However, the majority of empirical studies have come up with mixed and ambiguous results. For example, Masih & Masih (1996), Erol & Yu (1987) and Cheng & Lai (1997) find that there is positive and unidirectional causality running from income to electricityconsumption where the country does not rely on electricityconsumption for economic development. The country thus can adopt energy preservation policies without any harmful effect on economicgrowth. On the other hand, several studies such as by Asafu-Adjaye (2000), Yang (2000), and Glasure & Lee B (1997) observed that there is a unidirectional causality between electricityconsumption to income. Thus, it is confirmed that the country is highly dependent on energy consumption for economicgrowth. As a result, energy preservation policies may cause harm and conflict with economicgrowth (Narayan & Singh, 2007). Many works of literature have studied the causal relationship between these two variables, particularly in developed economies. However, there are only a few studies that have been conducted for emerging markets, particularly in the context of Malaysia. Therefore, to contribute to the existing literature, this paper attempts to examine the long-run relationship between electricityconsumption and economicgrowth in Malaysia.
Following multi-countries studies, Yoo (2006) considered the relationship between electricityconsumption and economicgrowth in case of ASEAN countries 2 . The results indicated that bidirectional causality exists between electricityconsumption and economicgrowth in case of Malaysia and Singapore and unidirectional causality also exits running from economicgrowth to electricityconsumption in case of Indonesia and Thailand. In case of 17 African countries, Wolde-Rufael (2006) investigated the cointegration and causal relation between electricityconsumption and economicgrowth. The ARDL bounds testing approach to cointegration developed by Pesaran et al. (2001) and Toda and Yamamoto (1995) causality approaches were applied respectively. The empirical evidence reveals that cointegration exists in nine out of seventeen countries. Though, causality analysis considers electricity-led-growth hypothesis in Benin, the Democratic Republic of Congo, and Tunisia, while electricity conversation hypothesis exists in Cameroon, Ghana, Nigeria, Senegal, and Zimbabwe. Further, feedback hypothesis is found between both the variables in case of Egypt, Gabon, and Morocco 3 . In case of China, Hong Kong, Indonesia, India, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand, Chen et al. (2007) re-examined the causal relation between both variables. Their empirical exercise confirms the existence of cointegration between electricityconsumption and
There are already some previous studies conducted in Pakistan such as Aqeel and Butt  and Zahid , however, these studies only investigated the wider scope of energy consumption instead of the narrower scope of electricityconsumption. Jamil and Ahmad  is the only study that examined the relationship between electricityconsumption and economicgrowth in Pakistan. However, they did not consider other potential and vital variables such as capital and labor in their analysis. Lütkepohl  argued that omission of important variables would risk providing potentially biased and inappropriate results. No causal relation is found in the bi-variate system due to these neglected variables. Bartleet and Rukmani  also recommended incorporating some pertinent variables in the analysis. Thus, we re-investigate the causality between electricityconsumption and economicgrowth in Pakistan by incorporating in the effects of the capital and labor factors.
Dahl (1994), in his survey, found that most of the studies on electricity demand used static or partial adjustment models. Jones (1993) compared the forecasting ability of the static and partial adjustments model with the general to specific (GTS) or dynamic regression model and found that the GTS approach was a more superior forecast model. However, Chan and Lee (1997) argued that the GTS approach may overlook the fact that most of the time series data are non-stationary. Their study show that the Engle- Granger approach outperforms Hendry’s ECM and Hendry’s general-to-specific approach in terms of having the smallest ex post forecast errors. Besides the study by Chan and Lee (1997), several other empirical studies also used ECM approach. Asafu- Adjaye (2000), for instance, estimated the causal relationship between EC and income for India, Indonesia, the Philippines and Thailand, using cointegration and error-correction modeling techniques. He found an unidirectional Granger causality runs from energy to income for India and Indonesia, while bidirectional Granger causality runs from energy to income for Thailand and the Philippines. Hondroyiannis et al. (2002) used VECM approach to empirically examine the relationship between EC and economicgrowth in Greece. The VECM specification includes EC, real GDP and price developments-a measurement for economic efficiency. The empirical evidence suggested that there is a long- run relationship between the three variables.
