ENERGY CONSUMPTION AND ECONOMIC GROWTH IN SMALL ISLAND ECONOMIES

Nikeel Kumar; Ronald Kumar; Peter Stauvermann

doi:10.32782/10.21272/mer.2019.84.04

Nikeel Kumar University of the South Pacific, School of Accounting & Finance, Faculty of Business & Economics, Suva
Ronald Kumar University of the South Pacific, School of Accounting & Finance, Faculty of Business & Economics, Suva
Peter Stauvermann Changwon National University, Department of Global Business, Changwon

DOI: https://doi.org/10.32782/10.21272/mer.2019.84.04

Keywords: petroleum consumption, growth, ARDL bounds approach, causality, structural break, Fiji

Abstract

Petroleum is the primary source of energy used in transportation and electricity generation for many small Pacific island economies. Noting the growing demand for transportation and infrastructure services, we investigate the long-run association between petroleum consumption and output per worker in Fiji, a small island economy in the Pacific. We use a Cobb-Douglas framework and the ARDL bounds procedure with sample periods from 1980 to 2013. The results show that a 1 % increase in petroleum consumption results in 0.08 % increase in the long run economic growth. The granger non-causality results show that energy consumption causes economic growth, thus confirming energy-led growth hypothesis. The overall results underscore the need for efficient use of energy in general with the impetus to focusing on renewable energy as an important source of economic growth. We argue that energy in whichever form (renewable or non-renewable) is an integral input for economic growth for small island countries in the Pacific. Furthermore, the country is an importer and redistributor of petroleum to other neighbouring islands. The petroleum products comprise of motor gasoline, jet fuel, kerosene, distillate fuel oil, residual fuel oil, and liquefied petroleum gases (LPG). The operations of airlines, ferries, cruise liners and other types of transportation are linked with tourism industry and heavily rely on petroleum. Also, petroleum is used for generating electricity, and the usage increases during the hot and dry season to support the hydro power plants. Considering Fiji as a reference and petroleum as a major type of energy, the study examines the relationship between energy and economic growth, whilst accounting for capital and labour stock, and structural breaks. This study aims to provide impetus to efficient use and management of energy in the Pacific with the overarching aim to promote economic growth and fostering policies to gradually phase out non-renewable energy sources.

References

Abosedra S., & Baghestani, H. (1989). New evidence on the causal relationship between United States energy consumption and gross national product. Journal of Energy and Development, 14, 285–292.

Abosedra, S., Dah, A., & Ghosh, S. (2009) Electricity consumption and economic growth, the case of Lebanon. Applied Energy, 86(4), 429–432.

Acaravci, A., & Erdogan, S. (2016). The Convergence Behavior of CO2 Emissions in Seven Regions under Multiple Structural Breaks. International Journal of Energy Economics and Policy, 6(3), 575–580.

Akarca, A. T., & Long, T. V. (1980). On the relationship between energy and GNPP: A re- examination. Journal of Energy and Development, 5, 326–331.

Akinlo, A. E. (2009). Electricity consumption and economic growth in Nigeria: Evidence from cointegration and co-feature analysis. Journal of Policy Modelling, 331(5), 681–693.

Al-Mulali, U., & Saboori, B., & Ozturk, I. (2014). Investigating the environmental Kuznets curve hypothesis in Vietnam. Energy Policy, 76, 123–131.

Al‐Mulali, U., Solarin, S. A., & Ozturk, I. (2016). Biofuel energy consumption‐economic growth relationship: an empirical investigation of Brazil. Biofuels, Bioproducts and Biorefining, 10(6), 753–775.

Alper, A., & Oguz, O. (2016). The role of renewable energy consumption in economic growth: Evidence from asymmetric causality. Renewable and Sustainable Energy Reviews, 60, 953–959.

Altinay, G., & Karagol, E. (2004). Structural break, unit root, and the causality between energy consumption and GDP in Turkey. Energy Economics, 26, 9855–994.

Altinay, G., & Karagol, E. (2005). Electricity consumption and economic growth: Evidence from Turkey. Energy Economics, 27(6), 849–856.

