Dynamics of Electricity Consumption, Oil Price and Economic Growth: Global Perspective

Transcription

1 MPRA Munch Personal RePEc Archve Dynamcs of Electrcty Consumpton, Ol Prce and Economc Growth: Global Perspectve Shahbaz Muhammad and Suleman Sarwar and Chen We and Muhammad Nasr Malk Montpeller Busness School, Montpeller, France, School of Economcs, Shandong Unversty, Jnan, Chna, UCP Busness School, Unversty of Central Punjab Lahore, Pakstan May 207 Onlne at MPRA Paper No , posted 6 June :45 UTC

2 Dynamcs of Electrcty Consumpton, Ol Prce and Economc Growth: Global Perspectve Muhammad Shahbaz Energy and Sustanable Development Montpeller Busness School, Montpeller, France. Emal: Suleman Sarwar School of Economcs, Shandong Unversty, Jnan, Chna Emal: Chen We School of Economcs, Shandong Unversty, Jnan, Chna. Emal: Muhammad Nasr Malk UCP Busness School, Unversty of Central Punjab Lahore, Pakstan. Emal: Abstract: Ths study uses the data from 57 countres from 960 to 204 to analyze the relatonshp between economc growth, electrcty consumpton, ol prces, captal, and labor. The economc growth of developng countres wth ndustral nfrastructure has a more sgnfcant assocaton wth electrcty consumpton than ol prces. We use ol prces and electrcty consumpton jontly to study hghly predctve observatons for economc growth. The data are categorzed by ncome, OECD and regonal levels. The panel contegraton, long-run parameter estmaton, and Pool Mean Group testsare used to analyze the contegraton and short-run and long-run relatonshps between the varables. The emprcal results ndcate the presence of contegraton between the varables. The presence of feedback effects between electrcty consumpton and economc growth, ol prces and economc growth s vald. These fndngs confrm that nspte of the ol prces, developng countres rely heavly on electrcty consumpton for economc growth. In the short run, growth and feedback effects suggest that more vgorous electrcty polces should be mplemented to attan sustanable economc growth for the long-term. Keywords: Electrcty Consumpton, Ol Prces, GDP, Captal, Populaton JEL Classfcaton: Q43, Q48, O3

3 . Introducton The economc progress of developng countres reles heavly on electrcty. The producton of manufacturng ndustres declnes due to electrcty shortages, whch, n turn, destablze an economy. Electrcty consumpton s a key component of economc growthand s drectly or ndrectly a complement to labor and captal as a factor of producton (Costantn and Martn, 200). Varous studes have revealed the dverse mpact of electrcty consumpton on economc growth (Yuan et al. 2007, Chen et al. 2007, Yuan et al. 2008, Narayan and Prasad 2008, Abosedra et al. 2009, Mutascu 206, Ahmed and Azam 206, Stremkene and Kasperowcz 206). For example, some studes suggest apostve mpact of electrcty consumpton on economc growth (Shu and Lam 2004, Yuan et al. 2007, Shahbaz and Lean 202, Iyke 205, Tang et al. 206, Stremkene and Kasperowcz 206). Ozturk (200) argues that f economc growth s nversely affected by energy consumpton, then dfferent arguments could justfy the adverse mpacts of energy consumpton on economc growth. For example, we could magne a stuaton n whch a growng economy ams to reduce the level of energy consumpton through producton shfts to less energy-ntensve sectors. Furthermore, the neffcent use of energy, such as constrants n capacty use or an neffcent supply of energy, may also have a negatve mpact on economc growth or growth n real GDP (Chontanawat et al. 2008, Payne 200, Ozturk 200). A large number of developng countres have concerns about electrcty shortagesdue to scarce resources and nfrastructure (Allcott et al. 204, Shahbaz and Al 206). The relatonshp between electrcty consumpton and economc growth also vares across the ncome levels of countres (Yoo and Kwak, 200). Smlarly, Ferguson et al. (2000) reported that the relatonshp between electrcty consumpton and economc growth s stronger n hgh-ncome countres. 2

4 Ol prces are a key component of energy, and ther mportance n economc development has been recognzed by economsts, polcy makers, busnessmen, households, and researchers. After the 973 ol crss, several studes (Tmlsna 205, Klan and Vgfusson 20, Klan 2008, Hamlton 983, 985, Gsser and Goodwn 986, Mork 989) affrmed an nverse relatonshp between ol prces and economc growth. Economsts and researchers have reached a consensus that ol prce volatlty smultaneously reduces economc growth. However, the recent lterature shows the negatve relatonshp decreasng over tme because of ol alternatves and preemptve governmental measures aganst sudden ol prce shocks (Doroodan and Boyd 2003, Jbr and Zouar-Ghorbel 2009). Ol-mportng developng economes are severely affected by ol prce hkes because of a lower tax share on ol prces. Moreover, developed economes have a hgher tax share on ol. Therefore, such ol prce shocks may be mtgated to an extent by suspendng the tax share as ol prces rse. Developng countres wth less of a tax share on ol have less ablty to absorb ol prce shocks. Consequently, ol prce hkes appear to have a more adverse mpact on developng economes. These dynamcs between electrcty consumpton, ol prces and economc growth prompt researchers to conduct emprcal research and provde dverse emprcal evdence. Ths paper s a humble effort to provde comprehensve emprcal evdence by coverng data from 57 countres for the perod from 960 to 204. Ths study contrbutes tothe exstng energy lterature n four ways: () The study employs the growth model developed by Solow (956) by augmentng the producton functon to nvestgate the role of electrcty consumpton and ol prces on domestc producton. The ndustral nfrastructure heavly reles on ol as an nput to producton operatons and transportaton. The ncrease n ol prces leads to hgher costs of producton and drves nflaton, whch adversely affects nvestment and purchasng 3

