Threshold impact of shadow economy on sustainable development in high and low-financial development countries

Abstract

This study investigates the impact of the shadow economy on sustainable development in 54 countries (categorised as high and low financial development) from 2008 to 2021, using Bayesian regression. Utilizing a sophisticated Bayesian regression analysis, our study unearths a compelling negative relationship between the shadow economy and sustainable development within both of these groups of nations. This empirical evidence underscores the pervasive influence of the shadow economy on hindering the progress of sustainable development, irrespective of a country’s financial development status. Furthermore, our research goes beyond this fundamental relationship to elucidate the presence of a crucial threshold effect in the relationship between the shadow economy and sustainable development. This threshold effect is observed at distinct levels in countries with high and low financial development, standing at 21.08% and 39.38%, respectively. This critical finding emphasises the need for tailored policy interventions that recognise and address the unique dynamics in these two countries. Drawing on these substantial insights, our paper outlines specific policy recommendations tailored to the unique circumstances of each group of countries. These recommendations are aimed at effectively regulating the shadow economy, thus facilitating the fostering of sustainable economic development. Our research contributes valuable empirical evidence and policy guidance to the ongoing discourse on the complex relationship between the shadow economy and sustainable development, offering a pathway toward more robust and effective policy frameworks for the nations under study.