The study by Mahadevan and Asafu-Adjaye (2007) investigated the relationship between GDP growth and energy consumption. The study used a panel error correction model, with annual data from 1971 to 2002. This is a multi-country study of 20 nations.
80 To test for unit roots, co-integration and Granger-causality Mahadevan and Asafu- Adjaye (2007) used panel methods for the following reasons: firstly, it prevented low power problems which existed in the traditional unit roots and co-integration tests; secondly, it entailed pooling which increased the sample size considerably. This led to more reliable and accurate statistical tests because the increase in sample size resulted in higher degrees of freedom. Lastly, the panel method lessened collinearity between the regressors and enabled heterogeneity among the countries. They used a trivariate model which proxied energy prices because price changes have been hypothesised to have a direct impact on both energy consumption and income.
The findings of their research were different for developing and developed countries. It was observed that bidirectional causality existed between economic growth and energy consumption for developed countries both in the short and long run. The results for developing countries showed that bidirectional causality existed only in the short run. Razzaqi and Sherbuz (no date) conducted a study for the D8 countries for the period of 1980 to 2007. The aim of the study was to examine the relationship between energy use and economic growth. In their research to find the long run and short run relationship between economic development and energy they used the Johansen co- integration, VAR Granger-causality and VECM tests. The results showed bidirectional causality for all the countries in the short and long run, except Indonesia. In Indonesia a neutral hypothesis was found in the short run.
Sadorsky (2012) studied the relationship between energy consumption, output and trade in South America. The period of data used in the study was from 1980 to 2007 for seven South American countries. The study used the panel co-integration technique to examine the long run relationship between the variables. The findings of the study demonstrated a long run relationship between capital, output, exports, labour and energy and a long run relationship between output, labour, capital and imports. The results for causality direction showed a two-way causality between energy consumption and exports, output and exports and also output and imports. There was also a unidirectional relationship flowing from energy consumption to imports in the short run.
81 3.4.5 Electricity Supply Vs. Economic Growth in Single Countries
The research proceeds to consider the supply side of electricity. The supply side has been rarely investigated in the literature. The few studies that considered the supply side attempted to apply causality direction to indicate which variable takes precedence over the other (Yoo & Kim 2006). This means that the studies sought to investigate whether electricity supply stimulated economic growth or whether economic growth improved electricity supply.
Knowledge of the direction of causality from either side has a significant importance for policy recommendation for the following reasons: firstly, a one-way causality flowing from electricity generation to economic growth shows that policies of reducing electricity generation should not be made as they would adversely affect economic growth; secondly, a one-way causality flowing from economic growth to electricity generation shows that policies to reduce electricity could be made without affecting economic growth or could have a small effect; lastly, no causality between the two would mean that electricity generation could be reduced without affecting economic growth at all (Yoo & Kim 2006).
The research further considers the work of Ellahai (2010) who studied the relationship between industrial sector development, electricity supply and economic growth. This study used the Autoregressive Distributed Lag (ARDL) approach and the endogenous growth model. The study used a model to find relationship between economic growth and five independent variables, namely, industrial sector development, electricity supply, labour, capital and electricity shortages. The findings of the research was that capital, labour, electricity supply and industrial sector development played an important role in improving economic growth. It further showed that electricity shortages had an adverse effect on economic growth.
Yoo and Kim‟s (2006) study examined the relationship between economic growth and electricity generation in Indonesia. The study used data from 1971 to 2002. The study tested for stationarity and co-integration and estimated the error correction model. The findings suggested the existence of unidirectional causality flowing from economic growth to electricity generation. This implied that economic growth has an impact on
82 electricity generation such that reducing economic growth would lead to a fall in electricity generation. Furthermore, the results indicated no causality flowing from electricity generation to economic growth. Therefore, in Indonesia, policies on increasing or decreasing electricity generation could be made without affecting economic growth.
Another similar study that focused on the supply side of electricity is by Morimoto and Hope (2004). The aim of the study was to investigate the impact of electricity supply on economic growth in Sri Lanka. The study followed the research by Yang (2000) which examined the impact of electricity consumption on economic growth. The cost benefit analysis was used in this study and the findings indicated that electricity supply had a positive impact on economic growth. Numerically, the study showed that an increase of 1 Mwh of electricity supplied at time t led to an increase in economic growth by Rs38 200, and while at time t-1, economic growth increases by Rs30 000 and at time t-2, economic growth increases by Rs44 100. Generally, this implied that the past and the current changes in electricity supplied have a significant effect on economic growth in Sri Lanka.
