Energy Consumption and Manufacturing Industry Performance: Evidence from Panel Data for Low-Income Sub-Sahara African Countries

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1 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) Energy Consumpon and Manufacurng Indusry Performance: Evdence from Panel Daa for Low-Income Sub-Sahara Afrcan Counres Ismal Alyu Danmaraya *,+ and Sallahuddn Hassan +, Absrac Ths paper examned he effec of energy consumpon, capal and labour on manufacurng ndusry performance usng panel daa for he sample of seven low-ncome sub-saharan Afrca (SSA) counres durng he perod The panel conegraon es provded evdence of conegraon among he varables for he seven low ncome-ncome SSA counres. The Fully Modfed Ordnary Leas Square (FMOLS) resul ndcaed ha energy consumpon and capal formaon are posvely sgnfcan varables n explanng he performance of he manufacurng ndusry n he seven low-ncome SSA counres. Conversely, labour was nsgnfcan n explanng manufacurng ndusry performance. For ha, srong energy polcy ha wll enhance effcen and susanable energy supply should be pu n place o enhance energy consumpon n SSA counres. Keywords Energy consumpon, manufacurng ndusry performance, sub-sahara Afrca.. INTRODUCTION Energy s beleved o have absolue role as a facor npus n he process of producon for many producers, as well as a fnal good for end users. The shor run changes, as well as he long run economc acves rend affec he household and busness s energy consumpon, whch by mplcaon may affec an economy []. From he producon pon of vew, he classcal economs of he 7 h and 8 h cenures consdered capal, land and labour as he prmary facors n he process of producon. Ye, he developmen of ndusralzed naons n he 9 h cenury has recognzed energy as an essenal npu n he process of producon [2]. The neres of scholars o explore he relaonshp beween energy consumpon and economc growh s raced back o he energy consumpon crss of 97s. Ths brough abou he argumen ha energy consumpon causes he growh of GDP. Snce hen, many sudes such as; [3]-[6] were conduced o uphold he asserons ha recommend energy consumpon o be relaed wh he growh of GDP posvely. Bu, evdences from emprcal perspecves were found o be conflcng and conradcng on he drecon of causaly [7]. Ths paper was amed a examnng he effec of energy consumpon, capal and labour on manufacurng ndusry performance for seven lowncome SSA counres (Benn, Congo DR, Cameroon, Kenya, Mozambque, Togo and Tanzana). The sudy was consdered as a sudy relevan o he prevous sudes on he lnk connecng energy consumpon wh GDP. Moreover, he sudy s movaed owng o he fac ha mos of he SSA counres depend on mporaon of *Deparmen of Economcs, Norhwes Unversy, Kano, Ngera. + School of Economcs, Fnance and Bankng, Unvers Uara Malaysa. Correspondng auhor; E-mal: dn636@uum.edu.my; ladanmaraya@yahoo.com; fnshed goods and here s he need o fnd ou wheher hs over relance of mpor n conneced o poor manufacurng performance arsng from energy consumpon. Also, prevous sudes lay more emphass on energy-gdp nexus and here s he need o examne hs relaonshp from he manufacurng ndusry secor as ncrease n manufacurng ndusry performance lead o ncrease n GDP. Hence, hs sudy herefore makes a sgnfcan conrbuon n he feld of energy economcs as focuses on he performance of manufacurng ndusry whch may affec economc growh. Secondly, he sudy has made a sgnfcan conrbuon by ryng o look a he relaonshp for he same ncome group as hey share some characerscs for a more robus resul. The paper proceeds as follows: Frs, he sudy provdes an nroducon n secon, followed by a