Latest RESEARCH ARTICLE examining how climate change and natural disaster risks impact informal economic activities by Dr. Nguyen Phuc Canh, HAPRI's Senior Researcher and colleagues
The study investigates how increasing risks and uncertainty from natural hazards such as storms, flooding, and sea level rise influence the shadow economy using panel data from 144 countries during 2011-2017. The research reveals a novel non-linear relationship, finding that natural hazards have an inverted U-shaped effect on informal economic activities across both developed and developing economies.
The research demonstrates that increases in natural hazards from low levels initially motivate economic agents to operate in informal sectors, but this effect reverses once risk levels exceed certain thresholds. The study finds consistent evidence for this inverted U-shaped relationship across multiple measures, including total shadow economy expenditures as a percentage of GDP and in absolute dollar terms.
Moreover, the study highlights important regional and income-level variations in these effects. The inverted U-shaped relationship is particularly strong in upper-middle and high-income countries, as well as in Europe & Central Asia and Sub-Saharan Africa regions. However, mixed effects are found in other regions and lower-income countries, suggesting the relationship may depend on institutional capacity and economic development levels.
The findings have significant policy implications, particularly given increasing natural disaster risks due to climate change. Governments should focus on building coping capacity and adaptive strategies while avoiding tax increases that could push more economic activity into informal sectors. The study emphasizes the importance of healthcare system investments and institutional improvements, especially for developing countries with large shadow economies.
KEYWORDS:
Natural hazards
Risk
Uncertainty
Economic vulnerability
Shadow economy
Panel data
Citation:
Nguyen, C.P., Nguyen, et al (2024), "Natural hazards and the influence on the shadow economy: non-linear evidence from panel analysis", Environ Dev Sustain, DOI: 10.1007/s10668-024-05541-1
Comments