Energy consumption and economic growth in Asian economies: A more comprehensive analysis using panel data
Introduction
How to reduce carbon dioxide (CO2) emissions yet, all the while, maintain stable economic growth has not just given rise to heated rhetoric but has also been one of the major concerns of energy and environmental protection policy in every corner of the world. The 1997 Kyoto protocol commits industrialized nations that have ratified the treaty to reducing their emissions of greenhouse gases, principally CO2, by around 5.2% below their 1990 levels over the next decade. Proponents have reached a consensus that this is a necessary step, not least because high-growth, industrialized economies produce nearly 40% of the world's human-generated CO2, a figure that has accelerated in recent years. But, opponents contest such a policy out of fear that the imposition of a set of such so-called ‘unrealistic’ goals would be detrimental to the global economy, not to mention economic development at home, and subsequently lead to serious unemployment. By extension, many argue that even a shortage of energy would adversely affect income (Masih and Masih, 1998).
Following the work of Stern, 1993, Stern, 2000, Oh and Lee, 2004a, Oh and Lee, 2004b, Ghali and El-Sakka (2004) and Beaudreau (2005) who argue that energy is an essential factor in production, this paper makes it mark in the extant literature by empirically examining long-run co-movement and the causal relationship between energy consumption and real GDP. It does so based on the aggregate production function. And, rather than the bivariate model attempted in numerous earlier studies, the present research employs a multivariate model with energy consumption (EC henceforth), real GDP (GDP henceforth), labor force (LB henceforth) and real capital stock (K henceforth) for 16 Asian economies from 1971 to 2002. This study includes Iran, Jordan and Syria which have not been investigated in most, if not all, recent studies (see Table 1). We also determine the relationship between EC and GDP within a multivariate framework when capital stock and labor input are controlled for; this relationship could feasibly run in either or both directions regardless of whether it is transitory or permanent. For our panel of sample countries, we use a cointegration test which,1 when compared to the cross-section approach, is more powerful and allows us to increase the degrees of freedom. We then use the fully modified OLS (FMOLS henceforth) technique to estimate the cointegration vector for heterogeneous cointegrated panels. This enables us to correct the standard OLS for bias induced by endogeneity and serial correlation of the regressors. Furthermore, we specify and estimate a dynamic vector error correction model (VECM) that is appropriate for heterogeneous panels and that distinguishes between short-run and long-run causality. Finally, we explore different group issues that are of concern to the Asia Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN), and with the results of this study, we are able to examine the deeper characteristics that determine the most efficient policies with respect to energy use.
Most earlier studies have investigated the energy—income/output relationship from one of two perspectives: the demand side (or energy demand function) and the production side (or the aggregate production function). On the demand side, Oh and Lee (2004b) emphasize that this model should be used with three variables, namely energy, GDP and energy price proxied by the consumer price index (CPI). The production side model, however, includes energy, GDP, capital stock and labor in a multivariate production function. Table 1 lists some of the most recent research studies that pertain to energy consumption and income in Asian countries. With the exception of Masih and Masih (1998), Asafu-Adjaye (2000) and Fatai et al. (2004), all of the studies primarily focus on the production side; few papers include labor and capital input in their model. Meanwhile, most scholars have only considered single countries or have only had small samples (see as Stern, 1993, Stern, 2000 and Oh and Lee, 2004a, Oh and Lee, 2004b). Though some have employed the panel data approach, they have mostly ignored the cointegrated relationship among variables (Olatubi and Zhang, 2003). Al-Iriani (2006), however, does apply the panel causality technique to determine the EC–GDP relationship among the Gulf Cooperation Council (GCC) countries. Nevertheless, we note that the error correction term is missing in the panel system.