5 power. Electrcty supply s the basc element of ndustral producton, and countres facng an electrcty shortage cannot sustan the pace of economc growth. The economc growth of developng countres wth ndustral nfrastructure has a hgh and sgnfcant assocaton wth electrcty consumpton compared to ol prces. The producton process can be slowed due to an electrcty shortage (Shahbaz and Al 206). Such a declne n output has a drect nfluence on fnancal values. On the other hand, to mtgate such massve losses, many frms attempt to acqure alternatve energy-producng plants, whch also escalate producton costs. The ncrease n electrcty consumpton n manufacturng economes may help to trgger economc growth (Kahane and Squter 987). Therefore, ths study has ncorporated electrcty consumpton as a factor of domestc producton along wth ol prces n an augmented producton functon. The jont use of electrcty consumpton and ol prces n the augmented producton functon wll also provde new gudelnesfor polcy makers to desgn comprehensve growth polces whle consderng the role of electrcty consumpton and ol prces. The gnorance of relevant varables n the functon of producton may be a reason for the ambguous results of prevous studes n the exstng lterature (Shahbaz et al. 206). () The paper nvestgates the electrcty-growth nexus usng data from 57 countres, whch are further categorzed nto sub-panels, such as regonal, ncome, OECD and non-oecd levels, to mtgate heterogenety n the data. () Ths study apples the panel contegraton approach developed by Westerlund (2007). The Fully Modfed Ordnary Least Square (FMOLS) and Pool Mean Group (PMG) tests have also been appled to scrutnze the short-run and long-run assocatons between the varables. (v) The heterogeneous panel causalty test orgnated by Dumtrescu and Hurln (202) s used to examne the causalty relatonshp between electrcty consumpton and economc growth n heterogeneous panels. Our results show the exstence of a feedback effect between electrcty consumpton and economc growth. The assocaton between ol prces and economc growth s also bdrectonal. Gross fxed captal 4

6 formaton and labor lead to economc growth. The fndngs show heavy relance by developng countres on electrcty consumpton rather than ol prces for sustanable economc growth. Ths fndng vares across ncome levels and regons. The rest of the study s organzed as follows: Secton 2 provdes a bref lterature revew of energy consumpton, electrcty consumpton, ol prces and Pedron panel contegraton. Secton 3 dscusses the data and methodology used for estmatons. Secton 4 reports the results and concluson. Secton 5 provdes concludng remarks. 2.Lterature Revew We have dvded the lterature revew nto two portons: () electrcty consumpton-economc growth nexus and () ol prce-economc growth nexus. 2.. Electrcty Consumpton and Economc Growth Researchers and academcs have researched the energy-growth nexus usng tme seres and panel data sets but have reported conflctng emprcal fndngs (Ozturk, 200). These dscrepances may not help polcy makers n desgnng comprehensve economc and energy polces touse electrcty consumpton as an economc tool to sustan economc growth n thelongrun (Payne, 200) 2. For example, Murray and Nan (996) appled the causalty test A summary of electrcty consumpton-economc growth s gven n Table-A (see Appendx) 2 The exstng lterature on electrcty consumpton and the economc growth relatonshp provdes four conflctng hypotheses: () The feedback effect reveals that electrcty consumpton causes economc growth and that economc growth causes electrcty consumpton. Ths hypothess s emprcally valdated by Mash and Mash (996), Constantn and Martn (200), Shahbaz et al. (202), Polems and Dagoumas (203), Mutascu (206) and Sarwar et al. (207). The feedback effect ndcates that a declne n the electrcty supply mpedes economc growth and a reducton n economc growth wll decrease electrcty demand () The growth hypothess valdates the presence of undrectonal causalty runnng from electrcty consumpton to economc growth. Ths ndcates that electrcty consumpton plays a vtal role n enhancng domestc producton and, hence, economc growth. Emprcally, the growth hypothess s emprcally confrmed by Murry and Nan (994), Khan et al. (2007), Pradhan (200), Das et al. (202), Tang and Shahbaz (203), Wolde-Rufael (204), Iyke (205) and He et al. (207). The feedback and growth hypothess reveals the mportance of energy- 5

7 developed by Granger (969) to examne the relatonshp between electrcty consumpton and economc growth usng data from 5 countres from 970 to 990. They found neutral effects between both varables n the cases of Inda, the Phlppnes, and Zamba. Furthermore, ther analyss ndcates that the conservaton hypothess s vald for Colomba, ElSalvador, Indonesa, and Kenya, whereas the growth effect s found n Mexco, Canada, Hong Kong, Pakstan, Sngapore, Turkey, Malaysa, and South Korea. Wolde-Rufael (2006) appled the bounds testng approach developed by Pesaran et al. (200) as well as the causalty developed by Toda and Yamamoto (995) to examne contegraton and causalty between electrcty consumpton and economc growth n 7 Afrcan countres. The results reveal that economc growth causes electrcty consumpton n 6 countres (Cameroon, Ghana, Ngera, Senegal, Zamba, Zmbabwe), whereas electrcty consumpton causes economc growth n 3 countres (Benn, Republc of Congo, Tunsa), and the feedback effect exsts between both varables n 3 countres (Egypt, Gabon, Morocco) 3. Yoo (2006) nvestgated the drecton ofthe causal assocaton between electrcty consumpton and economc growth for ASEAN countres and reported a feedback effect for Malaysa and Sngapore and that economc growth causes electrcty consumpton n Indonesa and Thaland. In the case of the OPEC regon, Squall (2007) employed the bounds testng and causalty approaches developed by Pesaran et al. (200) and Toda and Yamamoto (995), respectvely, to examne contegraton and causalty between electrcty consumpton and economc growth. The causalty results ndcate the dependence of economc growth on (electrcty) explorng polces to attan long-run economc growth. () The conservaton hypothess reveals that undrectonal causalty runs from economc growth to electrcty consumpton. Ths shows that electrcty consumpton does not play a vtal role n stmulatng economc growth. The conservaton hypothess s emprcally valdated by Cheng and La (997), Aqeel and Butt (200), Narayan and Sngh (2007), Narayan et al. (200), Mahmood and Mahmood (20), Shahbaz and Ferdun (202) and Kasnan and Dunan (205). (v) The neutral effect ndcates that electrcty consumpton does not lead economc growth and vce versa. Ths hypothess s emprcally confrmed by Yu and Hwang (984), Chontanawat et al. (2008), Wolde-Rufael (2009) and Smech and Papez (204).The conservaton and neutral hypotheses reveal mnor (or no) role of electrcty consumpton n promotng economc growth. In such crcumstances, energy (electrcty) conservaton polces are sutable because they have no adverse effect on economc growth. 3 A neutral effect also exsts n the cases of Algera, PR Congo, Kenya, South Afrca, and Sudan. 6

