CHAPTER ONE: INTRODUCTION
1.1 Background of the study
Energy is the essential material resources for economic growth and development and for human existence. Economic growth is among the most key factors to be measured in projecting deviations in world energy consumption. The effect of energy consumption on economic growth has attracted the interests of policymakers and economists in recent times. According to Erbaykal (2008), the oil crisis in the 1970s displayed the importance of energy as a production factor. Energy has come up as a production factor in addition to capital and labor, since the oil crisis.
The BRICS countries (Brazil, Russia, India, China, and South Africa) are acknowledged as the most developed economies from emerging countries. In recent years, the world energy consumption has rapidly increased driven by the slowing but a still dynamic increase in energy consumption in BRICS Enerdata (2014). For example, China embodied approximately 22% of the global energy consumption with Brazil lifting its world rankings to eight largest energy consumers. It was revealed that in 2013 BRICS validated their increasing dominant role in the new global energy landscape with a share of approximately 40% compared to the 20% it experienced in 2000 Enerdata (2014). The BRICS countries are likely to remain the main drivers of growth in the world economy by 2030, as they have become an important force of the world economic stage. In 2009, BRICS states accounted 31.6% of total global electricity consumption. In addition, the demand for electricity in BRICS accounted 65% of global increase. During 2000-2009, the demand for electricity in BRICS grew at an average of 75%. In China alone, the electricity sector grew at an average of 11.6% per annum during the same period. BRICS economies have attended amazing economic growth over the past three decades; to date, these economies account for 21% of world GDP, 40% of energy consumption, and hold more than 40% of world population. According to British Petroleum (BP) (2017), primary energy consumption has increased by 1% in 2016, after the growth of 0.9% in 2015.
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1.2 Significance of the study
Energy is one of the essential components for social and economic development of a nation and is closely linked to sustainable development. The study is primarily an academic requirement and seeks to analyze the energy consumption on economic growth among BRICS countries. It is important to investigate and analyze the nexus between energy consumption and economic growth of the BRICS countries.
The reason why it is important to investigate the linkage between energy consumption and economic growth is straightforward: the implementation of economically efficient energy policies and the prediction of the impacts of various energy and economic policies requires an understanding of which these variables causes the other. According to Karanfil (2009) at the present it is quite difficult to summarize the status of our knowledge regarding this causal linkage.
This study contributes by employing the latest time series data and methodology, for instance, the Levin, Lin, and Chu test, Im, Pesaran, and Shin test, ADF Fisher Chi-Square, and PP Fisher Chi-Square tests are employed to determine the order of integration. Kao and Johansen panel tests are adapted to determine the co-integration among the variables. FMOLS and DOLS models have been employed to check the robustness of the results. Second, the specific analysis for prominent five emerging economies BRICS, to the best of our knowledge no study has studied incorporating agricultural growth and fossil fuels. Finally, it utilizes recent panel techniques that allow for the heterogeneous unobserved parameters and cross-sectional dependence. The estimation techniques of time series used by previous studies have to capture the true dependency of connection between energy consumption and economic growth. The failure of these time series driven co-integration techniques may misguide policymakers and governments officials of high energy consuming countries, especially at the time of energy and economic growth policy making. This study is complementary to previous empirical studies but differs from existing literature by including industry to discover the causal nexus between energy consumption and economic growth in BRICS economies. This study adds to qualitative and quantitative information regarding the impact of energy consumption on economic growth of BRICS countries.
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CHAPTER TWO: REVIEW OF LITERATURE
2.1 Introduction
Energy availability and consumption play a crucial role in the process of economic growth Chima (2007). The linkage between energy consumption and economic growth is a well-studied research topic in economics. There are a number of studies carried out in the past which investigated the empirical linkage between these two variables. However, these studies differ in methodology according to different a country, data used, and study periods. This chapter is pertaining to the papers that investigated the linkage between energy consumption and economic growth and related studies using panel tests.
The pioneering first generation study of the linkage between energy consumption and economic growth was presented by Kraft and Kraft (1978). However, the direction of causality between energy consumption and economic growth remained divisive.
