Summary Findings between Electricity Consumption and Ghana’s Economic Growth (GDP): Using Time Series Data from 1980-2016

Bismark Ameyaw

Introduction

The causal relationship between energy consumption and economic growth has attracted many literatures. Researches relating to these two variables are conducted in order to propose policy frameworks to ensure that efficient policies are implemented. Following the pioneering work by (Kraft and Kraft, 1978) who found a unidirectional causality running from gross domestic product to energy consumption, many researchers have analyzed the possible nexus between energy consumption and economic growth. However, the results between these two variables are inconclusive. The differences in authors work may stem from the time period under consideration, different countries economic development, the type of analysis and probably the data differences in different countries (Inglesi and Pouris, 2013). Empirical evidence testing the causality nexus between economic growth and energy consumption has been categorized into four main hypotheses namely growth hypotheses, conservation hypothesis, feedback hypothesis and neutrality hypothesis (Chang and Soruco, 2011)

Growth Hypothesis

The growth hypothesis asserts that energy consumption leads to economic growth. Thus, there is evident of unidirectional causality from energy consumption to economic growth. This implies that surges in electricity consumption may boost economic growth whiles restrictions in energy usage may negatively impact economic growth of a country. Thus, energy conservation measures isn’t a viable option because energy crisis may impede on economic growth. Growth hypothesis is backed by researches from Damette and Seghir (2013), Javid and Awan (2013) and Ouedraogo (2013).

Conservation Hypothesis

This hypothesis asserts that economic growth may lead to energy consumption. In other words, there exist unidirectional causality running from economic growth to electricity consumption. This implies that severe energy crisis wouldn’t have an adverse impact on economic growth thus energy conservation strategies and measures are a viable option. In other words, policies in relation to energy conservation can be enacted without any adverse implications on economic growth. Researches concluding on conservation hypothesis are Baranzini et al. (2013), Azlina (2012).

Feedback Hypothesis

This hypothesis asserts that there exists a bidirectional causality between energy consumption and economic growth. In other words, energy conservation policy will negatively affect economic growth whereas an increase in economic growth will also increase energy consumption. Researches backing the feedback hypothesis are Hu and Lin (2013), Tang and Tan (2013).

Neutrality Hypothesis

Neutrality hypothesis states that there is no causal relationship between energy consumption and economic growth. It implies that economic growth is autonomous from energy usage and that energy conservation policies will not affect economic growth. Studies such as (see: Apegris and Payne, 2009b, Halicioglu, F. 2009) supports the neutrality hypothesis.

  1. Materials, Methods and Empirical Findings
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Data Source (Materials)

Variables Description Source of Data Measurement
GDP Gross Domestic Product World Bank Development Indicators Constant 2000 US$
E Electricity Consumption World Bank Development Indicators kWh

 

Methods

In order to avoid spurious relationship among the variables, two different unit root test, namely Phillips-Perron (PP) and Augmented Dickey-Fuller (ADF) were conducted on the time series data for gross domestic product and electricity consumption. After the unit root testing, it was important to test for the existence of co-integration among the variables using the Johansen co-integration test. Lastly, the causality nexus between electricity consumption and gross domestic product was tested by employing the pairwise Granger causality test. The econometric views was used to carry out the analysis.

Empirical Findings and Policy Recommendations

The PP and ADF was used to examine unit root test with the inclusion of trends and intercepts at both level and first difference. The two test unanimously revealed that all the variables were non-stationary at level. After first differencing the data became stationary which further indicate that the variables were integrated of order 1(1). Stationarity property was therefore satisfied at first differencing. Johansen co-integration test was employed to examine the long-run relationship among the variables. After the trace and maximum statistics values were compared with the critical values, it was found that there existed long-run equilibrium relationship amongst the observed variables. In examining the causal relationship between GDP and electricity consumption by employing the pairwise granger causality test, it was evident from the empirical results that electricity consumption Granger causes GDP and vice versa. Therefore, in Ghana, there exist a bidirectional causality between GDP and electricity consumption. My findings support the feedback hypothesis which implies that electricity conservation policies will negatively impact GDP. Thus, any energy or environment policy aiming at reducing electricity consumption should be designed to do this through energy-intensity reduction to avoid output and trade declines. Policies for economic growth may not be successful if electricity consumption considerations are ignored because electricity shortages and supply interruptions can reduce expected results.

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BISMARK AMEYAW is a researcher, a market researcher and an editorial board member of Cillans publications. He is currently a doctoral researcher in economics and management. He writes, teaches and consults on management and econometric issues. He serves as an editorial board member and a reviewer for a number of international journals. His research interest is energy and agriculture economics and management. You may contact him through E-mail:3101153683@qq.com or kofiameyaw9@hotmail.com

References

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  1. Inglesi-Lotz, R. and Pouris, A. (2013) On the Causality and Determinants of Energy and Electricity Demand in South Africa: A Review. Department of Economics Working Paper Series, University of Pretoria, Working Paper: 2013-14.
  1. Chang, C.C. and Soruco, C.C.F. (2011) Energy Conservation and Sustainable Economic Growth: The Case of Latin America and the Caribbean. Energy Policy, 39, 4215-4221.
  1. Damette, O. and Seghir, M. (2013) Energy as a Driver of Growth in Oil Exporting Countries? Energy Economics, 37, 193-199. https:/doi.org/10.1016/j.eneco.2012.12.011
  1. Javid, A.Y., Javid, M. and Awan, Z.A. (2013) Electricity Consumption and Economic Growth: Evidence from Pakistan. Economics and Business Letters, 2, 21-32.
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