An Empirical Analysis of Multivariate Causality Between Electricity Consumption, Economic Growth and Foreign Aid: Evidence from Bangladesh
The Journal of Developing Areas, Vol. 51, No. 2, Spring 2017, pp. 369-380
Posted: 27 Nov 2017
Date Written: 2017
The indispensable role of electricity in expediting the process of industrialization leading to economic development, of developing nations in particular, cannot be questioned. Thus, researchers and policy makers all around the globe have endeavored themselves in identifying the contribution of electricity consumption in spawning economic growth of a nation. Furthermore, energy is also acknowledged as a key factor in attainment of the Social Development Goals (SDGs).Besides, it is globally acclaimed that foreign aid plays a direct role in attributing to economic growth of the recipient nation, while it also plays an indirect growth-role via enhancing electricity generations. The aim of this paper is to investigate the causal relationships between electricity consumption, economic growth and foreign aid inflow in Bangladesh incorporating relevant data from 1980 to 2013. Augmented Dickey Fuller (ADF) unit root test was used to test the stationarity of all the concerned variables. Johansen cointegration test is then employed to determine the long run relationships between the variables. Moreover, using Granger causality test, we observe various long run causal relationships between the variables while the Vector Error-Correction Model (VECM) approach provides the short run causalities. Results from the ADF test confirms that all our variables are stationary at their first differences, I (1) which eliminated the possibility of our regression being spurious. The Johansen cointegration test results provide evidence suggesting the existence of long run associations between the concerned variables. Moreover, results from the Granger causality test reveals a unidirectional causality running from electricity consumption to economic growth in Bangladesh in the long run. In addition, the VECM approach findings also confirm the unidirectional causality running from electricity consumption to economic growth in the short run as well. Thus, the ‘growth hypothesis’ is found to be valid in context of Bangladesh. As electricity consumption is found to be influencing the growth of the economy, it is recommended that Bangladesh ensures its energy security through effective energy diversification policies that are in line with the global trends in energy transition. Besides, the government can also consider its option to engage in Cross-Border Electricity Trade (CBET) with regional countries.
Keywords: causality, electricity consumption, foreign aid, economic growth
JEL Classification: C22, F18, F21, F31, F35, O24
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