A Dynamic Causality Study between Electricity Consumption and Economic Growth for Global Panel: Conclusions and Policy Implications

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.
Bidirectional short-run and long-run causal relationships are found between electricity consumption and economic growth for high income, upper middle income and for global panels. Unidirectional short-run causal relationship is found from economic growth to electricity consumption for lower middle income panel and no short-run causal relationship is found for low income panel. It is found that both the short-run and long-run elasticities of economic growth with respect to electricity consumption are positively significant for all panels. The error correction term for the upper middle income panel is statistically significant represents evidence about a long-run relationship between economic growth and electricity consumption. It is found that the long-run elasticity of economic growth with respect to energy consumption for high income, upper middle income and also for global panel is higher than short run elasticity indicates that over times higher electricity consumption in high income, upper middle income and global panels gives rise to more economic growth. Also it is found that in the long-run for 100% increases in electricity consumption for lower middle income and low income panels, the economic growth with be increased by 28.71% and 21.45% respectively and they are statistically significant.
Thus from the analytical results it can be easily concluded that any restriction on the use of energy will strike the economic development of high income and upper middle income countries as well as the countries of the global panel but the lower middle income and low income countries will not be affected. Thus from the analysis the following policies should be implemented to the panels of high income, upper middle and also for global panel to solve the problem. The research and investment in clean energy should be an integral part of the process of controlling the GHG’s emissions in the high income and upper middle income countries for which the economy of these countries will not be negatively affected due to any restriction on energy use. The high income and upper middle income countries have to find the alternative sources like as solar energy of energy to oil for which any restriction on energy use will not strike the economic growth.