University of Ghana Department of Economics
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University of Ghana http://ugspace.ug.edu.gh UNIVERSITY OF GHANA DEPARTMENT OF ECONOMICS ENERGY CONSUMPTION AND ECONOMIC GROWTH: EVIDENCE FROM THE WEST AFRICAN SUB-REGION BY KWAME SUMAILA IDDRISU (10348016) THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL ECONOMICS DEGREE JULY, 2017 University of Ghana http://ugspace.ug.edu.gh DECLARATION This is to certify that I, KWAME SUMAILA IDDRISU have undertaken this research on my own and that to the best of my knowledge, this work does not contain without due reference in the text any information previously published or submitted in any other institution for the reward of a degree. STUDENT ………………………………………… KWAME SUMAILA IDDRISU (10348016) ...………………………………………. DATE SUPERVISORS …………………………………………… ………………………………….. DR. DANIEL KWABENA TWEREFOU DR. WILLIAM BEKOE DEPARTMENT OF ECONOMICS DEPARTMENT OF ECONOMICS UNIVERSITY OF GHANA UNIVERSITY OF GHANA …………………………………….. ………………………………….. DATE DATE ii University of Ghana http://ugspace.ug.edu.gh DEDICATION This thesis is dedicated to my mum Mrs. Janet Korantengmaa for her immense support throughout the years. I would also like to dedicate to my family and every individual who contributed in diverse ways to making this study a reality. iii University of Ghana http://ugspace.ug.edu.gh ACKNOWLEDGEMENT I cannot proceed with my acknowledgements without first recognizing the one who gives breath to every human being, God. For this reason, my first acknowledgement goes to God for without Him and the life He gives, it would not have been possible to undertake this study. Having done that, I also desire to extend my sincere gratitude to my supervisors Dr. Daniel Twerefou and Dr. William Bekoe for their guidance, advice and suggestions. Your contribution made this work a reality and I am very much grateful for your time and effort. I would also like to appreciate the contribution of my family through their encouragement and prayers. I can never forget the efforts of my mother towards the successful completion of my Master of Philosophy program. I am very grateful for your sacrifices. Finally, to every individual who contributed in one or the other to the successful completion of this study, I am very much grateful for your effort. I pray the almighty God replenish whatever you may have lost. iv University of Ghana http://ugspace.ug.edu.gh ABSTRACT The availability of reliable energy supply to meet the exigency of the growing population in West Africa is important in achieving sustainable development and reducing poverty in the continent. Diverse studies have sought to examine the link between energy consumption and growth. However, the consensus with reference to the causal link if any between energy consumption and growth is not explicit. Conflicting conclusions have been espoused on the energy-growth nexus and this has necessitated this study. In this study, we employ panel cointegration and granger causality to examine the relationship between energy consumption disaggregated into total energy consumption, petroleum consumption and electricity consumption for seventeen West African countries for the period 1990 to 2013. The study finds that in the short run, there is no causal relationship running from total energy consumption, electricity consumption and petroleum consumption to growth and from growth to total energy consumption. However, in the short run, the conservation hypothesis is established as there is a unidirectional relationship running from growth to electricity consumption. As well, electricity consumption has a significant effect on petroleum consumption. In the long run, total energy consumption has a negative and significant effect on growth with electricity and petroleum consumption having a positive and significant effect on growth. Also, in the long run, there is no causal relationship among the variables. The study therefore recommends that policies that will enhance access to electricity are implemented. v University of Ghana http://ugspace.ug.edu.gh TABLE OF CONTENTS CONTENT PAGE DECLARATION ……………………………………………………………………. ii DEDICATION……………………………………………………………………….. iii ACKNOWLEDGEMENT…………………………………………………………… iv ABSTRACT…………………………………………………………………………… v TABLE OF CONTENTS……………………………………………………………... vi LIST OF TABLES……………………………………………………………………. xii LIST OF FIGURES…………………………………………………………………... xiii LIST OF ABBREVIATIONS………………………………………………………... xv CHAPTER ONE ……………………………………………………………………..... 1 INTRODUCTION………………………………………………………………………. 1 1.1 Background to the study……………………………………………………………... 1 1.2 Statement of problem………………………………………………………………... 4 1.3 Research Questions………………………………………………………………….. 7 1.4 Research objectives………………………………………………………………….. 