REVISITING THE ENVIRONMENTAL KUZNETS CURVE HYPOTHESIS WITH THE ROLE OF THE SHADOW ECONOMY IN NIGERIA

Abstract

Climate change and environmental degradation continue to pose a serious threat to humanity, especially in developing countries. Researchers around the globe are making efforts to analyze the factors responsible for climate change and environmental degradation in order to propose policies that mitigate the problem. These researchers conduct their analyses mostly using the environmental Kuznets curve (EKC) hypothesis that emphasize the role of economic development on the environment. However, very few of the researchers have captured the influence of the shadow economy and financial development in their analyses. Consequently, the purpose of this study is to explore the role of the shadow economy and financial development in analyzing the growth-environment nexus in Nigeria. The paper utilizes annual data from 1991 to 2020 and employs a threshold regression approach. The findings demonstrate that the EKC hypothesis holds true in Nigeria, and the size of the shadow economy has an adverse effect on environmental quality in both the lower and upper regimes. It is also found that financial development has an inverse relationship with environmental degradation, regardless of the level of economic development. This suggests that the financial sector development contribute to environmental improvement. Based on these findings, the paper recommends that policymakers should take a holistic approach to sustainable development, one that considers both economic growth and environmental protection. They should also take steps to reduce the detrimental effects of the informal economy on the environment and promote responsible and sustainable financial practice