Energy Consumption and Four Growth Hypotheses: an Evidence From Saarc Nations

Abstract

The contemporaneous study investigates the directional relationship between economic growth and energy consumption for four selected SAARC nations from 1990 to 2018 within a panel-data framework. In the empirical literature, conservation, growth, feedback, and neutral hypotheses exist between energy and economic growth. First, study implies a Granger causality test to find the short-run directional relationship. Secondly, it checks the order of panel unit root that is a prerequisite condition for cointegration particularly when we have a long panel.  In the end, based on panel unit root, the study estimates the model with the help of FMOLS to find a long-run relationship. The present study explores the conservation hypothesis in the short run at the regional level for Bangladesh and Pakistan. While the feedback hypothesis and neutral hypothesis exist in case of India and Sri-Lanka respectively. On the other hand, in the long run, there is cointegration between economic growth and energy use, while the direction conforms to the feedback hypothesis in our panel after allowing heterogeneous cross-sectional effect. Thus, energy and economic growth are coupled with each other in the long run at a regional level whereas, energy as a factor of the production process does not contribute significantly in the short run. It is because this region is labour abundant, therefore, the share of energy is significantly low in the final output as compared to developed nations. Consequently, the availability of energy at affordable prices truly matters for developing nations of SAARC.