7 vi University of Ghana http://ugspace.ug.edu.gh 1.5 Justification of the study……………………………………………………………. 8 1.6 Scope of study…………..……………………………………………………………9 1.7 Organization of the study…………………………………………………………….10 CHAPTER TWO……………………………………………………………………… 11 OVERVIEW……………………………………………………………………………. 11 2.0 Introduction…………………………………………………………………………. 11 2.1 Sources of energy in Africa………………………………………………………….11 2.2 Overview of the Energy sector in Africa…………………………………………….12 2.3 Energy consumption mix in selected West African countries……………………….16 2.3.1 Energy consumption mix in Benin…………………………………………………16 2.3.2 Energy consumption mix in Burkina Faso………………………………………….19 2.3.3 Energy consumption mix in Cote d’Ivoire………………………………………….21 2.3.4 Energy consumption mix in Ghana…………………………………………………23 2.3.5. Energy consumption mix in Nigeria………………………………………………..26 2.4 The West African economy……………………………………………………………29 2.5 Analysis of standard of living in West Africa…………………………………………32 vii University of Ghana http://ugspace.ug.edu.gh 2.6. Relationship between energy consumption and economic growth in some selected West African countries……………………………………………33 2.7 Conclusion………………………………………………………………………………..36 CHAPTER THREE…………………………………………………………………………38 LITERATURE REVIEW……………………………………………………………………..38 3.0 Introduction………………………………………………………………………………..38 3.1 Theories of growth………………………………………………………………………...38 3.1.1 The basic growth model………………………………………………………………....38 3.1.2 Endogenous technical change……………………………………………………………40 3.1.3 Growth models with natural resources…………………………………………………...41 3.2. Critique and alternative views……………………………………………………………..43 3.2.1 Ecological economists and Mainstream Views on Growth………………………………43 3.2.2 Limits to substitution……………………………………………………………………..44 3.2.3 Limits to technological change……………………………………………………………45 3.3 Factors influencing the relationship between energy and growth…………………………. 45 3.3.1. Relationship between energy and capital: substitution and complementarity……………46 viii University of Ghana http://ugspace.ug.edu.gh 3.3.2. Innovation and energy efficiency………………………………………………………..46 3.3.3 Energy quality and changes in the constituents of energy input…………………………47 3.3.4 Shifts in the composition of output……………………………………………………….47 3.4 Review of the empirical literature…………………………………………………………..48 3.5 Conclusion…………………………………………………………………………………..54 CHAPTER FOUR……………………………………………………………………………...55 METHODOLOGY………………………………………………………………………………55 4.0 Introduction…………………………………………………………………………………..55 4.1 Theoretical framework……………………………………………………………………….55 4.2 The Empirical Model………………………………………………………………………...61 4.3 Estimation Technique………………………………………………………………………. 63 4.3.1 Panel Granger causality test……………………………………………………………….65 4.3.2 Testing for Unit Roots in a Panel Context…………………………………………………66 4.3.2.1 Levin, Lin and Chu Panel Unit root test…………………………………………………67 4.3.2.2 Im, Pesaran and Shin Panel unit root test………………………………………………..68 4.3.3 Panel Cointegration………………………………………………………………………..69 4.3.3.1 Kao residual based test…………………………………………………………………..70 4.3.3.2 Pedroni (1999) Cointegration test………………………………………………………..71 ix University of Ghana http://ugspace.ug.edu.gh 4.4 Estimating the long run relationship………………………………………………………..72 4.5 Testing for causality………………………………………………………………………...74 4.6 Description of variables...……………………………………………………………………75 4.7 Source of data……………………………………………………………………………….76 4.8 Conclusion…………………………………………………………………………………..76 CHAPTER FIVE……………………………………………………………………………….78 DISCUSSION OF RESULTS…………………………………………………………………...78 5.0 Introduction…………………………………………………………………………………..78 5.1 Descriptive statistics of variables…………………………………………………………….79 5.2 Panel unit root test…………………………………………………………………………...80 5.3 Panel Cointegration results…………………………………………………………………..83 5.3.1 Pedroni Panel Cointegration test (GDP, Electricity consumption and petroleum consumption)…………………………………………………………………….85 5.4 Estimating the long run Relationship………………………………………………………...87 5.5 Short run analysis and policy implications…………………………………………………..94 5.6 Summary of Main findings...………………………………………………………………...99 x University of Ghana http://ugspace.ug.edu.gh CHAPTER SIX………………………………………………………………………………101 CONCLUSION AND RECOMMENDATIONS……………………………..........................101 6.0 Introduction………………………………………………………………………………..101 6.1 Conclusion………………..……..…………………………………………………………101 6.2 Recommendations of the study…………………………………………………………….103 6.3 Area for further study………………………………………….……………………………105 REFERENCES….……………………………………………………………………………...106 APPENDICES………………………………………………………………………………….120 xi University of Ghana http://ugspace.ug.edu.gh LIST OF TABLES Table Page Table 5.1: Descriptive statistics of variables employed………………………………….79 Table 5.2: Levin, Lin & Chu Panel Unit root test………………………………………...80