8 electrcty consumpton. Chen et al. (2007) nvestgated the assocaton between electrcty consumpton and economc growth n 0 ndustralzed countres from 97to 200. Ther analyss showedthat electrcty consumpton causes economc growth, and as a result, economc growth causes electrcty consumpton.narayana and Sngh (2007) appled the multvarate producton functon by ncorporatng labor as an addtonal determnant of economc growth and electrcty consumpton for the Fj Islands for the perod from 97 to Ther results show the presence of undrectonal causalty from economc growth and labor to electrcty consumpton 4. Usng data from 30 OECD countres, Narayan and Prasad (2008) used the bootstrap causalty test to examne the causal relatonshp between electrcty consumpton and economc growth. They suggested that the mplementaton of energy conservaton polces s not harmful to economc growth. Carreta and Zarraga (2008) nvestgated the causal assocaton between electrcty consumpton and economc growth n European economes by applyng panel contegraton and causalty approaches. They found that electrcty consumpton predcts economc growth n the long run. Oztuek and Acaravc (200) nvestgated the 4 Cheng and La (997) appled Hsao s verson of the Granger causalty for Tawan for the perod from 955 to 993. Ther results ndcated the presence of undrectonal causalty from economc growth to energy consumpton. Asafu-Adjaye (2000) noted that energy consumpton caused economc growth for Inda and Indonesa for the perod. By contrast, n Thaland and the Phlppnes, a feedback effect was noted between energy consumpton and economc growth over the perod from 97 to 995. Soytas and Sar (2003) used the data from G-7 and 0 emergng economes, but not PR Chna, for the perod from 950 to 990 to examne the assocaton between energy consumpton and economc growth. They reported that energy consumpton has a postve and sgnfcant effect on economc growth n Argentna, Italy and Korea and that undrectonal causalty from economc growth to energy consumpton also exsts. Ghal and El-Sakka (2004) collected Canadan data for the perod from 96 to997 to examne lnkages between energy consumpton and economcs by applyng the Johansen-Juselus (990) and varance decomposton approaches. They confrmed the presence of bdrectonal causalty between energy consumpton and economc growth. Mehrara (2007) attempted to nvestgate the relatonshp between energy consumpton and economc growth for ol-exportng countres over the perod from 97 to 2002 and found a postve mpact of economc growth on energy consumpton. Erdal, Erdal and Esengün (2008) also reported bdrectonal causalty between economc growth and energy consumpton for the Turksh economy. Lee et al. (2008) studed the relatonshp between energy consumpton and economc growth for 22 OECD countres by applyng the Pedron panel contegraton test. Ther fndngs supported the presence of a feedback effect between energy consumpton per capta and real GDP per capta. Bartleet and Gounder (200) reported that economc growth stmulated energy consumpton n New Zealand. 7

9 relatonshp between electrcty consumpton and economc growth n the cases of 5 transton economes usng panel contegraton and causalty approaches 5. Ther analyss ndcated no contegraton between the varables and that the mplementaton of energy (electrcty) conservaton polces would affect economc growth. Yoo and Kwak (200) emprcally examned the relatonshp between electrcty consumpton and economc growth usng data from 7 South Amercan countres for the perod from 975 to Ther results showed that economc growth s the Granger cause of electrcty consumpton n Ecuador, Columba, Chle, Brazl and Argentna, but a feedback effect also exsts for Venezuela, whereas a neutral effect s vald for Peru. Apergs and Payne (20) used a multvarate producton functon usng a panel of 88 countres to examne the assocaton between electrcty consumpton and economc growth. They used a panel error correcton model and found a feedback effect between electrcty consumpton and economc growth for hgh-ncome and upper-mddle-ncome country panels, whereas electrcty consumpton causes economc growth n the lower ncome country panel. Das et al. (202) used data from 45 countres from 97 to 2009 by applyng the generalzed method of moments (system GMMs) test developed by Blundell and Bond (998) to examne the lnkage between electrcty consumpton and economc growth. They found a postve and sgnfcant assocaton between both varables. Wolde-Rufael (204) nvestgated the relatonshp between electrcty consumpton and economc growth for 5 transton countres by applynga bootstrap panel contegraton test. The results ndcated that electrcty consumpton sgnfcantly affects economc growth n 5 Albana, Belarus, Bulgara, Czech Republc, Estona, Latva,Lthuana, Macedona, Moldova, Poland, Romana, Russan Federaton, Serba, Slovak Republc and Ukrane. 8

10 Bulgara and Belarus; that economc growth causes energy consumpton n the Czech Republc, Lthuana, Latva; and that a feedback effect s vald for the Russan Federaton and Ukrane. Smlarly, Karanfl and L(205) nvestgated the relatonshp between electrcty consumpton and economc growth for 60 countres from 980 to 202. They reported that electrcty consumpton and economc growth relatonshp s senstve to regonal dfferences, ncome levels, urbanzaton levels and supply rsks as well. Abdol and Dastan (205) examned the assocaton between electrcty consumpton and economc growth by ncorporatng exports as a potental determnant of the producton functon for OPEC countres. They employed fully modfed OLS (FMOLS) and found that electrcty consumpton and trade stmulate economc growth. Ther causalty analyss reveals the presence of a feedback effect between electrcty consumpton and economc growth n the short run. Kaykc and Bldrc (205) appled the bounds testng approach to examne the relatonshp between economc growth, electrcty consumpton and ol rents for the GCC and MENA regons. They noted that the causalty relatonshp wth electrcty consumpton depends upon natural resource levels. Osman et al. (206) appled PMGE and demeaned the PMG, AMG, MGE and DFE approaches to nvestgate the assocaton between electrcty consumpton and economc growth n the case of GCC countres. They found that electrcty consumpton and captalzaton spur economc growth. Ther analyss ndcates the presence of a feedback effect between electrcty consumpton and economc growth. However, undrectonal causalty s noted from captalzaton to electrcty consumpton, whereas economc growth causes captalzaton. 9

