Energy Consumption and Economic Growth: A Panel Data Aproach to OECD Countries

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1 Energy Consumption and Economic Growth: A Panel Data Aproach to OECD Countries Cem Işık 1, Muhammad Shahbaz 2 1 Atatürk University, Tourism Faculty, Turkey 2 Department of Management Sciences, COMSATS Institute of Information Technology, Pakistan *1 isikc@atauni.edu.tr; 2 shahbazmohd@live.com Abstract This paper purposes to examine the relationship between energy consumption and economic growth in OECD countries during the period of The panel data methods are used to analyse the causal relationship between energy and growth. It is important to see observe the ways of causality between energy consumption and economic growth for the policy makers. The research outcomes reveal that there is significant correlation between energy consumption and economic growth in OECD countries. Keywords Energy, Consumption, Growth, OECD Countries, Panel Data, JEL: O Introduction Organization for Economic Co operation and Development (OECD) countries have significantly grown in the energy market of the world. Seeing OECD s economic circumstances, a large population of residents and economic development are affecting more energy. The real GDP growth rates of OECD countries are the main factors of energy which are essential over the long period. In contradiction, those similar standards, which were considered in the 2000s as important components of achievement stories in these countries are now gradually observed to be outmoded and requiring considerable change. To know the causality between energy consumption and economic growth, it will contribute the governments to defining a suitable strategy on energy management. For example, if the energy consumption affects economic growth, the reducing consumption of energy may lead to budget deficit, low income or unemployment. But, if energy consumption does not affect economic growth, then it is probable to apply energy management policy to practice. Thus, it is significant for policy makers to find the causal relationship between the energy consumption and economic growth variables (Kalyoncu et. al., 2013, Işık, 2010). The purpose of this paper is to examine the relationship and causality between energy consumption and economic growth in OECD countries from 1980 to 2010 by using Pedroni panel cointegration and causality technique. This paper is prepared as follows: Section 2 includes literature review, Section 3 labels the methodology and data source collected. Empirical findings are argued in Section 4, while Section 5 presents conclusions and policy recommendations. Literature Review Soytas and Sari (2003), Lee (2006), Soytas and Sari (2006), Lee and Chang (2007b) and Angeliki et. al. (2013) found bi directional causality between energy consumption and economic growth for Japan, Argentina, Sweden, USA, Canada, Italy, Japan, UK, Trinidad and Tobago and developed countries by using granger causality in different periods. Soytas and Sari (2003), Lee (2006), Lee and Chang (2007b), Huang et al. (2008) examined that causality runs from economic growth to energy consumption in the long run for Italy, Germany, France, UK, Korea, Japan, Gambia, Ghana, Sudan, Zimbabwe, Congo, Senegal, developing countries and middle and high income countries. Lee (2005), Lee (2006), Soytas and Sari (2006), Narayan and Smyth (2008), Angeliki et. al. (2013) studied that International Journal of Energy Science, Vol. 5 No. 1 September / , 2015 DEStech Publications, Inc. doi: /ijes

2 2 CEM IŞIK, MUHAMMAD SHAHBAZ causality runs from energy consumption to economic growth in the long run for Canada, Turkey, France, Japan, Germany, Belgium, Netherlands, Switzerland, USA and developing countries. Finally, Lee (2006), Soytas and Sari (2006), Huang et al. (2008), Acaravcı and Öztürk (2010) found no relationship between energy consumption and economic growth for France, UK, Germany, Haiti and Jamaica, Cameroon, Cote d Ivoire, Nigeria, Kenya, Togoand and low income countries. The earlier studies on energy consumption were summarized by Öztürk (2010). The studies on causality test have grown sizably. It started with Granger in The amount of literature covering tourism started slowly, but has developed quickly in recent years. Causality test results including unidirectional causality, bidirectional causality and no causality, have produced varied results which can be explained with the differences between country conditions, time periods or econometric methodologies. This paper aims to reconsider the weak and strong relation between energy consumption (EC) and economic growth (EG) by using time series and panel data techniques. This study differs from other studies since this work covers the empirical literature on the causal relationship between energy consumption and economic growth in the example of OECD countries in addition to the investigation of the weak and strong relationship. Although the primary purpose of this study is to reconsider the relationship between variables in case of OECD countries, the empirical evidence of the nexus between energy consumption and economic growth is hoped to provide guidance for policy makers. Methodology Model Specification and Data In this study, energy consumption and economic growth variables for OECD 1 countries are conceptualized as an econometric model by using panel data analysis method over the period The data used in this study is obtained from the OECD. Figure 1 below shows the trends of energy (per capita) consumption and GDP (per capita) in OECD countries. The variables in the model are taken in natural logarithms. According to Pedroni there are some tests used for the co integration. The first test is non parametric test. The second and the third tests are Phillips Peron (PP) (rho) and PP (t). The fourth test is a parametric test called Augmented Dickey Fuller (ADF) (t). Finally, last two tests are PP (t) ve ADF (t) (Pedroni, , Joyeux and Ripple, 2011). Functional panel data model is In panel data, if there is only time consideration without section, there will be a one way fixed effects model; if there are time and section taken into consideration, a two way fixed effects model can be used for analysis (Hsiao, 1981). A two way fixed model discovers fixed effects of two group series, two time series, or one group or one time series (Baltagi, 2005). These are following; 1OECD countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States of America.