Apergis, N., Chang, T., Gupta, R., & Ziramba, E. (2016). Hydroelectricity consumption and economic growth nexus: Evidence from a panel of ten largest hydroelectricity consumers. Renewable and Sustainable Energy Reviews, 62, 318–325.

Asafu-Adjaye, J. (2000). The relationship between energy consumption, energy prices and economic growth: Time series evidence from Asian developing countries. Energy Economics, 22, 615–625.

Azam, M., Khan, A. Q., Bakhtyar, B., & Emirullah, C. (2015). The causal relationship between energy consumption and economic growth in the ASEAN-5 countries. Renewable and Sustainable Energy Reviews, 47, 732–745.

Bhattacharya, M., Paramati, S. R., Ozturk, I., & Bhattacharya, S. (2016). The effect of renewable energy consumption on economic growth: Evidence from top 38 countries. Applied Energy, 162, 733–741.

Bhattacharya, M., Rafiq, S., & Bhattacharya, S. (2015). The role of technology on the dynamics of coal consumption–economic growth: New evidence from China. Applied Energy, 154, 686– 695.

Bildirici, M. (2012). The relationship between economic growth and biomass energy consumption. Journal of Renewable Sustainable Energy, 4(2). Retrieved : http://dx.doi.org/10.1063/1.3699617.

Bildirici, M. (2013). Economic growth and Biomass energy. Biomass Bioenergy, 50, 19–24.

Bildirici, M., & Ozakskoy, F. (2013). The relationship between economic growth and biomass energy consumption in some European countries. Journal of Renewable Sustainable Energy, 5(2), 1–9. Retrieved : http://dx.doi.org/10.1063/1.4802944.

Bloch, H., Rafiq, S., & Salim, R. (2015). Economic growth with coal, oil and renewable energy consumption in China: Prospects for fuel substitution. Economic Modelling, 44, 104–115.

Bowden, N., & Payne, J. E. (2009). The causal relationship between US energy consumption and real output: a disaggregated analysis. Journal of Policy Modelling, 31, 180–188.

Bowden, N., & Payne, J. E. (2010). Sectoral analysis of the causal relationship between renewable and non-renewable energy consumption and real output in the US. Energy Sources Part B: Economics, Planning, and Policy, 5, 400–408.

Carmona, M., Congregado, E., Feria, J., & Iglesias, J. (2017). The energy-growth nexus reconsidered: persistence and causality. Renewable and Sustainable Energy Reviews, 71, 342– 347.

Central Intelligence Agency (CIA). (2015) Australia-Oceania: Fiji. World Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/fj.htm. Retrieved: August 17, 2015.

Cheung, Y. W., & Lai, K. S. (1995). Practitioners corner: Lag order and critical values of a modified Dickey-Fuller test. Oxford Bulletin of Economics and Statistics, 57, 411–419.

Dogan, E. (2016). Analyzing the linkage between renewable and non-renewable energy consumption and economic growth by considering structural break in time-series data. Renewable Energy, 99, 1126–1136.

Dornan, M. (2014a). Access to electricity in small island developing states of the Pacific: Issues and challenges. Renewable and Sustainable Energy Reviews, 31, 726–735.

Dornan, M. (2014b). Reform despite Politics? The political economy of power sector reform in Fiji, 1996–2013. Energy Policy, 67, 703–712.

Dornan, M., & Jotzo, F. (2015). Renewable technologies and risk mitigation in small island developing states: Fiji’s electricity sector. Renewable and Sustainable Energy Reviews, 48, 35– 48.

EIA. (2015). International energy statistics. http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm. Retrieved: August 5, 2015.

Erol, U., & Yu, E. S. H. (1987). On the causal relationship between energy and income for industrialized countries. Journal of Energy and Development, 13, 113–122.

Ertur, C., & Koch, W. (2007). Growth, technological interdependence and spatial externalities: Theory and evidence. Journal of Applied Econometrics, 22(6), 1033–1062.

Fang, Z., & Chang, Y. (2016). Energy, human capital and economic growth in Asia Pacific countries-Evidence from a panel cointegration and causality analysis. Energy Economics, 56, 177–184.

Ghali, K. H., & El-Sakka, M. I. T. (2004). Energy use and output growth in Canada: A multivariate cointegration analysis. Energy Economics, 26, 225–238.