11 2.2. Ol Prce and Economc Growth The general percepton about the correlaton between ol prce and GDP s that a declne n the prces of crude ol decreases nflaton (Maeda, 2008). In fact, t s also responsble for the petroleum subsdy along wth the nterest rates and fscal defct; ths ncreases the GDP growth rate and promotes economc development n the country. The relatonshp between ol prce and economc growth was explored by Morey (993) for the US economy. The emprcal results show that ol prce hkes decrease economc actvty and hence economc growth. Later, Jmenez-Rodrguez and Sanchez (2005) collected data for OECD countres to examne the mpact of ol prce on economc growth. They found that ol prce shocks postvely and negatvely affect economc growth n ol-exportng and ol-mportng countres. Lardc and Mgnon (2006) nvestgated the asymmetrc relatonshp between ol prce and economc growth by applyng asymmetrc contegraton. They found that contegraton exsts between the varables and that an ol prce ncrease mpedes economc growth. Mehrara (2008) analyzed the relatonshp between ol prce and economc growth for ol-exportng economes. The emprcal evdence reported that the relatonshp between ol prce and GDP s non-lnear and asymmetrc. Farzanegan and Markwardt (2009) nvestgated the relatonshp between ol prce and macroeconomc varables for Iran. Ther results confrmed that a postve shock n ol prce has a sgnfcant and postve mpact on ndustral producton. In contrast, negatve shocks n ol prces have an adverse mpact on ndustral producton. Jayaraman and Choong (2009) attempted to nvestgate the assocaton between ol prce and economc growth n ol-mportng economes. Ther emprcal data reveal that ol prce has a negatve and sgnfcant effect on economc growth and the undrectonal causalty exsts runnng from ol prce to economc growth. Ozlale and Pekkurnaz (200) analyzed the lnkages between ol prce and macroeconomc varables for the Turksh 0

12 economy. They appled a structural vector autoregresson model (SVAR) and confrmed that ol prce leadsto a current account defct that leads to a declne n economc growth. In the case of Chna, Tang et al. (200) reported that ol prce shocks adversely affect economc growth and nvestment. Usng data from the G-7, OPEC economes, Russa, Inda and Chna, Ghalayn (20) renvestgated the assocaton between ol prce shocks and economc growth. The emprcal exercse reveals that ol prces negatvely (postvely) lnked wth economc growth n olmportng (exportng) countres. Tmlsna (205) studed 25 economes to examne the emprcal relatonshp between ol prce and GDP. The results from the developng countres reported a negatve and sgnfcant effect of ol prce on GDP. The man cause for ths negatve relatonshp s the dependence of ndustres on ol. Moreover, the fndngs confrm that the ncrease n ol prce helps to strengthen the economy for ol-exportng countres. Ftt et al. (206) examned the nterdependence between ol prce and economc growth usng (selected) OPEC countres monthly data for They noted that ol prce shocks affect the ol-growth nexus n global busness cycle fluctuatons and the fnancal crss turmol n the OPEC regon. Sarwar et al. (207) nvestgated 20 countres; they used the fndngs to show that ol prce has a sgnfcant effect on economc growth n the short and long run. 3. The Model and Data Ths study nvestgates the assocaton between electrcty consumpton and economc growth by ncorporatng ol prce n the augmented producton functon. We have ncluded ol prcevarable nto the producton functon due to ts vtal mpact on economc actvty. The mpact of ol prce hkes s senstve n ol-exportng and ol-mportng countres. Ol prces

13 hke affect real economc actvty va supply and demand channels and vce versa. The supply-sde channel reveals that ol s a basc factor for producton, and an ncrease n ol prce lead to ncrease n the cost of producton, whch leads frms or ndustres to lower output (Morey 993, Tang et al. 200). The demand-sde channel entals that ol prce shocks affect not only consumpton but also nvestment actvtes. Increase n ol prces wll lower output, whch lowers real wages due to the declne n demand for labor as a result of the declne n economc growth. A declne n economc growth s postvely lnked wth less dsposable ncome and consumpton as well (Maeda 2008, Tang et al. 200, Ftt et al. 206). Ol prce hkes ncrease frms costs, the result of whch decreases nvestment actvtes. Indrectly, ol prce shocks nfluence not only exchange rate but also nflaton, whch n turn affects real economc actvty and, hence, economc growth. The general form of the augmented producton functon s modeled as follows: Y t = f ( E, O, K, L) () All the varables have been transformed nto natural-log. Shahbaz and Lean (202) argued that a log-lnear specfcaton provdes effcent and relable emprcal evdence relatve to a smple lnear specfcaton. In dong so, all the varables are transformed nto natural-log followng Shahbaz et al. (207). The emprcal equaton of the producton functon s modeled as follows: lny t = α + α 2 ln Et + α3 ln Ot + α 4 ln Kt + α5 ln Lt + µ (2) where ln Y t, E t, O t, Kt and L t are the natural-log of economc growth measured by real GDP per capta (constant 200 US$), electrcty consumpton proxes by electrc power 2