Owing to the gravity of the two energy crises in 1974 and 1981, the energy consumption—economic growth relationship has been at the core of numerous empirical studies since the late 1970s (see for example, Erol and Yu, 1987, Masih and Masih, 1996, Asafu-Adjaye, 2000, Morimoto and Hope, 2004, Lee, 2006, Lee and Chang, in press-a, Lee and Chang, in press-b). The groundbreaking research by Kraft and Kraft (1978) used data for the 1947–1974 period and found evidence of unidirectional causality running from GDP to energy consumption in the United States. Based on the empirical results from those studies, three interesting, albeit contradictory, theories have been put forth. First, if uni-directional causality runs from income to energy, then the implementation of energy conservation policies would have few, if any, adverse effects on income. Secondly, if uni-directional causality runs from energy consumption to income, then this is indicative of an energy-dependent economy in which energy is an impetus for growth, with the implication being that a reduction in the amount of energy available would likely negatively affect income. Finally, the finding of no causality in either direction has been reported; this, the so-called ‘neutrality hypothesis’, signifies that energy consumption does not affect income whatsoever.
In this regard, there are several reasons for researchers being confounded with these reported causal relationships. For one, earlier studies have used time series data. Apart from this, several have been flawed by the short time spans of the typical datasets.2 Others have been estimated using the OLS without any regard for whether the series properties are stationary or not.3 Fortunately, Granger and Newbold (1974) pointed out that not taking non-stationarity into account could result in misleading conclusions about relationships among the variables. Recently, numerous studies have investigated the causal relationship between two series by using a time-series analysis, and in particular, by using the concept of Granger causality. However, despite advances in time series analysis over the last decade, recent tests on the energy consumption–growth relationship have employed bivariate causality procedures.4 These tests often fail to detect additional channels (such as capital and labor input) of causality and can also result in conflicting results.5 Thus, in the presence of cointegration among the series, what has been long overdue is an alternative, superior econometric method to the vector autoregressive (VAR) method (Asafu-Adjaye, 2000). Here, we use the VECM. Additional information suggests that VAR models may only be able to identify short-run relationships and that they are unable to determine cointegration among variables because a long-run relationship disappears with the first differencing; contrast this with a VECM which is capable of distinguishing between short-run and long-run relationships among variables as well as identify the sources of causation (Oh and Lee, 2004b).
As mentioned above, previous causality test results have mostly been based on individual countries and the use of time series data. However, there are different results for different countries, as well as for different time periods within the same country. Because panel data can provide much more information than either cross-sectional data or time series, and in light of the lack of power of individual unit root tests and traditional cointegration tests, we need to combine information from time series and cross-sectional data once again. Thus, we use the panel unit root tests and heterogeneous panel cointegration tests to prevent further debate and put the issue to rest.6 In a departure from previous studies, therefore, this study applies a new heterogeneous panel cointegration technique to re-investigate the relationship between energy consumption and real GDP across 16 Asian economies for the 1971–2002 period. Ideally, the panel methods is better able to catch the cointegrated relationships since a pooled level regression uses cross-section information in the data when estimating cointegrated coefficients.
We then compare the results for an overall more comprehensive, more accurate picture that should, in essence, resolve all the outstanding debates over the relationship between energy consumption and economic growth. This paper is unlike earlier ones in the sense that it compares the relationship between energy consumption and real GDP while controlling for capital and labor input in Asian economic groups rather than individual countries. It is well-known that Asia has an extremely bright future in the world economy, with economies that have the potential to develop quickly as well as those that are already considered developed. According to the population and vital statistics of the United Nations, Asia has the largest population of all major areas and regions in the world. Thus, the relationships among energy consumption, economic growth and environmental protection in such a densely populated area are the focus of this study. This paper targets the Asian region, and at the same time, developed and developing countries are included to gain more insight into relevant energy strategies in the different nations.
The remainder of this paper is organized as follows: In Section 2, we provide a brief discussion of the definitions of the variables and the data description. Section 3 presents the theoretical structures, methods and the empirical results. Finally, Section 4 concludes and suggests an important policy implication.
