Top PDF Energy consumption and economic growth nexus: Panel co-integration and causality tests for Sub-Saharan Africa

Energy consumption and economic growth nexus: Panel co-integration and causality tests for Sub-Saharan Africa

Energy consumption and economic growth nexus: Panel co-integration and causality tests for Sub-Saharan Africa

This study reassesses the causal relationships between energy consumption and economic growth in 18 Sub-Saharan Africa countries over the peri- od 1980-2011. The Panel Unit Root Test results show that variables (both exogenous and endoge- nous) are stationary at their first difference with indi- vidual effects and individual linear trends, while the results of panel co-integration tests show that ener- gy consumption and economic growth do have a stable long-run equilibrium relationship. There is unidirectional causality from energy consumption to economic growth in East and the Southern Africa Sub-region, which supports the growth hypothesis. As a result, the related authorities in the regions should take a special interest in different sources of energy and invest more in this sector, make suitable policies in this regard and find new alternative and cheap sources of energy. But, there is no causality between energy consumption and economic growth in Central and the West Africa Sub-region, which is in line with the neutrality hypothesis. In other words, both energy consumption and economic growth are neutral with respect to each other. Our results confirm the inconclusive nature of a causali- ty relationship between energy consumption and economic growth.
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Energy consumption and real GDP: Panel co-integration and causality tests for sub-Saharan African countries

Energy consumption and real GDP: Panel co-integration and causality tests for sub-Saharan African countries

Following from the above discussion, energy development can cause economic growth and also, economic growth can cause energy development. Increased interest has been placed on the nature of the relationship between energy and economic development. A major reason for such interest in the energy-economic development nexus is because knowing the direction of causality will help in shaping environmental and energy policies. If energy causes economic development, this implies energy-dependence and low or falling energy would adversely affect income and energy conser- vation policies would lead to a fall in output (Lee, 2005; Akinlo, 2008; Apergis and Payne, 2009). This has been referred to in the literature as the growth hypothesis. On the other hand, if causality is found to run from economic development to ener- gy, this supports the conservation hypothesis and such an economy is less energy-dependent and energy conservation policies can be implemented with little or no adverse effects on income (Jumbe, 2004; Lee, 2005). A similar conclusion is reached if no causal relationship is found between energy and economic development and energy conservation policies can be implemented without having an adverse effect on output. This is the neutrality hypothesis. Finally, the feedback hypothesis is sup- ported if bi-directional causality is found, in which case economic development and energy consump- tion are complementary and energy policies should be geared towards improving energy consumption Energy consumption and real GDP: Panel co-integration and causality tests for sub-Saharan African countries Babajide Fowowe
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Energy consumption, CO2 emissions and economic growth nexus: Evidence from panel Granger causality test

Energy consumption, CO2 emissions and economic growth nexus: Evidence from panel Granger causality test

In the literature, there are several studies, theoretical and empirical, which put the accent on the relationship between energy consumption, economic growth, and the emission of CO2 that may ex- ist. Empirically it has been tried to find the direction of causality between energy consumption and economic activities for some countries employing the Granger Test, ECM and other techniques. In recent papers, Zhang and Lin (2012) chowed that urbanization increases energy consumption and CO2 emissions in China using panel estimation. They proves that the effects of urbanization on en- ergy consumption vary across regions and decline continuously from the western region to the central and eastern regions. Shyamal and Rabindra (2004) examined the different direction of causal rela- tion between energy consumption and economic growth in India through a co-integration technique combined with the Granger causality test. They find the existence of a bi-directional causality be- tween energy consumption and economic growth. Wang et al. (2016) used a co-integration approach in China data to examine the relation between economic growth, energy consumption and CO2 emis- sion. Granger causality test identified a bi-directional causal relationship between economic growth and energy consumption, and a uni-directional causal relationship was found to exist from energy consumption to CO2 emissions. Saidi and Hammami (2015) studied the impact of energy consump- tion and CO2 emission on economic growth for 58 countries. They have used simultaneous equations models estimated by the GMM-estimator and they find evidence that energy consumption has a pos- itive impact on economic growth and that the CO2 emissions have a negative impact on economic growth.
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Human Capital-Economic Growth Nexus in Africa: Heteregeneous Panel Causality Approach

Human Capital-Economic Growth Nexus in Africa: Heteregeneous Panel Causality Approach