3 Energy Consumption and Economic Growth: A Panel Data Aproach to OECD Countries 3 Empirical Results Stationarity means that the mean and the variance of a series are constant through time and the auto covariance of the series is not time varying (Enders, 1995). Figure 1 is the graph of energy consumption (EC) and economic growth (GDP) in OECD countries from 1980 to The unit root test is used to define whether the series used in regression equations are stationary or not. Table 2 shows the test outcomes. As seen from Table 2, energy consumption and economic growth contain a unit root which is not stationary. According to Pedroni estimation, H0 : no Co integration and H1 : Co integration will be tested. As seen from Table 3: null hypothesis was rejected in 5 test and 2 of them accepted. As seen from Table 4: null hypothesis was accepted because value is bigger than 0.05 value) and no cointegration between variables. As seen from Table 5: Johansen Fisher Co integration test result shows a co integration between variables. Most of the tests we did show that co integration relationship exists. It means GDP and EC act together movement in the long term. FIG. 1 THE ENERGY (EC) ON GROWTH (GDP) FOR OECD COUNTRIES ( ) TABLE 2 UNIT ROOT ESTIMATION RESULTS FOR EC AND GDP Method T Statistics (Prob.) for GDP T Statistics (Prob.) for EC ADF Fisher Chi square [0.021] [0.6274] Breitung t stat [0.000] [0.003] Im, Peseran& Shin W stat [0.008] [0.7682] Hadri Z stat [0.000] [0.000] Heteroscedastic Consistent Z stat [0.000] [0.000] Levin, Lin & Chu t* [0.6020] [0.3024] PP Fisher Chi square [0.7398] [0.7605] TABLE 3 PEDRONI CO INTEGRATION ESTIMATION RESULTS FOR EC AND GDP T Statistics (Prob.) Panel ADF stat [0.000] Panel PP stat [0.003] Panel rho stat [0.002] Panel v stat [0.204] Group ADF stat [0.000] Group PP stat [0.000] Group rho stat [0.6812] TABLE 4 KAO CO INTEGRATION ESTIMATION RESULTS FOR EC AND GDP T Statistics (Prob.) ADF [0.2120] HAC variance Residual variance

4 4 CEM IŞIK, MUHAMMAD SHAHBAZ TABLE 5 JOHANSEN FISHER CO INTEGRATION ESTIMATION RESULTS FOR EC AND GDP Hypothesis Trace Statistic %95 Max eigen Statistic %95 r= r= TABLE 6 FIXED EFFECT PANEL DATA ESTIMATION RESULTS Coefficient Standard Error T Statistic Prob. C GDP R2: DW F stat (prob): 756.1(0.000) TABLE 7 VARIABLE VARIANCE LR AND WOOLDRIDGE AUTO CORRELATION TESTS RESULTS Test T Statistic Critical Value (0.05) Variable Variance LR Wooldridge Auto correlation As seen from Table 6, there is movement from EC to GDP (GDP prob. value is smaller than 0.05 value). In terms of consistency of results, autocorrelation and heteroscedasticity must be tested by the following hypothesis H0 : no heteroscedasticity and H1 : heteroscedasticity. As seen from Table 7 null hypothesis was rejected. It means model is verified without the influence of the auto correlation and heteroscedasticity problem. Conclusion and Policy Implications The research outcomes clearly present the correlation between energy consumption and economic growth in OECD countries for the periods. In addition to these important findings, democratic structures and market economy of OECD countries have played a significant role in choosing the particular interest field of this study. Due to the globalization of economic, social and management problems and opportunities to make energy policies beneficial, significant results with respect to politics variables might come up. OECD countries will demand more energy in future meaning that they must come up with alternative and lowcost energy sources in the production processes. Without taking the necessary steps and precautions in the procurement of alternative energy sources and environmental policies, the OECD countries will struggle to develop non renewable resources available to the next generations. Moreover, the results of the panel analysis support the feed back effect between energy consumption and economic growth indicating that energy conservation policies may sustain economic growth in OECD countries. Citizens living in OECD countries frequently have to invest in the area of production infrastructure and technology because they consume too much energy. The OECD countries have developed the resources in infrastructure, but this development requires further efforts. A reliable supply of energy, operational efficiency and better distribution of the resources would also be provided by intensification of the private public partnership. Additionally, their performances would also ensure the acquisition of import substitution targets which otherwise, might create an adverse effect on balance of payments in the related countries. Sustainable supply of energy to trigger the economy positively would be ensured by the strong intention to find local energy sources and investment incentives as well as initiatives to attract investment and therefore, it would be possible to prevent the price of local energy from increasing above affordable levels. Otherwise, there could be a reduction in the consumption of energy which would in turn significantly affect the economic growth of the related countries. Since gas is an important input factor of economic growth, the future economic development policymakers in OECD countries should actualize the progress and development of the energy sector. References [1] Acaravci, A. and Ozturk, (2010). Electricity consumption growth nexus: Evidence from panel data for transition countries, Energy Economics. 32(3), pp

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