Unregulated economic activities and the environment: The role of fiscal policies

Abstract

African countries are characterized by high unofficial activities, coupled with a fiscal structure that could either undermine or promote these activities to affect the environment. This study examines the direct and indirect environmental impacts of the unregulated economy and the fiscal instruments of government expenditure and tax using the panel quantiles regression technique. Driven by data availability, our analysis covers 46 countries when the fiscal variables are not considered, while 41 and 38 countries are respectively included in the models involving government expenditure and tax revenue from 2000 to 2016. We discover that the direct impact of unofficial economic activities is unfavourable on the environment, as it increases carbon emissions. The direct impacts of the fiscal policies are heterogeneous. The environmental effect of government expenditure changes from favourable to unfavourable as the countries move from low to high emissions levels. On the other hand, tax is only environmentally friendly in countries with moderate levels of emissions. The interactive effect of an unregulated economy and government expenditure worsens and improves the environment at low and high emissions levels, respectively. The results are heterogeneous for the interactive effect of unregulated economy and tax, although they are more biased toward a satisfactory impact on the environment at the extreme quantiles. Appropriate regulation of informal activities and the design of effective fiscal policy frameworks for environmental sustainability are policy derivatives of these findings.

Keywords: Africa; Environmental impacts; Fiscal policies; Panel quantile regression; Shadow economy.