Sarker (2010) investigated the relationship between electricity generation and economic growth in Bangladesh. The data used in the study covered the period 1973 to 2006. The study used the Granger-causality test to examine the relationship between electricity generation and economic growth. The study followed the model by Yoo and Kim (2006) who used a bivariate model with electricity generation and real GDP as the variables. The unit root test was examined by ADF and PP tests while co-integration was examined by Johansen‟s co-integration test. The results indicated a unidirectional relationship flowing from electricity generation to real GDP. This implied that a change in the policies for electricity generation would affect economic growth. The results of this study differed from Yoo and Kim (2006) results in that Yoo and Kim‟s (2006) found a unidirectional relationship running from economic growth to electricity generation. These two studies further show the inefficiency of using a bivariate system. In the case of Bangladesh, it was important for electricity generation to be increased as it would lead to an increase in economic growth.
83 Ghosh (2009) carried out a study in India that investigated the relationship between employment, electricity supply and real GDP. The data used in the study was for the period from 1970 to 2006. The research employed a multivariate system and utilised Autoregressive Distributed Lag (ARDL) bounds tests for co-integration. The long and short causality was established flowing from electricity supply and real GDP to employment without feedback effect. This showed that real GDP and electricity supply had an impact on employment in India. There was no causality flowing from electricity supply to real GDP, implying that electricity generation policies could be made in India without affecting economic growth. Further, in the short run, the study suggested a unidirectional causality flowing from economic growth to electricity supply.
Gupta (2009) researched the causal relationship between electricity supply and economic growth in India for the period of 1960 to 2006. The study used the Granger causality model to examine the relationship between electricity consumption and economic growth. The findings showed existence of a unidirectional causality between electricity supply and economic growth, flowing from electricity consumption to economic growth. The panel regression model was also used in the study to investigate the relationship between economic growth and electricity supply across major states. The data used was for the period of 1990 to 2004. The results showed that, in the backward states, an inverse relationship between electricity supply and economic growth existed whereas in the developed states the opposite was true.
Smyth and Lean (2010) added to the studies of the electricity supply side by studying the relationship between electricity generation, economic growth, exports and prices for Malaysia during the period 1970 to 2008. The study found a one-way causality flowing from economic growth to electricity generation. The relationship relating to exports and trade were not supported. The study also found a neutral hypothesis for prices and economic growth. The results implied that policies concerning increases in electricity generation could be implemented without fear of affecting economic growth.
84 3.4.6 Electricity Supply Vs. Economic Growth in Multi-Countries
A multi-country study from the supply side of energy was done by Yusuf and Metehan (2011) who studied the relationship between renewable electricity generation from renewable resources and economic growth for 30 OECD member countries. The study used data for the period 1980 to 2007 for the OECD member countries. The aim of the study was to examine the direction of causality (if it existed). The panel-data methodology was used in the research. The study applies Pedroin, Kao and Fischer‟s co-integration tests and the Holtz-Eakin causality test.
The Pedroin, Kao and Fisher co-integration tests suggested that there is a long term significant relationship between electricity generation and economic growth. Holtz-Eakin causality test demonstrated bidirectional causality between economic growth and electricity generation. The study recommended that the countries should aim at improving on their electricity generation as it would have a positive impact on economic growth.
The research of Halkos and Izeremes (2009), studied the impact of electricity generation on countries‟ economic efficiency. The data in the study was collected for 42 World and East Asian countries for the period 1996 to 2006. The econometric panel techniques and Data Envelopment Analysis (DEA) window analysis were used in the study. The DEA window analysis was used in the study to measure the countries‟ economic efficiency, and the impact of electricity on their economic efficiency was tested by the panel technique. The findings of the study showed an inverted U-shape relationship between electricity generation and economic efficiency. This implied that electricity generation affected economic efficiency positively to a certain extent and which after a certain period of time, the effect changes to negative.