Section snippets
Definitions of the variables and data description
Our study uses annual time series for 16 Asian countries. The sample includes China, Hong Kong, India, Indonesia, Iran, Japan, Jordan, South Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, the Syrian Arab Republic, Thailand and Turkey. Annual data for real GDP (2000 = 100), energy use in kilotons of equivalent oil, labor force and real gross capital formation (2000 = 100) are obtained from the World Development Indicators (WDI, 2005). The units are expressed in US dollars. The
Theoretical structure and empirical investigation
Such growth-theories as the Harrod–Domar growth model, with the popular name “knife-edge”, and the subsequent, well-known theory commonly referred to as the “Solow-Swan” growth model, among others, claim that energy has nothing to do with the production function. Yet, energy-economists take the view that energy is a crucial production factor as well as a major player in the production process in that it can be directly used as a final product (Stern, 1997). In this way, Pokrovski (2003)
Conclusions and policy implication
Determining the exact relationship between energy consumption and economic activity in Asian economies when capital and labor input are controlled for is certainly of considerable interest to policymakers, economists and other academic circles alike. Although earlier studies have usually investigated the relationship between energy and GDP from either the demand side or the production side models, in this paper, we argue that energy is indeed an essential factor in production. For this reason,
Acknowledgements
We are thankful for the highly constructive comments provided by two anonymous reviewers of this journal. Any errors that may remain in this paper are our own.
References (57)
Energy–GDP relationship revisited: an example from GCC countries using panel causality
Energy Policy
(2006)- et al.
Structural break, unit root, and the causality between energy consumption and GDP in Turkey
Energy Economics
(2004) The relationship between energy consumption, energy prices and economic growth: time series evidence from Asian developing countries
Energy Economics
(2000)Is public expenditure productive?
Journal of Monetary Economics
(1989)Engineering and economic growth
Structural Change and Economic Dynamics
(2005)- et al.
Financial development and economic growth: evidence from panel unit root and cointegration tests
Journal of Development Economics
(2004) - et al.
Time series analysis of the causal relationships between U.S. energy and employment
Resources and Energy
(1987) - et al.
Modelling the causal relationship between energy consumption and GDP in New Zealand, Australia, India, Indonesia, the Phillippines and Thailand
Mathematics and Computers in Simulation
(2004) - et al.
Energy use and output growth in Canada: a multivariate cointegration analysis
Energy Economics
(2004) - et al.
Cointegration, error-correction, and the relationship between GDP and electricity: the case of South Korea and Singapore
Resource and Energy Economics
(1998)
Spurious regressions in econometrics
Journal of Econometrics
Inference for unit roots in dynamic panels where the time dimension is fixed
Journal of Econometrics
Testing for unit roots in heterogeneous panels
Journal of Econometrics
Cointegration and causality between electricity consumption and GDP: empirical evidence from Malawi
Energy Economics
Energy consumption and GDP in developing countries: a cointegrated panel analysis
Energy Economics
The causality relationship between energy consumption and GDP in G-11 countries revisited
Energy Policy
Structural breaks, energy consumption, and economic growth revisited: evidence from Taiwan
Energy Economics
Electricity consumption, real income and temporal causality: results from a multi-country study based on cointegration and error correction modeling techniques
Energy Economics
The impact of electricity supply on economic growth in Sri Lanka
Energy Economics
Causal relationship between energy consumption and GDP revisited: the case of Korea 1970–1999
Energy Economics
Energy consumption and economic growth in Korea: testing the causality relation
Journal of Policy Modeling
Causality between energy consumption and economic growth in India: a note on conflicting results
Energy Economics
Energy in the theory of production
Energy
Testing the monetary model of exchange rate determination: a closer look at panels
Journal of International Money and Finance
The growth of income and energy consumption in six developing countries
Energy Policy
Electricity consumption and economic growth in China
Energy Policy
Energy consumption and GDP: causality relationship in G-7 countries and emerging markets
Energy Economics
Energy and economic growth in the U.S.A.
Energy Economics
Cited by (597)
Economic growth and environmental impact: Assessing the role of geothermal energy in developing and developed countries
2024, Innovation and Green DevelopmentEnergy as the new frontier: Dynamic panel data analysis revealing energy's transformative role in economic growth and technological progress
2024, Technological Forecasting and Social Change