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How does governance quality affect the shadow economy-sustainable development nexus? New insights from a dynamic threshold analysis

Author

Listed:
  • Nadia Assidi
  • Ridha Nouira
  • Sami Saafi
  • Walid Abdelfattah
  • Sami Ben Mim

Abstract

Purpose - The purpose of this study is to assess the impact of the shadow economy on three sustainable development indicators while considering the moderating effect of the governance quality, and to highlight the non-linearity of the considered relationship. Design/methodology/approach - A sample of 82 countries covering the period from 1996 to 2017. The dynamic first-differenced generalized method of moments (FD-GMM) panel threshold model is implemented to control for non-linearity. Findings - The shadow economy hinders sustainable development in countries with low-governance quality, while the opposite result holds in countries with high-governance quality. The critical thresholds triggering the switch from one regime to another vary across the sustainable development indicators. Boosting growth requires enhancing the legal system and the economic dimension of governance, while promoting environmental quality requires the implementation and enforcement of specific environment-friendly regulations. Originality/value - The study addresses non-linearity and the moderating effect of governance quality. The use of six governance indicators allows to gauge the ability of each governance dimension to curb the negative effects of the shadow economy. Considering the three objectives of sustainable development allows to identify specific policy recommendations for each of them.

Suggested Citation

  • Nadia Assidi & Ridha Nouira & Sami Saafi & Walid Abdelfattah & Sami Ben Mim, 2024. "How does governance quality affect the shadow economy-sustainable development nexus? New insights from a dynamic threshold analysis," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 52(1), pages 136-160, April.
    • Handle: RePEc:eme:jespps:jes-09-2023-0469
    DOI: 10.1108/JES-09-2023-0469
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    More about this item

    Keywords

    Governance quality; Dynamic panel threshold regression model; Shadow economy; Sustainable development; C33; E26; Q01; O17; O43;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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