Academic journal article Atlantic Economic Journal

Energy Dependence in Developing Countries: Does the Level of Income Matter?

Academic journal article Atlantic Economic Journal

Energy Dependence in Developing Countries: Does the Level of Income Matter?

Article excerpt

Introduction

The causal relationship between energy consumption and economic growth has important implications, especially from a policy perspective. While a uni-directional causality running from energy consumption to economic growth implies that economic growth is dependent on energy consumption, a uni-directional causality running from GDP to energy consumption shows that a country's economic growth is not entirely energy-dependent. In other words, pursuing energy conservation policies may not adversely affect a country's economic growth. The same argument applies to a situation in which there is no causality in either direction, i.e. the so-called 'neutrality hypothesis' (see also Narayan and Singh 2007:1142; Odhiambo 2010). Although a number of studies have been conducted to examine the causal relationship between energy consumption and economic growth, the empirical findings on the direction of causality between these two key economic variables are still largely inconclusive (see also Odhiambo 2010).

Previous studies, however, suffer from a number of methodological limitations. Firstly, the majority of the previous studies have used either the residual-based cointegration test associated with Engle and Granger (1987) or the maximum likelihood test based on Johansen (1988) and Johansen and Juselius (1990), which may not be appropriate, especially when the sample size is too small. Secondly, some of the previous studies have relied on the cross-sectional data, which may not satisfactorily address the country-specific issues. The problem of using a cross-sectional method has been highlighted in Ghirmay 2004, Quah 1993, Casselli et al. 1996, and Odhiambo 2008, and 2010, amongst others. The cross-country method of grouping countries that are at different stages of economic development fails to address the country-specific effects common in many causality studies.

It is against this backdrop that the current study attempts to investigate the intertemporal causal relationship between energy consumption and economic growth in four developing countries, namely Brazil, Uruguay, Cote d'Ivoire, and Ghana, using a time-series data analysis. Unlike the majority of the previous studies, the current study uses the newly developed ARDL-bounds testing approach to examine the dynamic causal relationship between energy consumption and economic growth. In addition, the study includes exports as the intermittent variable between energy consumption and economic growth--thereby creating a simple multivariate model. The study attempts to answer one critical question: Is the causality between energy consumption and economic growth sensitive to the level of a country's economic growth? The four countries include two lower-middle income economies: Ghana and Cote d'Ivoire, and two upper-middle income economies: Brazil and Uruguay. Figures 1, 2, 3, and 4 show the trends of the percentage change in energy consumption per capita and GDP per capita in these countries for the period 1995-2009.

The rest of the paper is structured as follows: The Literature Review section gives a summary of the literature. The Estimation Techniques and Empirical Analysis section deals with the empirical model specification, the estimation technique and the empirical analysis of the regression results. The Conclusion section concludes the study.

Literature Review

There are at least four possibilities in the literature regarding the causal relationship between energy consumption and economic growth. The first possibility is that energy consumption and economic growth are not causally related. This implies that neither of the two has considerable effects on the other, and that the empirically observed correlation between them is merely the result of a historical peculiarity. The empirical work from developing countries, which is consistent with this view, includes studies such as: Masih and Masih (1996) for the case of Malaysia and the Philippines; Cheng (1997) for the case of Mexico and Venezuela; and Wolde-Rufael (2006) for the case of Algeria, Congo (Rep), Kenya, South Africa and Sudan, among others. …

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