Informal Economy and Ecological Footprint: the Case of Africa

Abstract

Motivated by the growing levelof informal economy in emerging economies, this study examines the role of the informal economy in the ecological footprint for the case of Africa. The relationship between official economy, trade openness, governance indicator, financial development, and urbanization on ecological footprint is also investigated. Applying data from 1991 to 2017, this empiric utilizes panel estimation procedures to account for cross-sectional dependence and slope heterogeneity in panel data. The results establish the presence of cross-sectional dependence and slope heterogeneity across countries in Africa. Furthermore, long-run cointegration is confirmed using Westerlund panel cointegration. Driscoll-Kraay’s (DK) estimation technique shows that informal economy, official economy, governance, financial development, and urbanization have significant positive impacts on ecological footprint, implying that they contribute to environmental degradation. However, trade openness has a negative and significant effect on ecological footprint, improving environmental quality. Similarly, the Dumitrescu-Hurlin (DH) Granger causality test reveals a two-way relationship between the informal economy and ecological footprint and formal economy and ecological footprint. However, the study finds a one-way connection from urbanization and financial development to ecological footprint and from ecological footprint to governance indicators and trade openness. The implications of the findings for a sustainable environment are discussed. Applying data from 1991 to 2017, this empiric utilizes panel estimation procedures to account for cross-sectional dependence and slope heterogeneity in panel data. The results establish the presence of cross-sectional dependence and slope heterogeneity across countries in Africa.

Furthermore, long-run cointegration is confirmed using Westerlund panel cointegration. Driscoll-Kraay’s (DK) estimation technique shows that informal economy, official economy, governance, financial development, and urbanization have significant positive impacts on ecological footprint, implying that they contribute to environmental degradation. However, trade openness has a negative and significant effect on ecological footprint, improving environmental quality.

Similarly, the Dumitrescu-Hurlin (DH) Granger causality test reveals a two-way relationship between the informal economy and ecological footprint and formal economy and ecological footprint. However, the study finds a one-way connection from urbanization and financial development to ecological footprint and from ecological footprint to governance indicators and trade openness. The implications of the findings for a sustainable environment are discussed.