Regulating the unobservable: The impact of the environmental regulation on informal economy and pollution

Abstract

This paper examines the impact of informal economy and ecological footprint on environmental regulation for a sample of 25 Sub-Saharan Africa economies (SSA) countries from 1991 to 2017. The results obtained from the techniques of static panel (Pooled ordinary least squares (POLS), random effects (RE), fixed effects (FE), and panel corrected standard error (PCSE)) as well as from dynamic panel (generalized method of moments in differences (D-GMM), and generalized method of moments in system (S-GMM)) were all consistent. They showed that the environmental regulation has a significant positive impact for both informal economy and ecological footprint in the selected economies. Regarding the relation between ecological footprint and per capita gross domestic product (GDP), an inverted U-shaped environmental Kuznets curve is verified. The study concludes that weak environmental regulation in the region reinforces informal economy and environmental pollution. Hence, findings from this study can help policymakers in the region to have a better understanding of the role of environmental regulation in reducing informal economy and environmental degradation.