Ghatak, S., & Siddiki, J. (2001). The use of ARDL approach in estimating virtual exchange rates in India. Journal of Applied Statistics, 28, 225–583.

Ghosh, S. (2002). Electricity consumption and economic growth in India. Energy Policy, 30(2), 125–129.

Glasure, Y. U., & Lee, A-R. (1998). Cointegration, error-correction, and the relationship between GDP and energy: the case of South Korea and Singapore. Resource and Energy Economics, 20, 17–25.

Gollin, D. (2002). Getting income shares right. Journal of Political Economy, 110(2), 458–474.

Hamit-Haggar, M. (2016). Clean energy-growth nexus in sub-Saharan Africa: Evidence from cross-sectionally dependent heterogeneous panel with structural breaks. Renewable and Sustainable Energy Reviews, 57, 1237–1244.

Hondroyiannis G., Lolos, S., & Papapetrou, E. (2002). Energy consumption and economic growth: Assessing the evidence from Greece. Energy Economics, 24, 319–336.

Hwang, D. B. K., & Gum, B. (1992). The causal relationship between energy and GNP: The case of Taiwan. Journal of Energy and Development, 16, 219–226.

IRENA(2012). Country Profiles. www.irena.org/DocumentDownloads/Publications/Country_profiles_special_edition-islands.pdf. Retrieved: August 5, 2015.

Isaka, M., Mofor, L., & Wade, H. (2013). Pacific lighthouses renewable energy opportunities and challenges in the Pacific Islands region. International Renewable Energy Agency (IRENA), Abu Dhabi, United Arab Emirates. https://www.irena.org/DocumentDownloads/Publications/Fiji.pdf. Retrieved : August 5, 2015.

Kahia, M., Aïssa, M. S. B., & Lanouar, C. (2017). Renewable and non-renewable energy use- economic growth nexus: The case of MENA Net Oil Importing Countries. Renewable and Sustainable Energy Reviews, 71, 127–140.

Kraft, J., & Kraft, A. (1978). On the relationship between energy and GNP. Journal of Energy and Development, 3, 401–403.

Kumar, R. R., Stauvermann, P. J., & Patel, A. (2015b). Nexus between electricity consumption and economic growth: a study of Gibraltar. Economic Change and Restructuring, 48(2), 119–135.

Kumar, R. R., & Kumar, R. (2013) Effects of energy consumption on per worker output: A study of Kenya and South Africa. Energy Policy, 62, 1167–1193.

Kumar, R. R., Stauvermann, P. J., Loganathan, N., Kumar, R. D. (2015a). Exploring the role of energy, trade and financial development in explaining economic growth in South Africa: A revisit. Renewable and Sustainable Energy Reviews, 52, 1300–1311.

Kumar, R. R., Stauvermann, P. J., Patel, A., & Kumar, R. D. (2014). Exploring the effects of energy consumption on output per worker: a study of Albania, Bulgaria, Hungary and Romania. Energy Policy, 69, 575–585.

Kwiatkowski, D., Phillips, P. C. B, Schmidt P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54, 159–178.

Lal R (2015). FEA details the $1.5bn renewable energy projects. Fiji Sun Online, April 11. ://fijisun.com.fj/2015/04/11/fea-details-the-1-5bn-renewable-energy-projects/. Retrieved: 13 May, 2015.

Lee, C. C. (2005). Energy consumption and GDP in developing countries: A cointegrated panel analysis. Energy Economics, 27, 415–427.

Lee, C. C. (2006). The causality relationship between energy consumption and GDP in G-11 countries revisited. Energy Policy, 34, 1086–1093.

Mackinnon, J. G. (1996) Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11, 601–618.

Mala, K., Schläpfer, A., & Pryor, T. (2008). Solar photovoltaic (PV) on atolls: Sustainable development of rural and remote communities in Kiribati. Renewable and Sustainable Energy Reviews, 12, 1345–1363.

Masih, A., & Masih, R. (1996). Energy consumption, real income and temporal causality: results from a multi-country study based on cointegration and error-correction modelling techniques. Energy Economics, 18, 165–183.