bref revew of relaed research conaned n secon 2. The sudy furher presens he mehod of daa analyss n Secon 3 as he esmaed resuls are conaned n Secon 4. Fnally, secon 5 dsplayed he polcy mplcaon and he concluson of he sudy. 2. LITERATURE REVIEW The relaonshp connecng energy consumpon wh economc growh has sgnfcan mplcaon boh from he emprcal, heorecal and polcy pon of vew. For nsance, a undreconal causaly runnng from economc growh o energy consumpon enals ha energy consumpon s deermned by economc growh; herefore, energy conservaon polces can be acualzed wh lle or no negave effec on economc growh [8]. Lkewse, a undreconal causaly runnng from energy consumpon o economc growh sgnfes ha economc growh rely upon energy consumpon and as a resul, a wachful energy polcy s recommended as any decrease n energy consumpon mgh have a negave mpac on economc growh. Relaed sudes on he relaonshp beween energy consumpon and economc growh followed he orgnal work of [3] for he Uned Saes, and laer expanded o nvolve ndusralzed naons such as: Japan, Greece, France, and Germany among ohers. Sll, emprcal

2 58 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) fndngs for energy-growh nexus appear o be conradcng [9]. The absence of general agreemen may be generally because of he dsncons n he sages of developmen for dfferen naons suded or he dssmlares n he daa as well as he echnque employed []. In he successve sudes, whle some sudes ulzed he me seres approach, oher sudes employed he panel daa approach. Whn he me seres approach, conegraon and Vecor Error Correcon Model (VECM) mehod were used o jusfy he relaonshp beween energy consumpon and economc growh. For nsance, [] examned he causaly beween energy consumpon and economc growh for Tunsa and mananed causaly runnng from energy consumpon o economc growh. Smlarly, [2] analyze energy consumpon wh economc growh n Venam and esablshed causaly runnng from energy consumpon o economc growh. Conrary o hs fndng, [3] revealed causaly runnng from economc growh o energy consumpon. Furhermore, he feedback hypohess was proved for Canada usng conegraon and VECM n he sudy of [4]. Smlarly, [5] ulzed VECM and esablshed a feedback relaonshp beween elecrcy consumpon and economc growh n Turkey. Fnally, [3] sugges no causaly among economc growh and energy consumpon for Sngapore, Malaysa and he Phlppnes. Employng he Bounds esng o conegraon whn he Auoregressve Dsrbued Lag (ARDL) framework, [6] nvesgaed energy dependence for wo lower-mddle ncome counres (Ghana and Coe D Ivore) and wo mddle-upper ncome counres (Brazl and Uruguay). The emprcal fndngs dsclosed a undreconal causaly from energy consumpon o economc growh for Brazl and Uruguay as well as a undreconal causaly from economc growh o energy consumpon for Ghana and Coe D Ivore. Conrary o hese fndngs, [7] esablshed bdreconal causaly for Ghana, Gamba and Senegal whn he ARDL framework. Lasly, [8] looked a energy consumpon and GDP for Turkey. They revealed no causaly among energy consumpon and economc growh. Whn he panel daa approach, panel conegraon and causaly ess were employed n he relaonshp among energy consumpon and economc growh. [9] ake he case of Economc Communy of Wes Afrcan Saes (ECOWAS) counres durng he perod and descrbed a long run causal relaonshp runnng from energy consumpon o economc growh as well as, a shor run causaly runnng from economc growh o energy consumpon. Furhermore, [2] mananed causaly runnng from economc growh o energy consumpon for he Gulf Co-operaon Counres by usng panel conegraon and causaly ess. On he accoun of SSA counres, a conrary vew