Third category includes the studies that have found bidirectional causality between energy consumption and economicgrowth. Soytas and Sari (2002) for Argentina, Paul and Bhattacharya (2004) for India, Yoo (2004) for Korea, Yoo (2005) for Malaysia and Singapore, Wolde-Rufael (2006) for Egypt, Gabon and Morocco and Lise and Montfort (2006) for Turkey have found bidirectional causality in their targeted countries. This category holds that higher energy consumption may lead to higher economicgrowth and then following a simultaneous bias effect, the higher economicgrowth may lead to even higher energy consumption and vice versa. Fourth category consists of studies that have found no causality between economicgrowth and energy consumption. Yu and Hwang (1984), Cheng (1996) for Venezuela and Mexico and Wolde-Rufael (2006) for Algeria, Congo Rep., Kenya, South Africa and Sudan have found no causality between the two variables. For this category, conservation or expansion of energy usage may not affect the economicgrowth. (The review of literature is summarized in Table 1)
Toda and Yamamotoo (1995) has been applied with maximum lag order 2 to investigate the direction of causality between electricityconsumption per capita, real GDP per capita and capital use per capita. The results are reported in Table-6 indicated that bidirectional causality is founds between electricityconsumption and economicgrowth. This empirical evidence provides support to findings of energy literature such as Yang (2000) for Taiwan, Yoo (2005) for Korea, Zamani (2006) for Iran, Zachariadis and Pashouortidou (2007) for Cyprus, Tang (2008, 2009) and Lean and Smyth (2010) for Malaysia, Hondroyiannis et al. (2002) and Tsani (2009) for Greece, Odhiambo (2009a) for South Africa, Ouédraogo (2010) for Burkina Faso and Lorde et al. (2010) for Barbados but contrast with Kayhan et al. (2010). Kayhan et al. (2010) reported unidirectional running from electricityconsumption to economicgrowth. The findings of Kayhan et al., (2010) may be biased due to ignorance of relevant variable such as capital stock as pointed out by Lütkepohl (1982) that omissions of important variables provide biased and inappropriate results on relationship between electricityconsumption and economicgrowth. No causal relation is found in bivariate system due to neglected variables which affect electricityconsumption and economicgrowth relation. Our findings are more consistent because we have use trivariate system and covered long data span from 1980- 2008 while Kayhan et al. (2010) used 2001-2010. This finding implies that electricity conservation policies may retard economicgrowth by reduction in electricityconsumption in an economy and fluctuations in economicgrowth furthermore reduces demand for electricity due to feedback effect from economicgrowth to electricityconsumption.
At this stage, it is appropriate to perform the Granger causality test, which may help policymaking in energy and economic discourse. Single cointegration relationship established with ARDL bound test illustrates the presence of Granger causality in at least one path, but does not identify the direction of causality in the series. The results of Granger causality, within the VECM framework are presented in Table-4. Commencing with short run causality test, the estimates show lnEC to Granger cause lnY at 10% level, with no response from lnY to lnEC. Further, there is causation from lnY and lnCAP to lnURB, with no feedback from lnURB. In the long run, there is unidirectional causality flowing from lnEC to lnY. Similar to the short run outcomes, this is supporting growth (or electricity-led) hypothesis in the economy, which implies that expansive energy policies are necessary for sustainable economicgrowth. Previous studies with similar observations are Odhiambo (2010) and Solarin and Bello (2011) for the case of Kenya and Nigeria, which are fellow African countries; Narayan and Singh (2007) for Fiji; and Yuan et al. (2008) for China. Besides, long run causality results points to the existence unidirectional causation from all the other variables towards lnY. This is an evidence for capital-led, export-led and urbanisation-led economy in the country. The findings on capital- led is lined with Solarin (2011), while observation on export-led is lined with the Lean and Smyth (2010) for Malaysia. Collectively, these suggest expansive energy policies may not be enough to lift the country out of its recent economic stagnation, without corresponding policies such as export development, accelerated capital formation and checking the pace of urbanisation.