Menyah, K., & Rufael, Y. W. (2010). CO2 emissions, nuclear energy, renewable energy and economic growth in the US. Energy Policy, 38, 2911–2915.

Mezghani, I., & Haddad, H. B. (2017). Energy consumption and economic growth: An empirical study of the electricity consumption in Saudi Arabia. Renewable and Sustainable Energy Reviews, 75, 145–156.

Mishra, V., Smyth, R., and Sharma, S. (2009) The energy-GDP nexus: Evidence from a panel of Pacific Island countries, Resource and Energy Economics, Volume 31, Issue 3, 210–220.

Narayan, P. K. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Applied Economics, 37, 1979–1990.

Narayan, P. K., & Smyth, R. (2005). Electricity consumption, employment and real income in Australia: Evidence from multivariate granger causality tests. Energy Policy, 33, 1109–1116.

Ng, S., & Perron, P. (1995). Unit root tests in ARMA models with data dependent methods for the selection of the truncation lag. Journal of the American Statistical Association, 90, 268–281.

Niles, K. Y., & Lloyd, B. (2013). Small Islands Developing States (SIDS) & energy aid: Impacts on the energy sector in the Caribbean and Pacific. Energy for Sustainable Development, 17, 521– 530.

Odhiambo, N. M. (2009). Energy consumption and economic growth nexus in Tanzania: An ARDL bounds testing approach. Energy Policy, 37, 617–622.

Oh, W., & Lee, K. (2004a) Energy consumption and economic growth in Korea: Testing the causality relation. Journal of Policy Modelling, 26, 973–981.

Oh, W., & Lee, K. (2004b). Causal relationship between energy consumption and GDP revisited: The case of Korea 1970-1999. Energy Economics, 26, 51–59.

Omri, A., Mabrouk, N. B., & Sassi-Tmar, A. (2015). Modeling the causal linkages between nuclear energy, renewable energy and economic growth in developed and developing countries. Renewable and Sustainable Energy Reviews, 42, 1012–1022.

Ouedraogo, I. M. (2010). Electricity consumption and economic growth in Burkina Faso: A cointegration analysis. Energy Economics, 32(3), 524–531.

Payne, J. E. (2009). On the dynamics of energy consumption and output in the US. Applied Energy, 86(4), 575–577.

Payne, J. E. (2010). A survey of the electricity consumption-growth literature. Applied Energy, 87, 723–731.

Payne, J. E. (2011a). On biomass energy consumption and real output in the US. Energy Sources Part B: Economics, Planning, and Policy, 6, 47–52.

Payne, J. E. (2011b). US disaggregate fossil fuel consumption and real GDP: An empirical note. Energy Sources Part B: Economics, Planning, and Policy, 6, 63–68.

Payne, J. E., & Taylor, J. P. (2010). Nuclear energy consumption and economic growth in the US: An empirical note. Energy Sources Part B: Economics, Planning, and Policy, 5, 301–307.

Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics, 80, 355–385.

Perron, P., & Ng, S. (1996). Useful modifications to some unit root tests with dependent errors and their local asymptotic properties. The Review of Economics Studies, 63, 435–463.

Pesaran, B. & Pesaran, H. M. (1999). Microfit 4.1 interactive econometric analysis. Oxford University Press, Oxford.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289–326.

Rafindadi, A. A., & Ozturk, I. (2017). Impacts of renewable energy consumption on the German economic growth: Evidence from combined cointegration test. Renewable and Sustainable Energy Reviews, 75, 1130–1141.

Rahman, M. M., & Mamun, S. A. K. (2016). Energy use, international trade and economic growth nexus in Australia: New evidence from an extended growth model. Renewable and Sustainable Energy Reviews, 64, 806–816.

Rao, B. B. (2007). Estimating short and long-run relationships: A guide for the applied economist. Applied Economics, 39(13), 613–1625.

Rao, B. Bhaskara (2010) Time-series econometrics of growth-models: a guide for applied economists, Applied Economics, 42:1, 73–86, DOI: 10.1080/00036840701564434. Rodd, J. A. (1993). The petroleum potential of Fiji Southwest Pacific, Mineral Resources Department, Fiji, South Pacific Applied Geoscience Commission (SOPAC), Suva, Fiji. http://ict.sopac.org/VirLib/CP0002a.pdf. Retrieved : 8 August, 2016.