14 consumpton per capta (KWh), ol prce, captalzaton measured by gross fxed captal formaton per capta (constant 200 US$) and labor force per capta, respectvely. error term wth a normal dstrbuton. µ s an Ths study uses unbalanced panel data for 57 countres 6 over the perod from 960 to 204. The data for the real gross domestc product (constant 200 US$), electrc power consumpton (KWh), real gross fxed captal formaton (constant 200 US$) and total labor (populaton aged 5-64) were collected from World Development Indcators (CD-ROM, 205) 7. Crude ol prce data are obtaned from the Statstcal Revew of World Energy ( The total populaton s used to convert all varables nto per capta unts except crude ol prce. 3.. Estmaton Strategy 3... Cross-Sectonal Dependence Test Consderng the globalzaton of the world economy, cross-sectonal dependence may largely exst among countres and regonal economes. However, cross-sectonal dependency s an mportant factor that nfluences the result of panel unt root testng and contegraton testng. In dong so, we have appled frst- and second-unt root and contegraton tests. The frstgeneraton unt root and contegraton tests assumecross-sectonal ndependence. The secondgeneraton unt root and contegraton tests consder cross-sectonal dependence. To decde whch type of unt root and contegraton test s sutable, we test the null hypothess of crosssectonal ndependence. Usng the seemngly unrelated regresson equaton (SURE), Breusch 6 Intally we used data for 20 countres. The countres wth unavalable GDP data snce 960 are excluded

15 and Pagan (980) proposed the Lagrange multpler (LM) test, whch s based on the average of squared par-wse correlatons of the resduals. The emprcal equaton of the LM crosssectonal dependence test s formulated as follows: = α α (3) N N 2 CD lm T = j= + Sj where S j s the sample estmate of the par-wse correlaton of resduals and s defned as follows: S j = S j = α e e T t= t jt T 2 / 2 T 2 ( αt= et ) ( αt= e jt ) / 2 (4) where e t s the Ordnary Least Squares (OLS) estmate of µ t, defned as follows: e t = y α b x (5) t t Where t = T and = N ndex the tme-seres and cross-sectonal unts, respectvely. However, the Breusch and Pagan (980) LM test s lkely to exhbt sze dstortons when large N and small T exst, as n our data. Recognzng ther shortcomng, Pesaran (2004) proposed smple tests of error n cross-secton dependence thatare appled to a varety of panel data models. These tests nclude statonary and unt root dynamc heterogeneous panels wth short T and large N and are robust to sngle and even multple structural breaks n the slope coeffcents and error varances of the ndvdual regressons. Hs cross-sectonal dependence statstc s based on par-wse correlaton coeffcents rather than ther squares, as used n the LM test: 4

16 2T N N 2 CD = α = α j= + Sj (6) N( N ) 3..2.Panel Unt Root under Cross-Sectonal Dependence We apply the second-generaton panel unt root test to examne the cross-sectonal dependence developed by Pesaran (2007). The Pesaran panel unt root uses the cross-secton mean to proxy the common factorand constructs the test statstcs based on t-rato of the OLS estmate of b bˆ ) ( n the followng cross-sectonal augmented DF (CADF) regresson: Dy α + d Dy + e (7) t = + b y, t + c yt t t One possblty would be to consder a cross-sectonal augmented verson of the IPS testbased on the formula gven below: N CIPS N, T) = t bar = N a t ( N, T) (8) ( = where t ( N, T ) s the augmented Dcky-Fuller statstc across the cross-secton for the th cross-secton unt set by the t-rato of the coeffcent ( y, t ) n the CADF regresson Panel Contegraton Test We apply the panel contegraton approach developed by Westerlund (2007), whch generates samples through the bootstrap approach and usesa new sample to construct a two-group mean and two-panel statstcs. Ths approach examnes whether the model has an error correcton (full panel or ndvdual groups) based on the model as follows: 5

17 Dy t α ( ) α α α et (9) p p = c + yt b xt + j jdyt j + j gjdx + = = 0 t j whereα s the speed of the adjustment term. H0: α=0 concludes no error correcton, and the varables are not contegrated. H: α<0; the model shows the error correcton and provdes evdence of contegraton between varables Estmaton of Panel Regresson After determnng the exstence of contegraton, we move tothe dynamc OLS (DOLS) technque based on a parametrc panel developed by Kao and Chang (2000) for long-run dynamcs of the producton functon. The DOLS estmaton gnores the sgnfcance of crosssectonal heterogenety. Therefore, Pedron (999, 2000, 200, 2004) ntroduced a fully modfed OLS (FMOLS) heterogeneous panel contegraton approach. We apply the FMOLS estmaton approach due to ts consstent estmatons. In the presence of endogenety and heterogenety, t does not suffer from large-szed dstorton. ) β = N * ) ( ( y y) z Tη N T T 2 ( yt y) ) ( = t= t= t t (0) ) ) * L ) ) ) ) 3 ) o L3 o where zt = ( zt z) ) yt, η Γ3 + Ω3 ) ( Γ4 + Ω4 ) and L ) s the lowest trangular L L decomposton of 4 4 Ω ). The t-statstcs are gven as follows: N / 2 * ) = N tβ β * = t ), () 8 See Westerlund (2007)for more detals. 6

18 7 where 2 / * * ) ( ) (, Ω = = T t t y y t ) ) ) β β β 3..5.Pool Mean Group (PMG) Test We apply the Pool Mean Group (PMG) developed by Pesaran et al. (999), whch adopts a parametrc model to estmate the contegraton vector based on an error correcton model n whch short-run dynamcs are nfluenced by the devaton from the equlbrum. The autoregressve dstrbutve lag (ARDL) (p,q,..,qk) dynamc panel specfcaton s modeled as follows: t P j j t j t j t y x x ε µ δ λ = =,, (2) wherey, t-j s the (k x ) vector of explanatory varables for group, and u presents the fxed effects. p and q can vary across countres, and the model s known as vector error correcton model (VECM): t q j j t j p j j t j t t t y x x x x,, ',, ', ) ( ( ε µ γ γ β θ = = = (3) Whereβ represents the long-run parameters and θ s the error correcton term. The PMG uses β, whch s common across countres. t q j j t j p j j t j t t t y x x x x,, ',, ', ) ( ( ε µ γ γ β θ = = = (4) where β s the error correcton speed of adjustment.

