Explaining the relationship between energy consumption and economic growth in a dynamic panel model: Are the BRICs countries different?
Abstract
The aim of this paper is to explore the energy consumption -economic growth nexus for four emerging countries (Brazil, Russia, India and China – the BRIC countries) over the period 1989 -2014. By applying a set of recent panel data models, we show that increases in real per capita GDP have a positive and statistically significant effect on per capita energy consumption (and vice -versa). In the long term, a 1% increase in real per capita GDP raises the energy consumption per capita by about 0.56-0.67% while a 1% increase in per capita energy use increases the real per capita GDP by about 0,87-1.69%. Thus, the impact of real GDP on energy consumption is less important than vice versa.
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Introduction
The long-term sustainability of global energy markets faces major challenges today due to the current demographic, economic, social and technological global trends. One of its defining features over the past ten years is the dynamic raise of energy needs and economic growth in the emerging market economies compared to OECD countries while the predicted global energy supply will be stable and dominated by fossil fuels to 2030. According to the 2014 annual report of Enerdata, the world energy consumption has raised slightly in 2013 (+1.9%, compared to 1.8% in 2012 and +1.6% in 2011). This increase was primarily due to the dynamic rise of energy needs in four emerging economies, the so-called BRIC’s economies of Brazil, Russia, India and China (+3.5 in 2013, +4.4% in 2012 and 5.6%/year average between 2000 and 2011) and to the return to growing energy demand in the USA (+2.5%) after two successive reductions in the previous years (2.6% in 2012 and 1.1% in 2011). Therefore, understanding the behavior of energy use in the emerging markets, particularly in the BRICs, is crucial for achieving the goals of energy efficiency, and implicitly the long-term sustainability of global energy system.
The relationship between energy consumption and economic growth was actively analyzed in the energy literature since the seminal Kraft and Kraft (1978) paper for both developing countries (see for example, Akinlo, 2008; Chen and al., 2007; Yoo, 2006 and Lee, 2005) and developed countries (Apergis and Payne, 2009, 2010a, 2011b, 2010d; Coers and Sanders, 2013, Salim et al., 2014 among others) given the lack of consensus on the direction of causality between these two variables, regardless of the nature of empirical studies (time series or panel data), the length of the periods or the country samples.
Given the importance of BRIC’s economies in the emerging markets growth over the past decade, the empirical literature (e.g., Pao and Sai, 2010; Arseneau, 2011) has made some paces in modeling this relationship. However, it still remains a very open field of research.
Ozturk et al. (2010) and Apergis and Payne (2011) synthesize the approaches found in the energy economics literature in four major hypotheses: “the growth hypothesis” (meaning the unidirectional causality from energy consumption to economic growth), “the conservation hypothesis” (implying the unidirectional causality from growth to energy use), “the neutrality hypothesis” (meaning that there is no a linkage between these two variables) and “the feedback hypothesis” (referring to a bidirectional causality between these dimensions). From the point of view of policy implications, the growth hypothesis means that a decline in energy use negatively influences economic growth or that policies aiming to limit energy consumption stimulate growth. In opposition, the conservation hypothesis and neutrality hypothesis imply that adjustments in energy policies do not impact economic growth.
The purpose of this paper is to explore this debated relationship for BRIC’s countries over the period 1989-2014. Our contribution to the existing empirical literature is fourfold. Firstly, very little studies have been done on modeling this relationship for this region (e.g., Pao and Sai, 2010; Arseneau, 2011). Secondly, at our best knowledge, no panel study has been done to evaluate this relationship for the BRIC economies on a recent time-span (26 years) covering the recent global financial crisis period. Thirdly, some of these four regions are of strategic importance for EU energy supply security. It is well known that Russia with the Middle East, North Africa, and Norway are now the largest EU’s suppliers. Fourthly, the Chinese’s energy consumption recorded the highest raise among the G20 countries in 2013 (+4.7% - less than its previous trends according to Enerdata, 2014) which directly influences the world’s trend as China represented 22% of the global energy use in 2013 (compared to 12% in 2000). Overall, the BRICs economies constitute the primary tool for global energy consumption growth. Fifthly, the paper employs recent panel data models like: Kao and Chiang (2000) - the group-means fully modified ordinary least squares (FMOLS) estimator that considers a semi-parametric correction to the ordinary least squares (OLS) estimator, a parametric dynamic OLS (DOLS). Finally, the results may provide further support for the economic approaches exploring the relationship between energy use and economic activity. Results show that raises in real per capita GDP have a positive and statistically significant effect on per capita energy consumption (and vice-versa). This outcome validates the feed-back hypothesis in the long-run.
The rest of the paper is structured as follows. Section 2 outlines the empirical methodology, describes the data, displays and discusses the empirical results. The final section concludes.
Conclusion
This paper explores the long -run relationship between energy consumption and economic growth for BRIC s countries over the 1989 -2014 period (given the availability of data). Our data suggest the use of panel cointegration methods. In the models including a linear trend, outcomes show evidence in favor of a long -run positive effect of energy use per capita on the per capita GDP. A 1% increase in energy consumption per capita increases the real GDP per capita by about 0.87% (in the DOLS model). Furthermore, the effect of economic activity on energy use is also positive and significant because a 1% increase i n GDP per capita increases energy use per capita by a value of 0.67% (in the DOLS model with a linear trend). Overall, the results validate the feed -back hypothesis and show that energy use is an important input in the production function. In terms of poli cy implications, energy saving policy and efficiency enhancement stimulates economic growth.