Energy plays an important role in the growth process of a country by facilitating progress in scientific and technological innovations along with the emergence of improved information and communication technologies (ICT) that have increased the trade and production of the economy. The availability of energy is an important and driving force for enhancing standard of living of the general public across the countries. Energy infrastructure emerged as a contributing factor alongside the population growth, industrialization, and urbanization for the economy. The importance of energy is evident from the advancement and growth in the ICT in the developed economies . A high correlation between energy consumption and wealth creation exist among the wealthy countries than the poor one and that, as a whole for the global economy the correlation between electricityconsumption and wealth creation is stronger as compared to the total energy consumption and economicgrowth . An increase in energy consumption is a driving force for enhancing an economicgrowth, and the supply of electricity (a form of energy), its consumption is critical for sustainable economicgrowth .Well-documented debates on energy consumption and economicgrowth relationship exist in earlier literature at aggregated and disaggregated levels in context of individual country level as well as panel of countries, but their consensuses are inconclusive, and controversial results obtained from various studies. Some of the seminal empirical studies on causal relationship between energy consumption and economicgrowth support that economicgrowth induces electricityconsumption [4 - 7]. But study results of [8-11] showed unidirectional causality running from electricity to
Although there have been many empirical studies exploring the causality relationship between electricityconsumption and economicgrowth, their results were elusive, and controversial. In the literature, four kinds of causality linkages between electricityconsumption and economicgrowth have been found. First, some papers find bidirectional causality between economicgrowth and electricityconsumption such as Soytas and Sari (2003) for Argentina; Yoo (2005) for Korea during 1970-2002; Wolde-Rufael (2006) for three African countries; Yoo (2006) for Malaysia and Singapore during 1971-2002; and Bohm (2008) for the cases of Great Britain and Netherlands during 1978-2005. Second, some other studies conclude that there is a unidirectional causality relationship running from electricityconsumption to economicgrowth. A such relationship can be found in the work of Shiu and Lam (2004) for China during 1971-2000; Altinay and Karagol (2005) for Turkey during 1950-2000; Wolde-Rufael (2006) for three African countries; Yaun et al. (2007) for China in the period 1978-2004; Bohm (2008) for Greek, Italy, and Belgium during 1978-2005. Third, a unidirectional causality relationship running from GDP to electricityconsumption is found in some other papers, for example Ghosh (2002) for India during 1950-1997; Yoo (2006) for Indonesia and Thailand; Morumder and Mazathe (2007) for Bangladesh; and Ciarreta and Zarrage (2007) for Spain in the period 1971- 2005. Fourth, some papers find that there is no causality relationship between electricityconsumption and economicgrowth such as Stern (1993) for United States in 1947-1990; Ghaderi et al. (2006) for Iran; Ciarreta and Zarrage (2008) for group of European union countries in the short-run; Bohm (2008) for Austria, Germany, Finland, France, Luxemburg, and Switzerland.
