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growth in Sri Lanka

Risako Morimoto*, Chris Hope

Judge Institute of Management Studies, University of Cambridge, Cambridge CB2 1AG, UK

Abstract

Yang (Energy Econ. 22 (2000) 309) has found a bi-directional causal relationship between

gross domestic product and electricity consumption in Taiwan, ROC. This study applies

Yang’s model to examine the impact of electricity supply on economic growth in Sri Lanka.

Morimoto and Hope (An extended CBA model of hydro projects in Sri Lanka (2001)) have

found that the expected increase in economic output due to increased electricity supply

(parameter EO) plays a crucial role in their cost benefit analysis model. This study shows

that the application of Yang’s regression analysis is one possible approach to estimate a

better range for the parameter EO. The estimated figure is that an extra output of Rs. 88 000–

137 000 ($US1120–1740) for every 1 MW h increase in electricity supply.

䊚 2003 Elsevier Science B.V. All rights reserved.

1. Introduction

An adequate and regular power supply may be one of the most crucial factors,

which supports economic growth in developing countries. According to a study on

the relationship between electricity use and economic development conducted by

E-mail address: rm253@cam.ac.uk (R. Morimoto).

0140-9883/04/$ - see front matter 䊚 2003 Elsevier Science B.V. All rights reserved.

PII: S 0 1 4 0 - 9 8 8 3 Ž 0 3 . 0 0 0 3 4 - 3

78 R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85

Fig. 1. GDP and electricity demand growth rates in Sri Lanka (%).

Ferguson et al. (2000), there is a strong correlation between electricity use and

economic development.1 The Pearson correlation coefficient between growth in

annual electricity use and average annual economic growth for Sri Lanka during

the period 1971–1995 is 0.993 (Ferguson et al., 2000).2

Fig. 1 shows that there is a strong correlation between average annual growth

rates of gross domestic product (GDP) and electricity demand in Sri Lanka between

1984 and 1997 (CEB, 1999). Energy demand in Sri Lanka is mainly met by

hydropower so that electricity supply decreases severely when the country is hit by

serious droughts. This has led to a dramatic decline in its economic growth. In

particular, serious droughts in 1996 meant that Sri Lanka experienced a severe

power crisis that adversely affected the economy in 1996 (CEB, 1999). The GDP

growth rates in 1995, 1996 and 1997 are 5.45, 3.76 and 6.45%, respectively. This

evidence of the strong correlation between the growth rates of GDP and the

electricity demand in Sri Lanka enables one regression analysis that has a potential

to estimate the impact of electricity supply on economic growth to be applied. The

detail of the regression analysis applied to this particular case of Sri Lanka is

explained below.

Yang (2000) finds that there is a bi-directional causal relationship between GDP

and electricity consumption in Taiwan for the period 1954–1997. This study applies

1

Similar studies are, for example, Ramcharran (1990), Huang (1990), Mashi and Mashi (1996) and

Asafu-Adjaye (2000).

2

Their analysis uses electricity consumption in kWh as the energy use variable and GDP at purchasing

power parities in 1995 US dollars.

R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85 79

his model to examine the impact of electricity supply on economic growth in Sri

Lanka. Morimoto and Hope (2001) find that the expected increase in economic

output due to increased electricity supply (parameter EO) plays a crucial role in

their CBA (cost benefit analysis) model, which assesses the economic, social and

environmental impacts of dam projects in Sri Lanka. The model has used a mean

value of Rs. 26 000yMW h for the parameter EO, based upon an official calculation

by the Ceylon Electricity Board (CEB). This study shows that the application of

Yang’s regression analysis is also one possible approach to estimate a better range

for the parameter EO in the CBA model we have developed (Morimoto and Hope,

2001).

2.1. Methodology

Yang (2000) employs the Granger-causality test and his finding implies that

electricity shortage may have restrained economic growth in Taiwan over the study

period (1954–1997). He uses first differenced real GDP as a dependent variable,

with lagged first differenced electricity consumption and lagged first differenced

real GDP as independent variables in the model described in Eq. (1):

DGDPtsaq83is1biDGDPtyiq82is1ciDELECTtyiqut (1)

where DGDPt, first differenced real GDP in Taiwan at time t; DELECTtyi, first

difference of electricity consumption in Taiwan at time tyi and ut, error term at

time t.

Yang does not present the estimated coefficients of the equation in his article.

