Natural hazards and the influence on the shadow economy: non-linear evidence from panel analysis

Abstract

Due to climate change and global warming, levels of risk and uncertainty of natural hazards such as storms, flooding, sea level rise have increased. This study endeavours to analyse how this risk and uncertainty impact the shadow economy in a sample of 144 countries from 2011 to 2017, comprising seven regions and four income groups. The study documents the inverted U-shaped effects of natural hazards on the shadow economy. The results imply that increases of natural risk and uncertainty from a low level motivate economic agents to operate/work in informal sectors. The increasing effect is turned into a negative effect when level of natural risk and uncertainty pass a certain threshold. Inverted U-shaped effects are found in upper-middle and high-income countries, while mixed effects are documented in low- and lower-middle-income countries. Inverted U-shaped effects also exist in Europe & Central Asia and Sub-Saharan Africa, while other regions show mixed effects. The findings suggest that governments should invest more into coping and adaptive capacities against climate change, which could bring duo benefits of avoiding consequences from natural hazards along with lower shadow economy.