For instance, Wolde-Rufael (2006) found a unidirectional causality running from economic growth to electricity consumption in five African countries, whereas bidirectional causality was found for two countries and no causality evidence for seven African countries.
kinlo (2008) employed the bounds co-integration test to investigate the long-run linkage between energy consumption and economic growth for eleven Sub-Saharan African countries (SSA). The author employed a multivariate framework which included energy consumption, gross domestic product, government expenditure, and the consumer price index. Co-integration was found in seven countries. The Granger causality tests indicated that economic growth causes energy in two countries. Bidirectional causality was found in three countries and for five countries no evidence of causality was indicated.
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2.2 Energy-Growth Nexus in BRICS Countries
Energy consumption plays a critically important role in defining the outlook for economic development. For the whole world, energy is pushing GDP growth higher. The existing energy economies literature on the energy-growth nexus provides ambiguous empirical evidence. For example, in the case of Brazil, Rodriguez-Caballero and Ventosa-Santaularia (2016) revealed that energy consumption (economic growth) leads to economic growth (energy consumption). Pao et al. (2014) investigated the relationship between energy consumption and economic growth by using a bivariate framework. They found that energy consumption adds to economic growth, but the causality analysis confirmed the presence of feedback between the two variables. In an article, Zhang (2011) presented a feedback effect between energy consumption and economic growth. In another study done by Cheng (1997) cited the trivariate relationship in the production function by including energy consumption and capital as determinants of gross domestic product. By applying error-correction modelling, the empirical results indicated a unidirectional causality running from energy use to economic growth.
In the case of Russia, Faisal et al. (2016) re-examined the connection between energy consumption (electricity consumption) and economic growth over the period from 1990-2011. After confirming co-integration between the variables, their results provide evidence of a feedback effect between electricity consumption and economic growth, also a neutral hypothesis was found between energy consumption and economic growth. Zhang (2011) investigated the connection between energy consumption and economic growth by including capital and labor as additional determinants of economic growth. The empirical analysis indicated that the two variables are co-integrated and that energy consumption leads to economic growth, and in turn, economic growth also leads to energy consumption.
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CHAPTER THREE: METHODOLOGY AND APPROACH ................................ 20
3.1 DATA AND METHODS OF ANALYSIS ....................... 20
3.2 THEORETICAL FRAMEWORK ........................ 21
3.3 ECONOMETRIC APPROACH .............................. 22
CHAPTER FOUR: EMPIRICAL RESULTS ..................................... 30
4.1 EMPIRICAL RESULTS ................................... 30
4.1.1 Panel Unit Root Test .................................... 30
4.1.2 Panel Co-integration Test .............................. 32
CHAPTER FIVE: DETERMINATS OF DISAGGREGATED ENERGY CONSUMPTION ............. 40
5.1 INTRODUCTION .............................. 40
5.2 DATA DESCRIPTION AND EMPIRICAL MODEL .........................41
CHAPTER SIX: A TRIVARIATE FRAMEWORK OF SOUTH AFRICA
6.1 Introduction
Energy plays a crucial role in the economic development of a country and is a key to achieve a solid economic, social and environmental aims of sustainable development. Policy makers and researches and economists of South Africa need to apprehend which variables among the five in question cause another. So that, the right strategies can be identified and implemented that will have a major impact on economic development. Therefore, investigating the impact of energy consumption on economic growth is crucial in explaining which variable plays a major role in the economic growth of South Africa. The association between energy consumption and economic growth is now well established in the literature, yet the direction of causality of this relationship remains controversial see Asafu-Adjaye (2000); Glasure and Lee (1997); and Masih and Masih (1997). The big question is, whether energy consumption leads to economic growth or vice versa, is still debatable.
In this case, it seems equitable to undertake studies on the relation between economic growth, energy consumption, capital, and inflation. From a theoretical point of view, these variables have a tendency to impact one another. Therefore, without a deep understanding of the direction of these variables, it will be difficult to find the most effective policies to be implemented. Then, it makes sense to investigate the causality relation between these variables to make it easier in policy making in South Africa. The direction of causality has an impact on policy implication. Few studies have focused on economic growth, electricity consumption, energy use, capital, and inflation. The nexus between energy consumption and economic growth has been widely studied over the years, using modern advances in time series econometrics of co-integration and causality. Although to the best of our knowledge few studies have been conducted about South Africa.
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CHAPTER SEVEN: CONCLUSION AND RECOMMENDATIONS
7.1 Proceedings
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