evidence from the U.S.A. Energy Policy 88:317–328. https://doi.org/10.1016/j.enpol.2015.10.035

    Article  Google Scholar 

  • Huynh CM, Hoang HH (2019) Foreign direct investment and air pollution in Asian countries: does institutional quality matter? Appl Econ Lett 26(17):1388–1392. https://doi.org/10.1080/13504851.2018.1563668

    Article  Google Scholar 

  • Huynh CM, Nguyen TL (2019) Fiscal policy and shadow economy in Asian developing countries: does corruption matter? Empir Econ. https://doi.org/10.1007/s00181-019-01700-w

    Article  Google Scholar 

  • IQAir AirVisual (2019) 2018 world air quality report, region and city PM2.5 ranking, Switzerland

  • Isachsen AJ, Strom S (1985) The size and growth of the hidden economy in Norway. Rev Income Wealth 31(1):21–38

    Article  Google Scholar 

  • Iwata H, Okada K, Samret S (2012) Empirical study on the determinants of CO2 emissions: evidence from OECD countries. Appl Econ 44(27):3513–3519

    Article  Google Scholar 

  • Jiang L, Lin C, Lin P (2014) The determinants of pollution levels: firm-level evidence from Chinese manufacturing. J Comp Econ 42:118–142

    Article  Google Scholar 

  • Johnson S, Kaufmann D, Zoido-Lobaton P (1998) Regulatory discretion and the unofficial economy. Am Econ Rev 88(2):387–392

    Google Scholar 

  • Khan MM, Zaman K, Irfan D, Awan U, Ali G, Kyophilavong P, Naseem I (2016) Triangular relationship among energy consumption, air pollution and water resources in Pakistan. J Clean Prod 112:1375–1385. https://doi.org/10.1016/j.jclepro.2015.01.094

    Article  Google Scholar 

  • Kim MH, Adilov N (2012) The lesser of two evils: an empirical investigation of foreign direct investment-pollution tradeoff. Appl Econ 44(20):2597–2606

    Article  Google Scholar 

  • López R, Galinato GI, Islam F (2011) Fiscal spending and the environment: theory and empirics. J Environ Econ Manag 62(2):180–198

    Article  Google Scholar 

  • McIntosh C (2013) Cambridge advanced learner's dictionary, 4th edn. Cambridge University Press, Cambridge

    Google Scholar 

  • Medina L, Schneider F (2018) Shadow economies around the world: what did we learn over the last 20 years? IMF Working Paper WP/18/17. International Monetary Fund

    Article  Google Scholar 

  • O'Sullivan A, Steven MS (2003) Economics: principles in action. Pearson Prentice Hall, New Jersey

    Google Scholar 

  • Pereira RM, Pereira AM (2017) The economic and budgetary impact of climate policy in portugal: carbon taxation in a dynamic general equilibrium model with endogenous public sector behavior. Environ Resour Econ 67(2):231–259. https://doi.org/10.1007/s10640-015-9984-z

    Article  Google Scholar 

  • Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75(2):335–346

    Article  Google Scholar 

  • Schneider F, Dominik HE (2000) Shadow economies: size, causes, and consequences. J Econ Lit 38:77–114

    Article  Google Scholar 

  • Schneider F, Buehn A, Montenegro C (2010) New estimates for the shadow economies all over the world. Int Econ J 24(4):443–461

    Article  Google Scholar 

  • Simon C, Witte A (1982) Beating the system: the underground economy. Auburn House Publishing Company, Boston

    Google Scholar 

  • Smith JD (1985) Market motives in the informal economy. In: Gaertner W, Wenig A (eds) The economics of the shadow economy. Springer, Heidelberg, pp 161–177

    Chapter  Google Scholar 

  • Sung B, Song W, Park S (2018) How foreign direct investment affects CO2 emission levels in the Chinese manufacturing industry: evidence from panel data. Econ Syst 42(2):320–331. https://doi.org/10.1016/j.ecosys.2017.06.002

    Article  Google Scholar 

  • Tanzi V (1999) Uses and abuses of estimates of the underground economy. Econ J 109(456):338–340

    Article  Google Scholar 

  • Thomas J (1999) Quantifying the black economy: “measurement without theory” yet again? Econ J 109:381–389

    Article  Google Scholar 

  • Wooldridge JM (2002) Econometric analysis of cross section and panel data. The MIT Press, Cambridge

    Google Scholar 

  • World Bank (2018) World development indicators. World Bank Group, Washington

    Google Scholar 

  • World Bank (2018b) World bank country and lending groups. World Bank Group, Washington

    Google Scholar 

  • Zhang XP, Cheng XM (2009) Energy consumption, carbon emissions, and economic growth in China. Ecol Econ 68(10):2706–2712

    Article  Google Scholar 

Download references

Funding

None.

Author information

Authors and Affiliations

  1. Becamex Business School, Eastern International University, 1 Nam Ky Khoi Nghia St, Hoa Phu Ward, Thu Dau Mot, Binh Duong, Vietnam

    Cong Minh Huynh

Authors
  1. Cong Minh Huynh
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Cong Minh Huynh.

Ethics declarations

Conflict of interest

The author declares that he has no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary file1 (XLSX 72 kb)

Appendix

Appendix

See Table 8.

Table 8 Unit-root tests for all variables
Full size table

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Huynh, C.M. Shadow economy and air pollution in developing Asia: what is the role of fiscal policy?. Environ Econ Policy Stud 22, 357–381 (2020). https://doi.org/10.1007/s10018-019-00260-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10018-019-00260-8

Keywords

JEL Classification

Search

Navigation