This paper examines the causal relationship between human capital (HC) and economic growth (EG) for a panel 29 African countries. In particular, the study applied theoretically consistent panel unit root procedures and panel co-integration tests that account for the presence of cross-sectional dependency among the members of a panel. To ascertain the direction of causality between HC and EG, the study applies the heterogeneous panel causality test proposed by Dumitrescu and Hurlin. This test has the ability to control for the presence of both heterogeneity and cross-sectional dependence that might be present in the panel. To determine the signs of the relationship between the two variables, the study applied the dynamic ordinary least square (OLS). The results from the heterogeneous panel causality test provide evidence in support of bidirectional causality between HC and EG for the sample countries. The results from the dynamic OLS indicate that HC and EG have significantly positive effect on each other. This finding reinforces the need for the sample countries to work in tandem in promoting education as an engine of EG.
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The Energy Consumption-Growth Nexus in Seven Sub-Saharan African Countries

The Energy Consumption-Growth Nexus in Seven Sub-Saharan African Countries

Production and many consumption activities involve energy as an essential factor input in modern economies. It appears to be the key source of economic growth, industrializa- tion and urbanization. Conversely, these latter variables may induce use of more energy, particularly commercial energy. Over the past few years, the relationship between energy consumption and economic growth has been extensively investigated. However, there seems to be no consensus about the relationship and the direction of causality between energy usage and economic development. Moreover, four hypotheses have been formulated to explain the direction of causality between energy consumption and real gross domestic product: growth, conservation, feedback, and neutrality hypotheses (Apergis and Payne 2009a, 2009b). The growth hypothesis implies that energy consumption contributes directly to economic growth within the production process as a direct input. Unidirectional Granger-causality from en- ergy consumption to real GDP is consistent with the growth hypothesis; energy conservation policies could possibly reduce real GDP. The conservation hypothesis asserts that energy conservation policies designed to reduce energy consumption and waste may not have an adverse impact on real GDP. Granger-causality running from real GDP to energy consump- tion con…rms the conservation hypothesis. The feedback hypothesis suggests that energy consumption and real GDP are interrelated and may serve as complements to each other. Hence, the existence of bidirectional Granger-causality between energy consumption and real GDP would substantiate the feedback hypothesis. Finally, the neutrality hypothesis consid- ers energy consumption a relatively minor component of overall output and thus may have little or no impact on real GDP. In such cases, energy conservation policies may not adversely impact real GDP. The absence of Granger-causality between energy consumption and real GDP is evidence in favor of the neutrality hypothesis. As pointed out by recent studies, for instance Ferguson et al. (2000), Toman and Jemelkova (2003), Arbex and Perobelli (2010), the absence of any clear consensus on the relationship between energy consumption and growth can be attributed to the heterogeneity in climate conditions, varying energy con- sumption patterns, the structure and stages of economic development within a country, the alternative econometric methodologies employed, the presence of omitted variable bias along with varying time horizons of the studies conducted.
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Sub-Saharan African Countries Public Expenditure and Economic Growth: Wagner’s Panel Cointegration and Causality Applications

Sub-Saharan African Countries Public Expenditure and Economic Growth: Wagner’s Panel Cointegration and Causality Applications

In this paper, the validity of the Wagner’s law is investigated in tenth selected Sub- Saharan African countries, namely Botswana, Equatorial Guinea, Mauritania, Nigeria, South Africa, Sierra Leone, Tanzania, Ethiopia, Madagascar, and DR Congo. Five variants of the Wagner’s law were tested for the period 2005-2014, using panel econometric approaches encompassing cointegration and causality. The study found a long run relationship between the public expenditure and the various explanatory variables used as proxies of income. The long-run causality tests indicate that there is bidirectional causality between expenditure and income in all models with the exemption of the Gupta model. It is concluded that for Sub-Saharan Africa, both the Wagner’s law the Keynesian hypothesis tend to be valid under the period of investigation. The explanation is that there has been the tendency for public expenditure to grow relative to national income (Wagner’s law) and that public expenditure is a policy instrument (an exogenous factor) for improving national income (Keynesian hypothesis) during the 10-year period.
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Nuclear Energy Consumption-economic Growth Nexus in OECD: A Bootstrap Causality Test

Nuclear Energy Consumption-economic Growth Nexus in OECD: A Bootstrap Causality Test

