Human capital and the informal economy as asymmetric drivers of the ecological footprint in Bangladesh

This article assesses the impact of the shadow economy on Bangladesh’s ecological footprint and how this association is influenced by the country’s level of human capital. Using annual data from 1994 to 2020, it employs both the Linear and Non-linear Autoregressive Distributed Lag (NARDL) models to capture the short- and long-term dynamics between the informal economy and environmental degradation. The findings of the NARDL model confirm the presence of asymmetry in the linkage between the shadow economy and environmental degradation. Both positive and negative shocks to the shadow economy significantly affect the ecological footprint in the long run, indicating nonlinear dynamics. In the short run, negative shocks to the shadow economy exert a stronger and more significant impact compared to positive shocks. Human capital remains a significant determinant, with long-run positive effects on environmental pressure and mixed short-run dynamics. Robustness tests using the FMOLS, DOLS, and CCR models confirm the validity of these assessments. The study underscores the importance of embedding environmental literacy and sustainability practices into human capital development programs and policy frameworks. Targeted initiatives, such as green finance schemes supporting firms’ transition from the informal to the formal sector, are recommended to balance economic inclusion and environmental protection.