3 Squalli (2007) investigates the relation between electricityconsumption and economicgrowth for OPEC members by using the bounds test based on the unrestricted ECM. The paper finds a unidirectional causality running from electricityconsumption to economicgrowth in Indonesia, Nigeria, UAE, and Venezuela while economicgrowth Granger causes electricityconsumption in Algeria, Iraq, Kuwait, and Libya. Chen et al. (2007) find evidence of long-run bidirectional causality between electricityconsumption and economicgrowth in a panel of 10 Asian countries. They document a short-run unidirectional causality running from economicgrowth to electricityconsumption, although the short-run adjustment is slow and sluggish before building up to long-run causality. The absence of a reverse causality from electricity to economicgrowth indicates that energy conservation would not hamper economicgrowth in their sample. Moreover, economising electricityconsumption can be achieved without compromising economicgrowth. Yoo (2006) investigated the causal relation between electricityconsumption and economicgrowth among the four members of the Association of South East Asian Nations (ASEAN), namely: Indonesia, Malaysia, Singapore, and Thailand. Their results indicate the bidirectional causality between electricityconsumption and economicgrowth in Malaysia and Singapore. Apergis and Payne (2011) applied a panel ECM method for a sample of 16 emerging market economies over the period of 1990–2007. Their results revealed the unidirectional causality from economicgrowth to renewable electricityconsumption in the short run, but bidirectional causality in the long run. Wolde-Rufael (2006) found limited support for electricity- led growth hypothesis for 15 transitional economies for the period 1975-2010 using a bootstrap panel causality approach.
17 they do not attach necessary important to the role of energy which is important for economicgrowth and production (Stern and Cleveland, 2004). It is seen that electricity is the highest quality energy component and its share in energy consumption increases rapidly. Electricityconsumption is considered as an indicator of socio-economic development along with its role in the production function. Recent rise in energy prices, shrinking existing resources, and the search for alternative sources of energy and energy conservation technologies have brought into focus the issue of causality between energy use and economicgrowth. Various studies have been applied to find the nature of casual relationship between energy consumption and economicgrowth. Energy is an important element for production and economicgrowth. This study analyzes the electricityconsumption and its relationship with economicgrowth is Pakistan. Pakistan currently has been going through one of its worse electricity crisis, with a shortfall of more than 5000 MW (Economic Survey of Pakistan, 2011). The resulting power cuts in the form of load shedding, not only affects the normal life of the people of the country but it also badly damages the commerce, industry, and agriculture sectors. Which have ultimately effect on economics growth of the country. This down term of economics growth has severe consequences for unemployment and socio economics condition of the country. The electricity crisis is not a recent phenomenon in Pakistan, but this power crisis particularly is result of power policy adopted in 1994. In 1994 Power Policy of the government which has opened electricity generation to the private sector. With the induction of the private sector in power generation, the fuel mix in electricity generation has changed in favor of imported furnace oil. Until 2002, this policy worked reasonably well because the oil price in international market remained low. After 2002, the international price of fuel started rising and so did the cost of electricity generation. The cost of electricity generation, however, increased drastically in 2007-08 with an unprecedented surge in international fuel prices. In response of higher cost of electricity generation, government has been rising the price of electricity continuously for last four year. With this background, it is important for the policy makers to understand the relationship between electricityconsumption and economicgrowth in order to design effective power policy. The general conclusion from previous studies regarding Pakistan electricityconsumption and economicgrowth nexus is that there is no consensus on the direction of causality between electricityconsumption and economicgrowth.
It is generally accepted that there is a strong association between level of energy and level of major socio-economic variables in the literature. Electricity is an environmental energy source that can be used in every area of life. Numerous empirical studies conducted in both developed and developing countries indicate that level of energy, including electricity in a country played a crucial role in economic development. This study investigates the causality link between electricityconsumption and economicgrowth in Turkey using the ARDL cointegration and UVAR causality models based on two variables. In this regard, the longest available annual time series data have been selected for the period of 1960-2014. However, the findings of this study should take into consideration with causation due to possibility of omitted variables. Alternative unit root tests are utilized to determine the stationarity of the variables. The conclusion is that the two series are stationarity at the first difference data. The coefficient of ECT in ECM is negative and significant, which means that it converges towards equilibrium. All diagnostic tests, including the Cusum-Cusumsq tests in the econometric models have the desired econometric properties. The results based on the bounds testing procedure indicate that a stable link exists between Y and EC in the short/long run. The overall results support growth hypothesis that a positive unidirectional causality is moving from EC to Y in the short/long run, without feedback. That is, an increase on EC, ceteris paribus, gives rise to Y, and the implementation of electricity conservation policy causes a slowdown in economicgrowth. Electricityconsumption is an important source for the Turkish economy. Therefore, policy makers in Turkey should encourage investors to increase electricity supply, and implement energy promotion policies to increase in electricty consumption to maintain economicgrowth.