In contrast to aggregate energy consumption, there have been few studies specifically addressing the causal relationship between nuclear energy consumption and economic growth (Yoo and Ku, 2009). Some of them employ panel data models while others apply time series analysis. For instance, Naser (2014) examines the relationship between oil consumption, nuclear energy consumption and economic growth in four emerging economies (Russia, China, South Korea, and India) by using Granger non-causality and Toda-Yamamoto tests over the period from 1965 to 2010. The results propose that nuclear energy stimulates economic growth in both South Korea and India. In another panel data analysis, Chu and Chang (2012) searched whether energy consumption promotes economic growth by using specifically oil and nuclear energy consumption data for G-6 countries over the period of 1971-2010. The results indicate that nuclear energy consumption causes economic growth in Japan, UK, and the US; economic growth causes nuclear energy consumption in the US; nuclear consumption and economic growth have no causal relation in Canada, France and Germany.
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Urbanization, Energy Consumption and CO2 Emissions in Sub-Saharan Countries: A Panel Cointegration and Causality Analysis

Urbanization, Energy Consumption and CO2 Emissions in Sub-Saharan Countries: A Panel Cointegration and Causality Analysis

theories focus on the link between urbanization and natural environment. Sadorsky (2014) explores three theories on the relationship between urbanization and natural environment. These are well known as ecological modernization, urban environmental transition and compact city theories. According to the theory of ecological modernization, urbanization is a very important process of social transformation. As societies move from low to middle stages of development, economic growth is the primary goal of economy and environmental problems may emerge. In higher stages of development, environmental pollution becomes more important. Urbanization may reduce the impact of economic growth on the environment. The theory of urban environmental transition investigates the relationship between environmental issues and urbanization at the city level. In this theory, cities often become wealthier by industrial manufacturing and can cause to industrial demage. On the other hand, environmental regulations and technological innovations may lessen industrial pollution. The compact city theory deals with the benefits of urbanization. Higher urbanization may facilitate economies of scale for public infrastructure and environmental pollution may lessen by these scale economies. These theories suggest that urbanization may have positive and negative effects on the natural environment. Empirical studies have generally investigated the relationship between urbanization, energy consumption, and CO 2 emissions. For example, Cole and Neumayer (2004) deal with the relation
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Causality Nexus of Electricity Consumption and Economic Growth: An Empirical Evidence  from Ghana

Causality Nexus of Electricity Consumption and Economic Growth: An Empirical Evidence from Ghana

policy makers. The petroleum crisis in 1970s outlined the importance of energy as a factor of production [1]. Also the abnormal prices of oil in the 1990s and 2000s ce- mented the importance of energy in our daily activities. Countless studies have ex- amined the causality nexus between electricity consumption and economic growth. Reports from such studies have been seemingly contradictory and different. Reference [2] ascribes the variation in results to variable selection, time periods for conducting the study, economics policies implemented etc. Occurrence of economic events may impact the behavioral characteristics or trends of energy consumption and Gross Domestic Product (GDP) of a country [3]. Flouting the importance of structural shifts in a cau- sality nexus may produce misleading results. Therefore, parameter stability is impor- tant in identifying whether or not there is an existence of structural breaks in the time series data.
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Renewable energy consumption and economic growth in Argentina  A multivariate co integration analysis

Renewable energy consumption and economic growth in Argentina A multivariate co integration analysis

Most studies that argued that economic growth should not be sustained at the expense of the environment focused on the policies that would pursue an energy mix that includes clean and renewable energy. This led to studies investigating the linkage between economic growth and other sources of energy such as renewable energy (Sebri and Ben-Salha 2014). A vast majority of the studies that aimed to examine this relationship established mixed results. Some studies revealed a unidirectional causality flowing from renewable energy consumption to economic growth (Khobai and Le Roux 2017; Apergis and Payne 2011); whereas other studies confirmed a unidirectional causality running from economic growth to renewable energy consumption (Ocal and Aslan 2013; Zirimba 2013). Most studies affirmed a bidirectional relationship between renewable energy consumption and economic growth (Sebri and Ben-Salha 2014; Apergis and Payne 2014; Sardosky 2009; Apergis and Payne 2010). This led to the current study examining the causal relationship between renewable energy consumption and economic growth in Argentina.
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Health, Education and Economic Growth: Evidence from Sub Saharan Africa (Dynamic panel analysis)

Health, Education and Economic Growth: Evidence from Sub Saharan Africa (Dynamic panel analysis)

