The financial sector is a sector that utilizes productive resources to facilitate capital formation through the provision of a wide range of financial services to meet the different requirements of borrowers and lenders. Thus, the financial system plays a crucial role in mobilizing savings, and ensuring that these resources are allocated efficiently to productive sectors (Ang, 2007). In Ghana the financial system comprises formal, semi-formal and non-formal institutions that mobilize savings and grant loans to the public. The emergence of the informal financial system has become very crucial due to the inability of formal and traditional commercial banks to serve the wide range of needs of low income groups. In this regard and to serve the financial needs of the rural and urban poor, low income groups in society and micro-entrepreneurs, microfinance has been identified as a powerful way of serving the unserved, the under-served and reaching the unreached. Even though microfinance programmes have contributed immensely to poverty reduction among their clients as claimed by most authors, there remain significant challenges. While the provision of credit is by far the most important product of financial services, much progress has also been made by many MFIs offering a range of savings and insurance products, which has great potential for alleviating poverty and reducing vulnerability.
This paper attempts to empirically examine the short-run and long-run causal relationships between electricity consumption and economic growth for five panels namely high income, upper middle income, lower middle income and low income panels based on World Bank income classification and for global panel of 76 countries using the time series data for the period from 1960 to 2008. Also this study attempts to estimate the long-run and short-run elasticities of economic growth with respect to electricity consumption in order to examine the Narayn and Narayn new approach. so
Before testing for any causal relationship between the variables within a VEC model structure at the first stage panel unit root tests and at the second stage panel cointegration analysis are done. Three different panel unit root tests, IPS, MW, and Choi results support that both the panel variables are integrated of order one for high income, upper middle income, lower middle income and also for global panels but only the variable economic growth is integrated of order 1 for low income panel. The Kao and Johansen Fisher panel cointegration tests results support that both the panel variables are cointegrated for high income and upper middle income panels and also for global panel but for lower middle income and low income panels both the variables are not cointegrated.
We know macroeconomic variables tend to exhibit a trend over time. As a result it is more appropriate to consider the regression equation with constant and trend terms at level form. Since first differencing is likely to remove any deterministic trend in the variables, regression should include only constant term. Therefore both constant and trend terms are included in the model for the test statistics while utilizing level form and only constant term is included for first differenced of the variables in their logarithmic form. The test results for five panels are given below in Table.
The tests results support that both the variables are integrated of order 1 for high income, upper middle income, and lower middle income panels and also for global panel but only the variable economic growth is integrated of order 1 for low income panel.
From the panel unit root tests results it is found that both the series economic growth and electricity consumptions are integrated of order 1 for all panels except low income panel. For low income panel only the variable economic growth is integrated of order 1. Therefore the cointegration analysis is conducted to examine whether there is a long-run relationship between the variables using the Kao ADF type test and Johansen Fisher panel cointegration test proposed by Maddala and Wu.
The Johansen Fisher panel conintegration test is panel version of the individual Johansen conintegration test. The Johansen Fisher panel cointegration test is based on the aggregates of the p-values of the individual Johansen maximum eigenvalues and trace statistic. If and low income panels both the variables are not cointegrated.
From the tests results in Tables and it is found that there is a long-run relationship between electricity consumption and economic growth for high income, upper middle income and global panels but for lower middle income p is the p-value from an individual cointegration test for cross-section i.
The empirical investigation of the dynamic causal relationship between electricity consumption and economic growth based on modern econometric techniques involves the following three steps. At the first step whether each panel variable contains a unit root is examined. If the variables contain a unit root, the second step is to test whether there is a long run-cointegration relationship between the panel variables. If a long-run relationship between the variables is found, the final step is to estimate panel vector error correction model in order to infer the Granger causal relationship between the variables. Finally using the GMM technique the long-run and short-run elasticities of economic growth with respect to electricity consumption are estimated for five different panels.
Panel Unit Root Tests
Since none of the panel unit root tests is free from some statistical shortcomings in terms of size and power properties, so it is better for us to perform several unit root tests to infer an overwhelming evidence to determine the order of integration of the variables. In this paper three panel unit root tests: Im, Peasaran and Shin (IPS, 2003), Maddala and Wu, and Choi tests are applied. The IPS and MW tests are based on the assumption of cross-sectional independence. This assumption is likely to be violated for the income variable. It is found by Banerjee, Cockerill and Russell that these tests have poor size properties and have a tendency to over-reject the null hypothesis of unit root if the assumption of cross-section independence is not satisfied. Choi is derived another test statistic to solve this problem. so
Hossain and Saeki investigated the causal relationship between electricity consumption and economic growth for a panel of six South Asian countries using cointegration and error correction mechanism. They found that causality runs from electricity consumption to economic growth in Bangladesh, from economic growth to electricity consumption in India, Nepal and Pakistan and no causal relationship is found between electricity consumption and economic growth in Iran and Sri-Lanka.
Thus the existing literature reveals that due to the application of different econometric methodologies and different sample sizes the empirical results are very mixed and even vary for the same panel and are not conclusive to present policy formulation that can be applied over the countries especially for lower middle income and low income countries. Thus this study tries to overcome the shortcoming literature related with the linkage between electricity consumption and economic growth. Also this empirical study will be important for policy recommendation from the point of view of electricity consumption and economic growth for high income, upper middle income, lower middle income and low income panels and also for global panel. Annual data for electricity consumption (EC) (kWh per capita), and per capita GDP (PGDP) (constant 2000 US $), are downloaded from the World Bank’s Development Indicators. The data is for the period from 1960 to 2008. there