Does cultural characteristics moderate the effect of shadow economy on carbon emissions? Evidence from the Global South countries

Climate change presents a serious challenge to economies in the Global South, where informal economic activities remain widespread. The shadow economy, while providing livelihoods, undermines environmental regulations and contributes to rising carbon emissions. Yet, the extent to which cultural characteristics shape this relationship remains underexplored. This study investigates how five of Hofstede’s cultural dimensions—power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation—moderate the shadow economy–emissions nexus. Using panel data from 60 Global South countries between 1996 and 2018, we apply Prais–Winsten panel-corrected standard errors and feasible generalized least squares as baseline estimators, with a two-step system GMM for robustness against endogeneity. The results indicate that individualism, masculinity, and long-term orientation mitigate the emissions impact of informality, while high power distance and uncertainty avoidance amplify it. These findings highlight the role of cultural traits in shaping environmental outcomes and underscore the need for context-specific policy responses. Promoting cultural values that support responsibility, long-term planning, and compliance, while facilitating the transition of small enterprises into the formal economy, can reduce carbon intensity. The study provides new evidence on how cultural factors influence the environmental consequences of informality and offers insights for designing more effective climate and development strategies in the Global South.