Acemoglu and Johnson (2006) pointed out that, although health improvements are a valuable goal within itself, they do not have a significant effect on economic growth. The results in this study extend their findings in which investigate that positive and significant impact on economic performance of SSA including life expectancy at birth but their sheer is very small. An important point of these study is try to take into account the indirect effect of health on economic growth, in which improvements of health improves school enrolment which affect education positively and improves life expectance at the birth . It is expected that, using a single equation to capture the influence of health on economic growth would capture the labor force participation which build positive effect on growth. Furthermore, though the study attempts to establish some linkage between education and health, it only captures the contemporaneous effect of the former on the latter. Conceptually, more educated individuals are more productive (and obtain higher earnings). Also if children with better health and nutrition attain higher level of education and are less likely to play truant and drop out of school early, then improved health in young people would contribute to future productivity.Thus, the health effects in the macroeconomic sense may have long time lags, given that the average worker may have been several years or more which invariably makes the macroeconomic relationship difficult to estimate. This assertion is line with the empirical literature. Moreover, if good health is also linked to longer life, healthier individuals would have more incentive to invest in education and training, as the rate of depreciation of the gains in skills would be lower (Strauss and Thomas, 1998). However, this study had the established a careful indirect effect of health on economic growth through education. More importantly, these study used Table 3. panel cointgration tests results
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Foreign Direct Investment, Trade Openness and Economic Growth: A Panel Data Analysis for Sub-Saharan Africa

Foreign Direct Investment, Trade Openness and Economic Growth: A Panel Data Analysis for Sub-Saharan Africa

For SSA countries fewer studies have been conducted and most of the studies support the view for the positive impact of FDI on growth. Sukar et al. (2010) verify the impact of FDI on economic growth in SSA using panel data analysis. It is indicated that FDI marginally impact growth with positive and significant effect. However, the author pointed that many other factors such as institutions and lack of strong macroeconomic stability limit the inflow of FDI to Sub Sahara Africa. Ndambiri et al. (2012) employs the generalized method of moments using panel data and the findings show similar result. On the other hand, few studies have indicated negative and inconclusive relationship between FDI and economic growth. Katerina et al. (2004) investigate the relationship between FDI and economic growth for transitional economies. Their results show insignificant relationship between the two variables and it was explained that further study should be conducted. A study conducted in Turkey by Demirsel et al. (2014) to verify the relationship between the above mentioned variables using monthly data for the period 2002:Q1 and 2014:Q1. Employing the Johansen test of cointegration, the author also came out with inconclusive results.
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Remittances, Human Capital, and Economic Growth: Panel Data Evidence from Asia and Sub-Saharan Africa

Remittances, Human Capital, and Economic Growth: Panel Data Evidence from Asia and Sub-Saharan Africa

Households from least developed countries, such as LICs and SSA, may have severe borrowing constraints and they may even fail to get a minimum standard of consumption, thus largely falling below the poverty line. Remittance income may help them increase their current consumption and bring them out of the poverty trap, but may not necessarily help them invest in physical capital. This is consistent with several household surveys that find positive effects of remittances on consumption and poverty reduction in LICs and SSA countries (e.g., Acharya & Leon-Gonzalez, 2013 for Nepal; Anyanwu & Erhijakpor, 2010 for SSA). Meanwhile, others find a positive effect of remittances on physical capital accumulation among MICs such as Kenya (Kagochi & Kiambigi, 2012). It is therefore not surprising that remittances have no significant effect on capital accumulation in LICs and SSA countries. However, remittance recipient households tend to have higher expenditure on children's education, irrespective of country (see, Acharya & Leon-Gonzalez, 2014 for Nepal; De & Ratha, 2012 for Sri Lanka), providing support for our findings for the long-run positive effect of remittances on human capital investment at the macro level. In summary, our results, consistent with household surveys (Adams, 2011), suggest that the development level of a country generally shape the growth effect of remittances. The long-run growth effect is generally through the human capital channel, for all countries, and to some extent through productivity and physical capital investment.
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Asymmetric co integration and causality effects between financial development and economic growth in South Africa

Asymmetric co integration and causality effects between financial development and economic growth in South Africa