19 x t θ ( xt + π t (5) β = ) whereπ presents the statonary process. If β =0, the results do not confrm any long-run t relatonshp, and β <0 confrmsalong-run relatonshp between varables. The PMG test s ntermedate between Mean Group (MG) estmatons n whch slopes and coeffcents are permtted to dffer across countres and the fxed effect method (FEM) n whch nterceptsmay vary but slopes are fxed. In contrast, the PMG technque allows the coeffcents to vary across countres n the short run. Furthermore, the MG that averages the coeffcents of the country-specfc regressons s also a consstent technque but s not a better estmator when ether the number of countres orthe perod s small (Hsao et al. 999). In comparson, the pool mean group estmator uses the combnaton of poolng and averagng of coeffcents Heterogeneous Panel Causalty Test To test causalty, we use the Dumtrescu and Hurln (202) panel causalty test. It s a smplfed verson of the Granger (969) non-causalty test that s generally used for heterogeneous panel data models wth fxed coeffcents. It consders the two dmensons of heterogenety: a) the heterogenety of the regresson model for testng the Granger causalty and b) the heterogenety of the causalty relatonshps. The lnear model s as follows: z t = α + M m= γ ( m) z M ( m), t m+ β y, t k + m= ε t (6) 8

20 Equaton-6 shows that y and z are two statonary varables for a number of ndvduals (N) n tme perods (T). The ntercept term α and coeffcent β = β β are () ( m) (,..., ) consderedfxed n the tme dmenson, whereas the autoregressve parameter γ and the ( m ) regresson coeffcents β ( m) are assumed to vary across cross-sectons. The Homogenous Non-Causalty (HNC) hypothess s assumed to be the null hypothess; t states no causal relatonshp for any of the cross-sectons n the panel and s defned as follows: H : 0,2,..., 0 β = = N The Heterogeneous Non-Causalty (HENC) assumed to be the alternatve hypothess specfes two sub-groups of cross-sectonal unts. For the frst sub-group, from y to z, there s a causal relatonshp, whch s not necessarly based on the same regresson model. However, for the second sub-group, there s no causal relatonshp fromy to z when consderng a heterogeneous panel data model wtha fxed coeffcent. The alternatve hypothess s defned as follows: H : β = 0 =,2,..., N a 0 N,..., N β = + It s assumed that β may vary across cross-sectons havng N < N ndvdual processes wth no causal relatonshp from y to z. N s unknown, but t provdes the condton 0 / HNC N N <. Therefore, we propose the average statstc W N, T, whch s related to the Homogenous Non-Causalty (HNC) hypothess, as follows: 9

21 W HNC N. T = N N = W, T (7) Each Wald statstc converges to a ch-squared dstrbuton havng M degrees of freedom T of the null hypothess of the non-causal relatonshp. The standardzed test HNC statstc Z N, T for T, N s shown as follows: Z N HNC = ( WN, T M ) (0,) (8) 2M HNC N, T N HNC In equaton8, WN, T = (/ N) W, N = T. The Dumtrescu and Hurln (202) study can be helpful n offerng further nformaton about the heterogeneous panel causalty test. 4. Results and Dscusson Table- shows the results of the LM, CD, and CIPS cross-sectonal dependence tests. We fnd that the emprcal evdence provded by the LM and CD tests strongly supports rejectngthe null hypothess of cross-sectonal dependence. Ths result mples that the data are cross-sectonally dependent. The presence of cross-sectonal dependence drects us to apply the second-generaton unt root test to examne the unt root propertes of the varables. In dong so, we have appledthe CIPS unt root developed by Pesaran (2007). We note that all the varables are non-statonary n terms of the ntercept and trend but are statonary nterms of the frst dfference at the % level of sgnfcance. Moreover, we apply the Im, Pesaran and Shn (997) (IPS) unt root test for a robust check. The fndngs of the IPS unt root are smlar to the CIPS unt root test, whch ndcates the presence of a unt root process at level 20

22 and statonarty at frst dfference. The results of the IPS unt root test are shown n Table-A2 (appendx). Ths observaton shows that all the varables have a unque order of ntegraton,.e., I() n thefull panel. Table-: Cross-Sectonal Dependence and Unt Root Analyss Varable ln Yt ln Et ln Ot ln Kt ln Lt Breush-Pagan(LM) ** ** 32373** ** 32373** Pesaran CD ** ** ** ** ** Unt Root test wth cross-sectonal dependence CIPS Test (level) CIPS Test (frst) dfference).534**.492** 9.7** 5.37**.483** Note: ** and * ndcate sgnfcance at % and 5%, respectvely After confrmng that the varables are ntegrated at I(), we proceed to apply thepanel contegraton approach developed by Westerlund (2007). The results are reported n Table-2. We note that the emprcal fndngs of the panel and group statstcs lead to rejecton of the null hypothess of no contegraton n the full panelor at the ncome, OECD or regonal levels. Ths result mples the presence of contegraton between the varables over the perod from 960 to 204. We may conclude that the long-run relatonshp between economc growth, electrcty consumpton, ol prces, gross fxed captal formaton and labor s supported. For a robust check, we further apply (Pedron, 999, 2000, 200, 2004) a panel contegraton test, and the results are reported n Table-A2. The panel contegraton test results confrm the fndngs of the Westerlund (2007) contegraton test. For long-run dynamc lnkages between the varables, we have appled FMOLS. The results are shown n Table-3. The emprcal results ndcate that electrcty consumpton has a postve and sgnfcant mpact on economc growth n the case of the full panel as well as for lower-mddle ncome, upper-mddle ncome, OECD, East Asa & Pacfc, Mddle East & North Afrca, South Asa and Sub-Saharan Afrca regons. Ths fndng s consstent wth 2

23 those of Stremkene and Kasperowcz (206), Tang et al. (206), and Rafndad and Ozturk (206). Electrcty consumpton postvely (negatvely) but non-sgnfcantly affects economc growth n the cases of low-ncome countres, non-oecd countres, Europe & Central Asa and Latn Amerca & the Carbbean (hgh-ncome countres and North Amerca). These results show that ol s a more noteworthy energy component than electrcty n these regons. 22