of feedback beween energy consumpon and economc growh was mananed for 4 SSA counres [2]. Ulzng panel VECM whn he panel daa framework, [22] proved causaly runnng from energy consumpon o economc growh for Indonesa, Argenna, Kuwa, Ngera, Malaysa, Saud Araba and Venezuela, as well as a feedback relaonshp for Japan, Sweden, Ausrala, Norway, UK, and USA. Also [] revealed he exsence of bdreconal causaly beween energy consumpon and economc growh for Chna. Smlarly, [23] esablshed a feedback relaonshp among naural gas energy consumpon and economc growh. 3. METHOD OF DATA ANALYSIS 3. Framework In hs paper, we propose he convenonal Cobb- Douglas producon funcon suggesed n he framework of [24] and employed by [25]. In he model, oupu s gven by: y = Ak α, α where: A represens he sock of echnology k s he capal a me α s he share of prof. () In he Solow Model, s assumed ha echnology evoluon s gven by: g ψ = Ae (2) where: ψ s he aggregae echnology A A represens he nal sock of knowledge s he me perod g represens he echnologcal progress rae. In hs regard, s assumed ha he me varan echnology s gven by energy, hence where: ψ = f ( ENG) (3) ENG represens energy consumpon. Therefore, he effec f ENG on Toal Facor Producvy s explaned when ENG s used as a shf varable no he producon funcon. The raonale behnd addng he shf varable was developed by Rao (2), hence g Ae ENG ρ ψ = (4) and ψ = ( A e ENG ) k (5) g ρ α Therefore Equaon 6 s obaned by ransformng Equaon 5 no naural logarhm and wll be used o esmae long run relaonshp once conegraon s esablshed among he varables. LMANF = γ + γ LENG + γ LCAP + γ LLAB + ε (6) 2 3

3 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) where, LMANF s he manufacurng ndusry performance. The ndependen varables ha nfluence LMANF nclude he level of energy consumpon (LENG) capal (LCAP) and labour (LLAB) npus, γ s he nercep, γ, γ 2 and γ 3 represens he parameers esmaed, represens he me seres, represens he eny daa for each counry n he model and ε s he error erm. 3.2 Daa Ths sudy ulzed annual daa from panel of seven lowncome SSA counres (Benn, Congo DR, Cameroon, Kenya, Mozambque, Togo and Tanzana) for he perod The choce of hese counres and he me perod was based on he avalably of daa for all he varables n he sudy. Manufacurng ndusry performance (LMANF) s measured by manufacurng value added (consan USD) whle, energy consumpon (LENG) s measured by energy use (kg of ol equvalen per USD, GDP, consan 2 PPP). Capal (LCAP) s proxy by gross capal formaon (consan USD) as labour (LLAB) s proxy by populaon growh (annual percenage). The daa for all he varables are sourced from World Developmen Indcaors. 3.3 Esmaon Procedure The frs prerequse condon o nvesgae he exsence of panel conegraon s o deermne he saonary propery of he daa. Ths paper herefore, ulzed he panel un roo es advanced by [26] based on he Dckey-Fuller procedure. Reference [26] proposed a panel un roo by negrang nformaon from he cross-secon dmenson wh ha from he me seres dmenson. The advanage of hs es s ha has superor es power n analyzng he long run relaonshp n panel daa. The es commences by specfyng separae ADF regresson for each crosssecon wh ndvdual effecs and no me rend: (7) y = α + ρ y + β y + ε, j, j j= where =,...,4 and = 995,..., 22 Followng he separae esmaon of ADF regressons, he average of he -sascs for p from he ndvdual ADF regressons s gven by: NT T N = p N = ( pβ ) (8) Small number of N and T can be accommodaed by he -bar es. The -bar es also converges o sandard normal dsrbuon as N and T. 3.4 Panel Conegraon Tess Gven he esablshmen of a panel un roo, he nex