The above criticisms of the TAR model paved way for the next development advanced in the empirical literature, which saw researchers turn to the use of smooth transition regression (STR) model of Terasvirta (1994). Apart from ensuring a smooth transition between the regime coefficients, the STR framework provides an additional advantage of allowing the econometrician to determine which variable is responsible for the switching behaviour between the model regime coefficients. Take for example, Mehrara et. al. (2012) who investigate the nonlinear effects of financial development on economic growth for Iran using a smooth transition regression (STR) and find that the nonlinear dynamics governing the relationship is facilitated by the inflation rate. In particular, the authors find that in the low-inflation regimes, defined by inflation rates below 10.4 percent, the effects of financial development on economic growth are positive whereas this relationship turns negative at inflation rates exceeding the threshold level. Similarly, Jude (2010) investigates the linkage between financial development and economic growth using a panel STR model for 71 developing and developed economies. The author establishes that the nonlinearity existing in the finance-growth relationship can be attributed to a number of factors inclusive of the inflation rate, government expenditure, degree of openness to trade and financial development. In other words, this result implies that the asymmetric relationship between financial development and economic growth can be affected by both financial and economic development factors. Another study worth taking note of is that presented by Chiou-Wei et. al. (2010) who opt to use a smooth transition error correction model (STECM) framework to investigate the relationship between financial development and economic growth for South Korean data. The obtained empirical results reveal that whilst there may be a positive long- run relationship between financial development and economic growth, the authors take caution in interpreting these results, as the short run effects of financial development on economic growth prove to be negative.
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Asymmetric co-integration and causality effects between financial development and economic growth in South Africa

Asymmetric co-integration and causality effects between financial development and economic growth in South Africa

The above criticisms of the TAR model paved way for the next development advanced in the empirical literature, which saw researchers turn to the use of smooth transition regression (STR) model of Terasvirta (1994). Apart from ensuring a smooth transition between the regime coefficients, the STR framework provides an additional advantage of allowing the econometrician to determine which variable is responsible for the switching behaviour between the model regime coefficients. Take for example, Mehrara et. al. (2012) who investigate the nonlinear effects of financial development on economic growth for Iran using a smooth transition regression (STR) and find that the nonlinear dynamics governing the relationship is facilitated by the inflation rate. In particular, the authors find that in the low-inflation regimes, defined by inflation rates below 10.4 percent, the effects of financial development on economic growth are positive whereas this relationship turns negative at inflation rates exceeding the threshold level. Similarly, Jude (2010) investigates the linkage between financial development and economic growth using a panel STR model for 71 developing and developed economies. The author establishes that the nonlinearity existing in the finance-growth relationship can be attributed to a number of factors inclusive of the inflation rate, government expenditure, degree of openness to trade and financial development. In other words, this result implies that the asymmetric relationship between financial development and economic growth can be affected by both financial and economic development factors. Another study worth taking note of is that presented by Chiou-Wei et. al. (2010) who opt to use a smooth transition error correction model (STECM) framework to investigate the relationship between financial development and economic growth for South Korean data. The obtained empirical results reveal that whilst there may be a positive long- run relationship between financial development and economic growth, the authors take caution in interpreting these results, as the short run effects of financial development on economic growth prove to be negative.
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Government Expenditure and Economic Growth in South Africa: Causality and Cointegration Nexus

Government Expenditure and Economic Growth in South Africa: Causality and Cointegration Nexus

According to Perchman and Mayer (1952), who believed that these views are doubtful, the hypothesis showed that since elements of government expenditure, such as debt services and salaries, are fixed in monetary terms, public spending during inflation may rise less than the general price level and national income. This makes it possible for the real burden of government expenditure to be reduced during inflation. When inflation has reduced the burden of taxes sufficiently below the critical limit, government will apply economic policies to control it. They also offered their opinions on the grounds that it is still not clear whether the hypothesis is in terms of government expenditure or taxes, because it relies almost exclusively on the ratio of taxes to national income, instead of government expenditure. Another criticism is the case of using only one incident to draw conclusions, which they believe is part of the reason why Clark’s views are not supported by the facts presented as evidence in the study. In addition, Perchman and Mayer believed that statistics alone, without any theoretical underpinning, cannot be used to prove that a tax burden in excess of twenty-five percent of the national income would lead to price increases.
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The nexus between FDI and Total Factor Productivity Growth in Sub Saharan Africa