24 Table-2: Westerlund (2007) Panel Contegraton Analyss Test Full panel Income level OECD level Low Lower-Mddle Upper-Mddle Hgh OECD non- OECD Statstc P-value Robust P- value P-value Robust P-value P-value Robust P-value P-value Robust P-value P-value Robust P-value P-value Robust P-value P-value Robust P-value Gt Ga Pt Pa Statstc Regonal level East Asa & Pacfc P-value Robust P-value Europe & Central Asa P-value Robust P-value Latn Amerca & Carbbean P-value Robust P-value Gt Ga Pt Pa Note: **and*ndcate sgnfcance at % and 5%, respectvely Mddle East & North Afrca P-value 0.75 Robust P-value North Amerca P-value Robust P-value South Asa P-value Robust P-value Sub- Saharan Afrca P-value Robust P-value

25 Table-3: Fully Modfed OLS Regresson Analyss Group ln Et ln Ot ln Kt ln Lt Full Panel 0.57 ** 0.24 ** ** ** Income Level Low ** ***.526 ** Lower-Mddle **.54 ** 0.6 *** 0.69 ** Upper-Mddle ** *** Hgh ** 0.38 *** ** OECD OECD 0.59 ** 0.35 ** *** ** Non-OECD ** *** 2.3 ** Regon East Asa & Pacfc.065 ** ** *** 2.37 ** Europe & Central Asa *** Latn Amerca & Carbbean ** *** 0.58 ** Mddle East & North Afrca.8 ** ** ***.27 ** North Amerca ** 0.6 *** South Asa 0.63 ** ***.205 Sub-Saharan Afrca 0.98 ** 0.27 * *** * Note: ** and *ndcatesgnfcance at % and 5%, respectvely. Ol prce has a postve and sgnfcant effect on economc growth. Ths relatonshp shows that the ncrease n ol prce postvely affects economc growth n the full panel and n lowncome, lower-mddle ncome, hgh-ncome, OECD & non-oecd, East Asa & Pacfc, Latn Amerca & Carbbean, Mddle East & North Afrca, North Amerca and Sub-Saharan Afrca regons. The postve relatonshp ndcates that energy prce-savng and lower ol prcesmayalso curtal payments for mports (ol). North Amerca s the only regon adversely affected by an ncrease n ol prce. These countres are ol-exporters as well as ol-mporters, and the rapd declne n ol prces has both negatve and postve effects on dfferent sectors. In the case of Canada, real GDP ncreased by 2.4% n the last quarter of 204. By contrast, real ncomes contracted due to the value of exports (ol) (Isfeld, 205). Ths fndng s smlar to that of Alqust and Guénette (204). In the cases of upper-mddle ncome countres, Europe & Central Asa and South Asa, ol prce has a postve but non-sgnfcant mpact on economc growth. Ths fndng of non-sgnfcance s n lne wth Behmr and Manso (204), 24

26 who argue that South Asa,.e., Pakstan 9, Inda 0, Bangladesh, etc. conssts of ndustral economes n whch ol consumpton s contnuously ncreasng regardless of whether ol prce ncreases or decreases. The non-sgnfcance of ol prce and the sgnfcance of electrcty consumpton confrm that electrcty has a more promnent role than ol prce n South Asa. The relatonshp between gross fxed captal formaton and economc growth s postve and sgnfcant n the full panel and n all regons, whch mples that captalzaton enhances economc growth sgnfcantly. Our emprcal evdence s smlar to that of Stremkene and Kasperowcz (206), Apergs and Payne (200) and Satt et al. (204), who reported that gross fxed captalzaton plays a vtal role n stmulatng economc actvty and hence stmulates economc growth. The assocaton between labor growth and economc growth s postve and sgnfcant. Labor growth affects economc growth postvely and nonsgnfcantly n the full panel and all regons except for upper-ncome countres, but n North Amerca, labor growth adversely affects economc growth, albet non-sgnfcantly. Our emprcal evdence ndcates the sgnfcance of economc growth n all fve developng country categores. Lower-mddle ncome, upper-mddle ncome, East Asa & Pacfc, Mddle East & North Afrca and South Asa showa sgnfcant postve effect of electrcty consumpton on economc growth. Ol prce s sgnfcant for only three of the fve developng country categores. The upper-mddle ncome and South Asa categores showsgnfcant results. In sum, the results confrm that developng countres rely heavly on electrcty consumpton for economc growthn spte of ol prce. Profcent and sound fscal 9 Double-dgt percentage ncreases n ol consumpton were recorded by Pakstan between 202 and 203 (Raper, 204). 0 Inda became the thrd-largest ol consumer n 205 (Meyer and Hume, 204). 25

27 polcy, monetary polcy and ndustral nfrastructure can mtgate the effect of ol prce shocks on economc growth. Furthermore, we apply panel OLS and dynamc OLS for a robust check, and the results are reported n Table-A3. The emprcal evdence corroborates the mpact of electrcty consumpton, ol prce, captal and labor on economc growth, whch s n lne wth the FMOLS emprcal results. Ths ndcates that long-run emprcal results are relable and robust. Table-: Pool Mean Group Analyss Dependent Varable Source of causaton (ndependent varable) Short-run Long-run lny t ln Et ln Ot ln Kt ln Lt ECT t Full Panel lny t 0.** 0.063** 0.39** 0.28** 0.005** ln E t.242**.24** ** lno t 3.57** ** * ln K t * 5.846** 2.753** ln L t ** 5.753** 6.97** 0.00** Low-Income Panel lny t * ln E t ** lno t ** ln K t ln L t * Low-Mddle-Income Panel lny t 2.593**.854** 9.45* 8.937* ln E t lno t 8.209** ** 0.003** ln K t 0.85** 8.006** 9.65** 35.68** ln L t ** ** Upper-Mddle-Income Panel lny t * ** 43.54** ** ln E t ** * lno t 3.74** 8.907** ** ** ln K t ** ** 4.24* 5.7** ** ln L t ** Hgh-Income Panel 26

