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<p>Greenhouse gas (GHG) emissions pose a major challenge to environmental sustainability, particularly in developing countries where large informal sectors operate beyond formal regulatory frameworks. This study investigates the impact of the informal economy on GHG emissions measured by carbon dioxide (CO₂) and methane (CH₄), and examines whether governance quality, specifically control of corruption and good governance moderates this relationship. Using a balanced panel dataset of 107 developing countries covering the period 1996–2020, we employ the System GMM estimator to address endogeneity, dynamic persistence, and unobserved heterogeneity. To further validate the robustness of the results, we complement the analysis with the Lewbel IV-2SLS estimator. The empirical results reveal that a larger informal economy significantly increases both CO₂ and CH₄ emissions. In contrast, stronger governance quality directly reduces emissions and weakens the pollution-enhancing effect of the informal economy, indicating a substitutive relationship between governance quality and the informal economy. Additional heterogeneity analysis shows that the informal economy increases emissions across all income groups, with stronger direct effects in low- and lower-middle-income countries, while the moderating role of governance quality is more pronounced in upper-middle-income countries. These findings highlight the critical role of governance quality in shaping environmental outcomes and suggest that strengthening corruption control, improving government effectiveness, and promoting gradual economic formalization are essential policy strategies for reducing emissions and advancing environmental sustainability in developing countries.</p>

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Informal economy, control of corruption, good governance and environmental sustainability: empirical evidence from developing countries

  • 期刊论文

  • 发表日期：

    2026年7月13日

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  • Licong Xing,
  • Fatma Ahmed Hassan,
  • Muhammad Umair,
  • Waqar Ahmad

摘要

Greenhouse gas (GHG) emissions pose a major challenge to environmental sustainability, particularly in developing countries where large informal sectors operate beyond formal regulatory frameworks. This study investigates the impact of the informal economy on GHG emissions measured by carbon dioxide (CO₂) and methane (CH₄), and examines whether governance quality, specifically control of corruption and good governance moderates this relationship. Using a balanced panel dataset of 107 developing countries covering the period 1996–2020, we employ the System GMM estimator to address endogeneity, dynamic persistence, and unobserved heterogeneity. To further validate the robustness of the results, we complement the analysis with the Lewbel IV-2SLS estimator. The empirical results reveal that a larger informal economy significantly increases both CO₂ and CH₄ emissions. In contrast, stronger governance quality directly reduces emissions and weakens the pollution-enhancing effect of the informal economy, indicating a substitutive relationship between governance quality and the informal economy. Additional heterogeneity analysis shows that the informal economy increases emissions across all income groups, with stronger direct effects in low- and lower-middle-income countries, while the moderating role of governance quality is more pronounced in upper-middle-income countries. These findings highlight the critical role of governance quality in shaping environmental outcomes and suggest that strengthening corruption control, improving government effectiveness, and promoting gradual economic formalization are essential policy strategies for reducing emissions and advancing environmental sustainability in developing countries.