The nexus between FDI and Total Factor Productivity Growth in Sub Saharan Africa

The Liu (2008) model discussed in the previous paragraph seems sufficient to its objective of investigating the link between FDI and productivity spillovers at firm level. But the productivity spillovers from FDI are influenced more by the overall economic environment created by both formal institutions (mainly policies, rules and regulations) and informal institutions (such as culture, norms, social networks, etc) than mere managerial time. We argue that modeling the technology spillovers from FDI as a function of the aggregate economic environment, upon which the efficiency of managerial-time of firms itself depends, is more enlightening. Liu (2008), however, has made a significant contribution towards understanding inter-firm differences of the impact of technological spillovers from FDI on firm productivity. The results from the model by Liu (2008) that technological spillovers from FDI can have both negative and positive effects on the productivity of an economy is intuitively understandable. This is so since the managerial-time that must be invested on the conversion of the spillovers/externalities from FDI may have opposite effects on the level of productivity and long-term growth rate of productivity. The more managerial time is invested in the conversion process of such externalities, the larger the long run positive effect on the growth rate of productivity. But the same decision implies less time available for management of current production process and hence a negative effect on the level of current productivity. The overall effect being dependent on the magnitudes of these two opposite effects: short-term level effects and long-term growth rate effects.
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Determinants of US FDI and economic growth in Sub Saharan Africa

Determinants of US FDI and economic growth in Sub Saharan Africa

The aim of this study is to investigate the influence of host country factors on foreign direct investment (FDI) from the United States (US) to developed countries in the Organisation for Economic Co-operation and Development (OECD) from 1982 until 2010. This study differs from previous panel data studies on FDI determinants in that it uses the recently-introduced Common Correlated Effects Mean Group (CCEMG) estimator to allow the effects of observed variables and unobserved common factors to vary across countries. There are two major problems relating to the estimation methods in the FDI- determinant literature using aggregate panel data at the country level. Firstly, earlier studies, for example Nigh (1985) and Koechlin (1992), often use standard panel estimation methods such as Pooled OLS (POLS) or Fixed Effects (FE). In these cases, the slope parameters for the observed explanatory variables are typically constrained to be constant across recipients. This restriction can be too strong since the impact of a given factor on FDI may be different for different recipients. Given that the observed panel samples have a long time series dimension in this study, it could be more informative to allow the parameters to be heterogeneous across recipients.
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Telecommunications and economic growth: an empirical analysis of sub-saharan Africa

Telecommunications and economic growth: an empirical analysis of sub-saharan Africa

We examine the effect on economic growth of mobile cellular phones in sub-Saharan Africa where a marked asymmetry is present between land-line penetration and mobile telecommunications expansion. This study extends previous ones along two important dimensions. First, we allow for the potential endogeneity between economic growth and telecommunications expansion by employing a special linear generalized method of moments (GMM) estimator. Second, we explicitly model for varying degrees of substitutability between mobile cellular and land-line telephony, so that greater expansion of mobile telecommunications can have a different impact whenever the level of land-line penetration differs. We find that mobile cellular phone expansion is an important determinant of the rate of economic growth in Sub-Saharan Africa. Moreover, we find that the contribution of mobile cellular phones to economic growth has been growing in importance in the region, and that the marginal impact of mobile telecommunication services is even greater wherever land-line phones are rare. Given the low cost of mobile telecommunications technology relative to other broad infrastructure projects, especially land-line infrastructure, we advocate that mobile telecommunication services be encouraged in the area.
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Studies on financial development and economic growth in sub-Saharan Africa

Studies on financial development and economic growth in sub-Saharan Africa

We test our hypothesis by constructing a panel dataset of 23 SSA countries for the period 1980–2014. 19 The choice of these countries is based entirely on data availability for a sufficiently longer time period. Annual data for the variables were gleaned from the World Development Indicators (WDI) of the World Bank and Analyse Africa. We used credit to the private sector as percentage of GDP to proxy the quality of financial development. Credit to the private sector as a proportion of GDP is the widely used measure of financial development (see for instance Arcand et al., 2012; Levine et al., 2000; King and Levine, 1993a) since it accounts for credit advanced to the private sector that propelling the utilization and allocation of funds to more efficient and productive activities. Arguably, monetary aggregates are not good proxies since they only resonates the extent of transaction services offered by the financial sector relative to its ability to relocate funds from depositors to investors (Ang and McKibbin, 2007). The inflation variable is the annual percentage change in the consumer price index while terms of trade is the net barter terms of trade computed as the ratio of export to import price. With regard to the shock variables, monetary and real shocks are respectively proxied by inflation and terms of trade volatilities estimated by means of generalised autoregressive conditional heteroskedasticity (GARCH) developed by Bollerslev (1986). Relative to the traditional approaches, our choice of this approach rests on its ability to harvest past values and behaviour of the series. By restricting the vector of terms of trade and inflation ( ) to depend on the log of its one–period lag, we estimate the GARCH (1, 1) model as follows:
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