In time series econometrics most recent studies have tended to focus on VAR and VEC models and cointegration approach. For example Asafu and Adjaye (2000) investigated the causal relationship between energy use and income in four Asian countries using cointegration and error correction mechanism. They found that causality runs from energy use to income in India and Indonesia and bi-directional causality in Thailand and Philippines. Yang (2000), found bi-directional causality between energy consumption and GDP in Taiwan and this results contradicts with Cheng and Lai (1997) results. Soytas and Sari (2003) found bidirectional causality in Argentina and unidirectional causality from GDP to energy consumption in Italy and South Korea, and from energy consumption to GDP in Turkey, France, Germany and Japan. Paul and Bhattacharya (2004) found bidirectional causality between energy consumption and economicgrowth in India. Using cointegration analysis Wietze and and Van (2007) found that unidirectional causality from GDP to energy consumption in Turkey. Dirck (2008) used the cointegartion approach to study the causal relationship between electricityconsumption and economicgrowth for the panel of 15 European countries. He found the unidirectional causality from electricityconsumption to economicgrowth for Greece, Italy, and Belgium, and from economicgrowth to electricityconsumption for Great Britain, Ireland, Netherland, Spain and Portugal, no causality is found in Austria, Germany, Denmark, Finland, France, Luxembourg, and Switzerland. Narayan, Narayan and Popp (2010) used the cointegartion approach to study the causal relationship between electricityconsumption and economicgrowth for six different panels of 93 countries. They found bidirectional causality relationship between
between electricityconsumption and GDP growth for the Chinese economy using data for the 1971–2000 period. The authors found short–run unidirectional causality running from electricityconsumption to economicgrowth. This implies that an increase in electricityconsumption supported economicgrowth in China in the period under study. Later investigations by Yuan et al. (2007) performed for the period 1978–2004 are in line with contribution by Shiu and Lam (2004). Yang (2000) has found a bidirectional causal relationship between GDP and electricityconsumption in Taiwan. Morimoto and Hope (2004) applied Yang’s model to examine the impact of electricity supply on economicgrowth in Sri Lanka and found similar results. Jumbe (2004) showed that the Granger causality between GDP and electricityconsumption for Malawian time series data over the period 1970–1999 runs in both directions (feedback). The error correction model, however, indicated only a unidirectional long–run relationship running from GDP to electricityconsumption. Yoo (2005) performed an analogous analysis for Korea over the period 1970– 2002 and found a short–run unidirectional causal relationship running from electricityconsumption to GDP growth. Altinay and Karagol (2005) demonstrated that electricityconsumption was a leading indicator of the economicgrowth of Turkey. Halicioglu (2007) in a more recent study for the period 1968–2005 demonstrated long–run causality running from income to electricityconsumption in Turkey. However, in the short–run the results were inconclusive.
Past empirical studies have used cointegration analysis based on a number of methodologies including Engle and Granger (1987), Johansen (1988) and Johansen and Juselius (1990) in determining the causal relationship. Studies have also shown that these cointegration methods are not appropriate especially when the sample size is too small (Narayan & Smyth, 2005). Other studies have used cross-sectional data analysis, which in itself is not bad except that by grouping countries that are at different stages of development, it fails to address country-specific details. This study uses the Autoregressive distributed lag (ARDL) bounds testing method to determine the existence and direction of the causal relationship between electricityconsumption and economicgrowth. This study also investigates the kind of relationship that exists: unidirectional, bidirectional or no causality at all.
