Energy Consumption in Bangladesh, India, and Pakistan - a Cointegration Analysis
Chary, Swaroop R., Bohara, Alok K., The Journal of Developing Areas
Recognizing the significant role that energy plays on growth, the South Asian countries are beginning to focus on their energy issues and formulate common energy policies. The SAARC Energy Center (SEC) was established in 2005 to address energy challenges in the South Asian region. In this paper the authors investigate the presence of cointegration and causality relationships for energy consumption in the three largest SAARC countries: Bangladesh, India, and Pakistan and argue that establishing mutually beneficial energy policies in the three countries helps the SEC meet its goals and objectives.
JEL Classifications: O13, N70, N75
Keywords: Cointegration, Energy Consumption, India, Pakistan, Bangladesh, Causality, SAARC, SEC
Comprising one-fifth of world's population, the countries in the South Asian region are currently known for their expanding economies and large populations. Bangladesh, India, and Pakistan are the three largest South Asian countries in terms of population, gross domestic products (GDP), as well as land area. In December of 1985, Bangladesh, India, and Pakistan along with other smaller South Asian states established the South Asian Association for Regional Cooperation (SAARC) to accelerate the region's economic and social development.
Due to their rapid growth, the energy demand in the SAARC countries has grown significantly over the years resulting in chronic energy shortages. Like many other countries in the developing world, these countries have only begun to focus on their energy issues and formulating common energy policies. In 2005, recognizing the pivotal role that energy plays in economic and social development, the 13th SAARC Summit approved the establishment of the SAARC Energy Centre (SEC) in Islamabad. The SEC is currently mandated to strengthen its member countries' energy capacities by facilitating energy policy coordination through the establishment of common policies. By enhancing regional capabilities, the SEC is also expected to be a catalyst for economic growth. Under the guidance from the SEC, Bangladesh, India, and Pakistan are now working together to address their own as well as the region's energy issues.
Before beginning to consider policy options, it is important to understand the energy climate in each of the countries and the region as a whole. One of the key areas that the SEC will need to focus on is to determine if any changes in energy consumption in one country will cause a change in the energy consumption in the other country (ies) which is typically determined by testing for cointegration and causality. These tests are particularly important, because several studies indicate that depending on the policies adopted, cointegration on a particular economic lever can significantly improve performance. For example, having a cointegrated energy consumption in these countries may help increase the impact of energy integration if common, mutually beneficial energy policies are designed and implemented. Also, if the energy consumptions are cointegrated, then the countries might have several energy causality relationships which will also need to be considered before making common policy decisions. Conversely, if the energy consumptions are not cointegrated, then establishing separate policies for the individual countries might prove to be more beneficial. Figure 1 shows the historical primary energy consumption of Bangladesh, India, and Pakistan suggesting that the energy consumptions might be cointegrated.
However, cointegration or causality relationships between the energy consumption in the SAARC countries have not been previously studied. Therefore, this paper investigates the presence of a cointegrated trend along with any causality relationships that might exist among the energy consumption in the three major SAARC countries. The results imply that SEC's goal of establishing common energy policies will prove to be beneficial to the countries. …