The Energy, Economic Growth, Urbanization Nexus across Development: Evidence from Heterogeneous Panel Estimates Robust to Cross-Sectional Dependence

Abstract

This paper combines two aggregate production function models — one with urbanization as a shift factor and one that includes energy/electricity consumption and physical capital — to estimate the macro-level relationship among urbanization, energy/electricity consumption, and economic growth using a panel method that is robust to both cointegration and cross-sectional dependence. For four panels (comprising in turn high, upper middle, lower middle, and low income countries) GDP per capita, total final energy and electricity consumption per capita, gross fixed capital formation per capita, and urbanization were found to be I(1), cross-sectionally dependent, and cointegrated. The long-run elasticity estimates suggest (i) that urbanization is important to and associated with economic growth, (ii) that urbanization’s impact on economic growth ranges from substantially negative to nearly neutral to positive as countries develop — an “urbanization ladder” effect, and (iii) that less developed countries are over-urbanized (their elasticities being negative).

Keywords: energy/electricity consumption and economic growth, panel cointegration, cross-section dependence, urbanization and economic growth, environment and development

JEL Classification: C33, O1, O40, Q43, R10