ssue s o nvesgae wheher conegraon exs among MANF and he ndependen varables. Ths paper used he [27], [28] es o nvesgae conegraon among he varables. Pedron proposed he followng regresson: y = α + δ + β x + β x β x + e (9),, 2 2, K K,, Where; K α δ represens he number of regressors s he observaon over me s he cross-seconal un n he panel represens he nerceps, and represens specfc me effec References [27], [28] make use of seven ess for panel conegraon conssng of he heerogeneous panel es whch s based on polng resduals whn he dmenson n he panel, and he heerogeneous group mean panel es whch s based on poolng resduals beween he dmensons n he panel. The seven ess are compued n Equaon () o (6): Panel v- sascs: 2 2 υ = = = z L e Panel ρ-sascs: () N N = = = = ( λ ) zρ = L e L e e Panel PP-sascs: () /2 N N = σ = = = = ( λ ) z L e L e e Panel ADF-sascs (2) /2 N N 2 2 *2 2 * * * * = = = = = z S L e L e e Group ρ-sascs: T 2 = = = ( λ ) Z ρ = e e e Group PP-sascs: /2 T 2 2 = σ = = = ( λ ) Z e e e Group ADF-sascs: (3) (4) (5)

4 6 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) *2 /2 Z * = s e e e T 2 *2 * * ( ) = = = (6) where: e s he esmaed resdual s he esmaed long-run covarance marx 2 L for e s ( s ) are he long-run varances for ndvdual σ 2 are he conemporaneous varances for ndvdual, All he seven ess are dsrbued as beng sandard normal asympocally. Ths needs a sandardsaon based on he momens of he underlyng Brownan moon funcon. 3.5 Coeffcens Esmaon Followng he esablshmen of conegraon among he varables, nex s o esmae he long run coeffcen by adopng he Fully Modfed Ordnary Leas Square (FMOLS) procedure. One of he advanages of FMOLS s ha handled seral correlaon and non-exogeney n he model. Also, he model provdes effcen and conssen esmaon of conegrang vecors. The conegraed sysem of panel daa sars by OLS n Equaon (7) as follows: y = α + x β + e (7) ' x = x, + ε where = ' represen saonary wh covarance ξ [ e ε ], β Ω marx wll be conssen f error process sasfy y and x conex and allowng for shor run dynamcs heerogeney. Thus, Equaon (8) esmaes he Pedron s FMOLS as: 2 2 FM = Ω22 ( xx ) ΩΩ22 ( xx ) et γ = T= = = β where Ω Ω Γ = Ω (8) e = e Ω Ω γ =Γ +Ω Ω Ω ( Γ +Ω ) 22 2, Γ + Γ s he decomposed covarance marx s he conemporaneous covarance marx s a weghed sum of auo covarances. 4. ESTIMATION RESULTS The IPS panel un roo es presened n Table ndcaed ha all he varables are non-saonary a level usng consan and consan plus me rend. Therefore, we fal o rejec he null hypohess of a panel un roo n he level of he seres. Thus, was concluded ha he varables are non-saonary wh or whou me rend a level. However, akng he frs dfference of he seres n consan and consan plus me rend, he resul showed ha he null hypohess of un roo s rejeced for all he seres a 5% level of sgnfcance. Hence, s worh concludng ha here was enough evdence ha all he seres are negraed of order one, I() based on he IPS es. From he IPS un roo es resul, s possble o proceed wh he esmaon of he panel conegraon advanced by [27], [28] o enable us fnd ou wheher long run relaonshp exss among he varables. Table 2 presened he panel conegraon es resul. To elmnae he order bas caused by endogenous regressors, [29], [3] follows he [3] approach n correcng he OLS esmaors whn he panel daa Table. Panel un roo es resul. Varables Level Frs Dfference Consan Consan + Trend Consan Consan + Trend LMANF * -6.64* (.59) (.62) (.) (.) LENG * -6.3* (.93) (.897) (.) (.) LCAP * -5.7* (.396) (.844) (.) (.) LLAB * -3.56* (.559) (.67) (.48) (.) Noe: * ndcaes 5% level of sgnfcance. Fgure n parenhess represens probably value.