The methodology includes testing for unit roots, cointegration and a dy- namic panel estimation approach to identify the Granger causal relation in our panel data. The use of panel techniques enables the power of the tests to be increased and makes it possible to include heterogeneity between coun- tries. In this way we overcome some of the problems associated with single country studies. We apply system GMM estimation for a panel-VAR as in Huang et al. (2008). This methodology is more efficient than that in Arel- lano and Bond (1991) when using lagged differenced dependent variables as instruments (see Blundell and Bond, 1998). To our knowledge, there is no other study on that relationship for these countries and these two variables. The rest of the paper is structured as follows. Section 2 explains the panel methodology. Section 3 describes the data. We provide arguments to justify the choice of the countries used in the study. Section 4 summarizes empirical results. Section 5 concludes and proposes some policy implications that emerge from the study.
Since the mid-eighties and especially following the second oil shock, there has been a great deal of attention devoted toward the importance of energy in the economy. Hence, several researches have been conducted to study the relationship between energy consumption and economicgrowth. Some studies have been focused on carbon dioxide emission and its consequences on economicgrowth while some others have investigated whether electricityconsumption increases the output. Studies have analyzed the energy-growth nexus for different countries and regions around the world by the use of different econometric techniques (ECM, ARDL, VAR, OLS-EG, DOLS, FMOLS, etc). The earliest study was conducted by Kraft and Kraft in 1978 in which authors have provided evidence to support unidirectional causality running from income to energy consumption for the United States from 1947-1974 periods. Since this study established, many authors have joined the debate, some who have opposed and empirically challenged Kraft an d Kraft’s initial findings; and others who have supported their views (Nanthakumar and Subramaniam, 2010).
Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russian Federation, Serbia, Slovak Republic and Ukraine. The Pedroni panel and error correction method used do not provide support for cointegration for the variables and economicgrowth is not stimulated by an increase in electricityconsumption in such economies. Applying heterogeneous panel data analysis. Osman et al. (2016) investigate the relationship between electricityconsumption and economicgrowth in the GCC countries using annual data from 1975 to 2012. The panel results provide evidence for bi-directional causality between economicgrowth and electricityconsumption in these countries. In a similar study, Furuoka (2017) through panel granger causality and Dumitrescu–Hurlin panel causality tests, validated conservative hypothesis for the countries in the Baltic region
Regular and sufficient electricity is one of the most crucial determinants stimulating economicgrowth for any economy. Electricity is the most flexible form of energy and constitutes one of the critical resources for modern life and economicgrowth of any nation (Enebeli, 2010). Hence, due to few studies on electricityconsumption and growth, facts on energy are also adapted for this study. Economicgrowth results from growth in three factors: capital input, labour input and productivity. The relationship between use of energy and economicgrowth has been a subject of greater inquiry as energy is considered to be one of the important driving forces of economicgrowth in all economies (Pokharel, 2006).
In this paper we attempted to find the direction of the causal relationship between energy consumption and economic activity in Pakistan. More specifically we investigated the causal relationship between growth in energy consumption and growth in GDP while causality between other variables also. The methodology was based on the Granger causality test which has been found appropriate by using the unit root test and finding out that only GDP growth is stationary at level while all the other three variables are non stationary at level and can be made stationary at first level. The estimated results infer that all variables are not granger causing each other at 5 percent level of significance while at 10 percent level of significance electric power consumption is granger causing GDP growth. The paper has important policy implications. Since Pakistan pays high oil import bill, petroleum imports were $1.53 billion in 1999/00 and in the preceding year $1.57 billion. In 2000-01 petroleum imports may be close to $2.5 billion or around 25 percent of total imports (Dawn 18-23 April 2000). Therefore, using oil more efficiently and substituting gas for oil wherever possible could be a good policy measure. The implications of the present study suggest that an energy conservation policy regarding petroleum consumption would not lead to any adverse side-effects on economicgrowth in Pakistan, whereas energy growth policy in the case of gas and electricityconsumption should be adopted in such a way that, growth in these sectors stimulates economicgrowth.