28 lny t 6.438** ** ** ln E t 52.97** 5.4* ** ** lno t.66* ** * ln K t ** 0.058* ln L t ** OECD lny t 9.95** ** 0.055* ln E t.924** 25.09** 56.49** ** lno t * ln K t ln L t ** ** Non-OECD lny t 30.09** 9.082** * ln E t ** lno t 7.426** ** 0.045* ln K t 4.90** ** 73.25* ** ln L t East Asa & Pacfc lny t 7.5**.864** ** 0.000** ln E t ** ** ** lno t ** * ln K t * 6.936* ln L t * Europe & Central Asa lny t.55* ** * ln E t ** ** lno t ** * ln K t 8.564** 89.03** * 0.097* ln L t ** 23.0** Latn Amerca & Carbbean lny t 2.097** 7.869** * ln E t 4.927* ** lno t 3.90** ** ln K t 6.07** * ln L t * Mddle East& North Afrca lny t ** ** 5.84* ln E t ** lno t ** 0.009** ln K t 45.78** 6.085** 85.49* * ** 27

29 ln L t North Amerca lny t ** 2.63** * ln E t * lno t ln K t * ln L t South Asa lny t 77.02** 3.98* ** ln E t ** ** lno t ** * * ln K t * 0.00 ln L t Sub-Saharan Afrca lny t ** 0.708** 0.09 ln E t lno t ** 9.057** ** * ln K t ** 8.03** ln L t * Note:** and *ndcate sgnfcance at % and 5%, respectvely. The short-run and long-run causalty results obtaned by the Pool Mean Group (PMG) test are reported n Table-4. In the long run, we note that the feedback effect between electrcty consumpton and economc growth s vald for the full paneland for the upper-mddle ncome, hgh ncome, OECD, East Asa & Pacfc and Europe & Central Asa categores. Ths emprcal evdence s smlar to that of Ho and Su (2007) and Yuan et al. (2008). The bdrectonal relatonshp specfes that hgh economc growth stmulates ndustral development and household lvng standards, whch leads to an ncrease n electrcty consumpton. The undrectonal causalty from economc growth to electrcty consumpton s confrmed nthe low-mddle ncome, Mddle East & North Afrca and South Asa The long-run dynamcs are llustrated by the error correcton term (ECT) n Table5. The coeffcent of the error correcton term s sgnfcantly negatve n the low-ncome, upper-mddle-ncome, hgh-ncome, OECD, East Asa & Pacfc, Europe & Central Asa and South Asa categores. 28

30 categores. Thsemprcal evdence s consstent wth Costantn and Martn (200), Shahbaz and Ferdun (202), and Damette and Seghr (203). Electrcty consumpton as the Granger cause of economc growth s noted n North Amerca. Along smlar lnes, Mash and Mash (996), Wolde-Rufael (2005) and Alam et al. (205) also reported that economc growth s a cause of electrcty consumpton. A neutral effect s also noted n the cases of the low-mddle ncome panel, non-oecd, Latn Amerca & Carbbean and Sub-Saharan Afrca categores. The bdrectonal causalty between labor growth and energy consumpton s noted for thefull paneland for the upper-mddle ncome, hgh-ncome, OECD, East Asa & Pacfc, Mddle East & North Afrca and South Asa categores. Labor growth s the Granger cause of energy consumpton n the low-mddle ncome paneland n the Non-OECD, Latn Amerca & Carbbean, North Amerca and Sub-Saharan Afrca categores. Captalzaton causes electrcty consumpton, and thus, electrcty consumpton causes economc growth n the upper-mddle ncome, hgh-ncome, Europe & Central Asa and the Mddle East & North Afrca categores. Electrcty consumpton s a cause of captalzaton n the full panel as well as n the low-ncome, East Asa & Pacfc, Europe & Central Asa and South Asa categores. In the case of the non-oecd, Latn Amerca & Carbbean, and North Amerca categores, we fnd that electrcty consumpton causes captalzaton. In the short run, a feedback effect exsts between ol prce, electrcty consumpton and economc growth n the full panel and n low-mddle ncome, non-oecd, Latn Amerca & Carbbean and South Asan countres. The undrectonal causalty s found from ol prce to economc growth n the low-ncome, East Asa &Pacfc and North Amerca categores, whle economc growth nfluences ol prce n upper-mddle ncome, hgh ncome, OECD, European & Central Asan and Sub-Saharan countres. A neutral effect between ol prce and economc growth s also noted n the Mddle East & North Afrca. In 204, Colomba, 29

31 Venezuela and Ecuador experenced a declne n economc growth due to the fall n ol prce. Meanwhle, Mexco, Brazl, and Argentna experenced moderate economc growth. The Internatonal Monetary Fund (IMF) estmated that Latn Amerca reacts n a mostly neutral manner, wth no net gan from rsng or declnng ol prce. Captal formaton and labor force show a bdrectonal relatonshp wth economc growth n the full sample, whereas the subgroup level depcts dfferent fndngs. To examne the robustness of the PMG Granger causalty test, we have appled the heterogeneous panel causalty test. The results are reported n Table-5. We fnd that n the full sample panel, electrcty consumpton and economc growth have a confrmed bdrectonal causalty relatonshp. However, a undrectonal causal relatonshp exsts from economc growth to ol prce. These results also confrm the sgnfcant role of electrcty consumpton over ol prce for the economy. A feedback effect exsts between electrcty consumpton and economc growth for the low-ncome, upper-mddle-ncome, hgh-ncome, non-oecd, East Asa & Pacfc, Latn Amerca & Carbbean, Mddle East & North Afrca, South Asa and Sub-Saharan Afrca categores. Ths feedback effect ndcates that a reducton n electrcty supply wll retard economc growth, and thus, a declne n economc growth wll reduce electrcty demand. The emprcal evdence supports the mplementaton of energyexplorng polces to mantan economc development for the long run. The emprcal evdence for the bdrectonal causal assocaton between electrcty consumpton and economc growth s smlar to that ofho and Su (2007), Behmr and Manso (203), and Almulal and Sab (202). Economc growth s the Granger cause of electrcty consumpton n the case of OECD, whle the case of Europe & Central Asa reveals the mportance of consstent electrcty supply for long-run economc growth. The undrectonal causalty from electrcty consumpton to economc growth s consstent wth Narayan and Sngh (2007), 30