5 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) Table 2. The Pedron panel conegraon es. Varables Coeffcens Prob. Panel υ-sascs Panel rho-sascs Panel PP-sascs * Panel ADF-sascs * Group rho-sascs Group PP-sascs * Group ADF-sascs ** Noe: *, ** ndcaes 5% and % level of sgnfcance, respecvely. Table 3. FMOLS regresson. Varables Homogenous Varance Heerogeneous Varance Coeffcen T-Sascs Coeffcen T-Sascs Esmaed long run coeffcen LENG.5* * 2.37 (.) (.39) LCAP.97* * 4.94 (.) (.) LLAB (.5) (.56) Noe: * ndcaes 5% level of sgnfcance. Fgures n parenhess represen probably value. From Table 2, was revealed ha hree ou of he seven sascs rejec he null hypohess of no conegraon a 5% sgnfcance level for he Panel PPsascs, Panel ADF-sascs and Group PP-sascs whle n he Group ADF-sascs, he null hypohess of no conegraon s rejeced a % sgnfcance level. Therefore, four ou of he seven sascs rejec he null hypohess of no conegraon. Ths ndcaed ha he ndependen varables possess conegraon n he long run for he seven sampled low-ncome SSA counres wh respec o LMANF. Havng found conegraon among he varables, nex s o esmae he long run coeffcen hrough he FMOLS procedure. Table 3 presens he FMOLS regresson. Table 3 presens he long run parameer esmaes of manufacurng ndusry performance equaon n erms of energy consumpon, capal formaon and labour. The mehod of esmaon ulzes he homogenous and heerogeneous esmaon of he FMOLS. All he regressors are found o be sascally sgnfcan a 5% level of sgnfcance. Energy consumpon and capal formaon are found o have posve effec on manufacurng ndusry performance whle labour was found nsgnfcan n explanng manufacurng ndusry performance. Accordng o he homogenous and heerogeneous varance srucure resul dsplayed n Table 3, one percen ncrease n energy consumpon and capal formaon wll lead manufacurng ndusry performance o ncrease by 5% and 9.7%, respecvely. Therefore, worh concludng ha he growhs n energy consumpon and capal have posve effec on he performance of he manufacurng secor n he panel of seven low-ncome SSA counres. Ths mpled ha hgher level of energy consumpon and capal formaon means hgher level of manufacurng ndusry performance. Thus, enhancng effcen energy supply and access o capal n he seven low-ncome SSA counres wll enhance he performance of he manufacurng secor. Ths resul was conssen wh [32]-[36]. For nsance, Narayan and Smyh mananed ha energy consumpon and capal have a posve effec on real oupu. Smlarly, Kumar and Kumar ake he case of Kenya and Souh Afrca and mananed ha ncrease n energy consumpon resul n growh of oupu. 5. POLICY IMPLICATION AND CONCLUSION Ths paper examnes he effec of energy consumpon, capal and labour on manufacurng ndusry performance for seven low-ncome SSA counres whn he mulvarae framework. The sudy was movaed owng o he fac ha mos of he prevous sudes lay more emphass on he energy-growh nexus and here s a need o look no he manufacurng secor performance n solaon as ncrease n he manufacurng ndusry performance wll n general lead o an ncrease n GDP. Also, he ssues of over relance on mporaon of goods n SSA have rase neres on he performance of manufacurng secor n SSA. The IPS un roo confrms he saonary of all he varables before performng he conegraon es. Followng he confrmaon of he saonary of he varables, he panel conegraon approach s used n nvesgang he long run conegraon among he varable. The resul obaned shows he presence of conegraon among he varables. The coeffcens of he long run show a posve sgnfcan relaonshp beween manufacurng ndusry performance and energy consumpon as well as beween manufacurng ndusry performance and capal. However, he resul urns o be nsgnfcan beween manufacurng ndusry performance and labour. Generally, he paper demonsraes sascal evdence ha energy consumpon and capal formaon