Rodríguez-Caballero, C. V., & Ventosa-Santaulària, D. (2017). Energy-growth long-term relationship under structural breaks. Evidence from Canada, 17 Latin American economies and the USA. Energy Economics, 61, 121–134.

Sardorsky, P. (2009). Renewable energy consumption and income in emerging economies. Energy Policy, 37, 4021–4028.

Septon, P. S. (1995). Response surface estimates of the KPSS stationary test. Economics Letters, 47(3–4), 255–261.

Shahbaz, M., Tang, C. F., & Shabbir, M. S. (2011) Electricity consumption and economic growth nexus in Portugal using cointegration and causality approaches. Energy Policy, 39, 3529–3536.

Shahbaz, M., Van Hoang, T. H., Mahalik, M. K., & Roubaud, D. (2017). Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis. Energy Economics, 63, 199–212.

Shiu, A., & Lam, P-L (2004) Electricity consumption and economic growth in China. Energy Policy, 31(1), 47–54.

Soytas, U., & Sari, R. (2003). Energy consumption and GDP: Causality relationship in G-7 countries and emerging markets. Energy Economics, 25, 33–37.

Stauvermann, P. J., & Kumar, S. (2009). Can the Fijian economy be saved by ethanol production? Pacific Economic Bulletin, 24(3), 92–100.

Stern, D. I. (1993). Energy and economic growth in the USA: A multivariate approach. Energy Economics, 15, 137–150.

Stern, D. I. (2000). A multivariate cointegration analysis of the role of energy in the US macroeconomy. Energy Economics, 22, 267–283.

Stock, J. H. (1999). A class of tests for integration and cointegration, In: Engle, R. F., & White, H. (Eds), Cointegration, Causality and Forecasting. A Festschrift in Honour of Clive W.J. Granger. Oxford University Press, 33–37.

Sturm, J-R. (1998). Public capital expenditure in OECD Countries: The causes and impact of the decline of public capital spending. Edgar Elgar, Cheltenham.

Tang, C. F. (2008). A re-examination of the relationship between electricity consumption and growth in Malaysia. Energy Policy, 36(8), 3077–3085.

Tang, C. F., Tan, B. W., & Ozturk, I. (2016). Energy consumption and economic growth in Vietnam. Renewable and Sustainable Energy Reviews, 54, 1506–1514.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inferences in vector autoregression with possibly integrated processes. Journal of Econometrics, 66, 225–250.

Wolde-Rufael, Y. (2004). Disaggregated energy consumption and GDP, the experience of Shanghai 1952-1999. Energy Economics, 26, 69–75.

Wolde-Rufael, Y. (2006). Electricity consumption and Economic growth: A time series experience for 17 African countries. Energy Policy, 34, 1106–1114.

World Bank (2015). World development indicators. World Bank. http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#. Retrieved : August 6, 2015.

Yoo S-H, & Kwak, S-Y. (2010). Electricity consumption and economic growth in seven South American countries. Energy Policy, 38(1), 181–188.

Yoo, S-H. (2005). Electricity consumption and economic growth: Evidence from Korea. Energy Policy, 33(12), 1627–1632.

Yoo, S-H. (2006). The causal relationship between electricity consumption and economic growth in the ASEAN countries. Energy Policy, 34(18), 3573–3582.

Yoo, S-H., & Kim, Y. (2006). Electricity consumption and economic growth in Indonesia. Energy, 31(14), 2890–2899.

Yu, E. S. H., & Choi, J. Y. (1985). The causal relationship between energy and GNP: An international comparison. Journal of Energy and Development, 10, 249–272.

Yu, E. S. H., & Hwang, B. K. (1984). The relationship between energy and GNP, further results. Energy Economics, 6, 186–190.

Yuan, J., Zhao, C., Yu, S., & Hu, Z. (2007). Electricity consumption and economic growth in China: Cointegration and co-feature analysis. Energy Economics, 29(6), 1179–1191.

Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10, 251–270.