6 62 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26) are he deermnans of manufacurng ndusry performance for he low-ncome SSA counres. From he polcy vew pon, he resul suggess ha energy polcy s mporan n enhancng manufacurng ndusry performance. Ths s owng o he fac ha energy consumpon smulaes he performance of he manufacurng secor. Therefore, he need o mplemens polces ha wll enhance energy consumpon canno be over emphasze. Consequenly, polcy makers should mplemen polces ha wll reduce he problems of promong susanable energy n SSA such as; he problem of monopoly srucures n he energy secor and he problem of capal requremen o fund susanable energy scheme among ohers. REFERENCES [] Sar R., Ewng B.T., and Soyas U., 28. The relaonshp beween dsaggregae energy consumpon and ndusral producon n he Uned Saes: An ARDL approach. Energy Economcs 3(5): [2] Noor S. and M.W. Sddq. 2. Energy consumpon and economc growh n Souh Asan counres: A co-nergraed panel analyss. Journal of Human and Socal Scences 5: [3] Kraf J., and A. Kraf Relaonshp beween energy and GNP. Energy Developmen (Uned Saes), 3(2). [4] Eden S.H. and B.K. Hwang The relaonshp beween energy and GNP: Furher resuls. Energy Economcs 6(3): [5] Akarca A.T. and T.V. Long Energy and employmen: A me-seres analyss of he causal relaonshp. Resources and Energy 2(2): [6] Akarca A.T. and T.V. Long. 98. Relaonshp beween energy and GNP: A reexamnaon. Journal of Energy Developmen 5(2). [7] Ozurk I. and F. Blgl. 25. Economc growh and bomass consumpon nexus: Dynamc panel analyss for Sub-Sahara Afrcan counres. Appled Energy 37: -6. [8] Odhambo N.M., 29. Elecrcy consumpon and economc growh n Souh Afrca: A rvarae causaly es. Energy Economcs 3(5): [9] Oh W. and K. Lee. 24. Causal relaonshp beween energy consumpon and GDP revsed: The case of Korea Energy Economcs, 26(): [] Wang Y., Wang Y., Zhou J., Zhu X. and Lu G., 2. Energy consumpon and economc growh n Chna: A mulvarae causaly es. Energy Polcy 39(7): [] Belloum M., 29. Energy consumpon and GDP n Tunsa: Conegraon and causaly analyss. Energy Polcy 37(7): [2] Tang C.F., Tan B.W. and Ozurk I., 26. Energy consumpon and economc growh n Venam. Renewable and Susanable Energy Revews 54, [3] Mash A.M. and Mash R., 997. On he emporal causal relaonshp beween energy consumpon, real ncome, and prces: Some new evdence from Asan-energy dependen NICs based on a mulvarae conegraon/vecor error-correcon approach. Journal of Polcy Modelng 9(4): [4] Ghal K.H. and M.I. El-Sakka. 24. Energy use and oupu growh n Canada: A mulvarae conegraon analyss. Energy Economcs 26(2): [5] Shahbaz M., Ozurk I. and Al A., 25. Elecrcy consumpon and economc growh causaly revsed: evdence from Turkey. Bullen of Energy Economcs (BEE) 3(4): [6] Odhambo N.M., 24. Energy dependence n developng COUNTRIES: Does he level of ncome maer? Alanc Economc Journal 42(): [7] Aknlo A.E., 28. Energy consumpon and economc growh: Evdence from Sub-Sahara Afrcan counres. Energy Economcs 3(5): [8] Ozurk I. and A. Acaravc. 2. CO 2 emssons, energy consumpon and economc growh n Turkey. Renewable and Susanable Energy Revews 4(9): [9] Ouedraogo N.S., 23. Energy consumpon and economc growh: Evdence from he Economc Communy of Wes Afrcan Saes (ECOWAS). Energy Economcs 36: [2] Al-Iran M.A., 26. Energy GDP relaonshp revsed: An example from GCC counres usng panel causaly. Energy Polcy 34(7): [2] Fowowe B., 22. Energy consumpon and real GDP: Panel co-negraon and causaly ess for sub-saharan Afrcan counres. Journal of Energy n Souhern Afrca 23(): 9. [22] Mahadevan R. and J. Asafu-Adjaye. 27. Energy consumpon, economc growh and prces: A reassessmen usng panel VECM for developed and developng counres. Energy Polcy 35(4): [23] Ozurk I. and U. Al-Mulal. 25. Naural gas consumpon and economc growh nexus: Panel daa analyss for GCC counres. Renewable and Susanable Energy Revews 5: [24] Solow R.M., 956. A conrbuon o he heory of economc growh. The Quarerly Journal of Economcs 7(): [25] Kumar R.R., Sauvermann P.J., and Shahzad S.J.H., 26. Can echnology provde a glmmer of hope for economc growh n he mds of chaos? A case of Zmbabwe. Qualy and Quany 7(): -2. [26] Im K.S., Pesaran M.H. and Shn Y., 23. Tesng for un roos n heerogeneous panels. Journal of Economercs 5(): [27] Pedron P., 999. Crcal values for conegraon ess n heerogeneous panels wh mulple regressors. Oxford Bullen of Economcs and sascs 6(S): [28] Pedron P., 24. Panel conegraon: Asympoc and fne sample properes of pooled me seres ess wh an applcaon o he PPP hypohess. Economerc Theory 2(3):

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8 64 I.A. Danmaraya and S. Hassan / Inernaonal Energy Journal 6 (26)