However, he estimates another model without DELECTtyi and obtains Akaike’s

final prediction errors (error values that are used to select appropriate independent

variables and lag specifications) for both models with and without DELECTtyi. He

finds that Akaike’s final prediction error for the equation with DELECTtyi is smaller

than the one without DELECTtyi, which accepts the hypothesis that electricity

consumption Granger-causes GDP.

Since Sri Lanka does not import or export electricity, the amounts of electricity

production and consumption are the same.3 Thus, in this article, annual electricity

production will be used instead of electricity consumption. The current electricity

consumption was not included in Yang’s model as his model was purely to

investigate the directions of the causality.4 However, according to Yang, the current

electricity consumption is included in the estimation of a production function in

research publications on Taiwanese economic growth. In the case of Sri Lanka, the

change in electricity production at time t (DELECTt) should also be included, as

3

See UN Energy Statistics Year book.

4

A time series is said to Granger-cause another time series Y if the prediction error of current Y

declines by using past values of X in addition to past values of Y.

80 R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85

GDP growth at time t seems highly dependent on electricity supply at time t (Fig.

1). Hence, the following slightly modified equation is used in this study:

DGDPtsaq83is1biDGDPtyiq82is0ciDELECTtyiqvt (2)

where DGDPt, first differenced real GDP in Sri Lanka at time t; DELECTtyi, first

difference of electricity production in Sri Lanka at time tyi and vt, error term at

time t. Eq. (2) implies that change in real GDP at time t is a function of past

changes (with yearly lags up to ty3) in real GDP and of current as well as past

changes in electricity supply (with yearly lags up to ty2).

2.2. Results

Annual data for the period 1960–1998 for real GDP (billion Rs.) and for

electricity production (million kW h) in Sri Lanka are used (Figs. 2 and 3).5

Before estimating the model, the stationarity of dependent and independent

variables are examined in order to meet the condition of using Yang’s Granger-

causality model. Although both GDP and electricity production are non-stationary,

their first differenced values are stationary according to the result from the

5

The nominal GDP is transformed into real GDP in 1998 prices using GDP deflators, which is the

same transformation method as Yang’s (2000).

R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85 81

Augmented Dickey–Fuller test for stationarity and unit roots.6 Moreover, the

cointegration test for the series of GDP and electricity production is also satisfied,

therefore the standard Granger-causality test can be applied.7

Eq. (2) is estimated by a standard ordinary least square (OLS) regression analysis

with 35 observations and the result is presented in Table 1, column 1. The value

for the model fit (adjusted R 2s70%) seems to be reasonable for this type of growth

models.8 All the coefficients of DGDPtyi are insignificant at the 5% level individ-

ually (t-tests) and simultaneously (F-test).9 Therefore, they are dropped from the

model, which is then re-estimated. The results are presented in Table 1, column 2.

All the coefficients of DELECTtyi in the model (2) are significant at the 5% level.

The result implies that current as well as past changes in electricity supply have a

significant impact on a change in real GDP. According to the specification in column

2 in Table 1, one unit change in DELECTt, DELECTtyi and DELECT ty2 separately

leads to changes in DGDPt of 38.2, 30.0 and 44.1 units, respectively. In other words,

6

The ADF test statistics show the values of 1.95 and 0.85 for the variables GDP and ELECT,

respectively, which are insignificant at the 5% level. However, the ADF test shows the values of

y4.68 and y5.97 for a first difference of GDP and ELECT, respectively, which are both significant at

the 5% level. See basic econometrics textbooks such as Greene (2000) for more details about the ADF

tests.

7

The unit root tests for residuals show the value of y2.5, which is insignificant at the 5% level.

8

Its diagnostic test also shows that there are no serial correlation or heteroscedasticity problems.

9

F-test for the null hypothesis of all the coefficients of DGDPtyi being insignificant simultaneously

shows the values of 0.72 with P value 0.56.

82 R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85

Table 1

OLS estimates of first differenced real GDP (DGDPt) in Sri Lanka for the period 1960–1998

Explanatory variables (1) Original model (2) DGDPtyi all (3) DELECTty3

eliminated added to (2)

Intercept 7072 7710 7138

(2.4)a (3.4)a (3.2)a

DGDPty1 0.15

(0.8)

DGDP ty2 y0.22

(y1.0)

DGDPty3 0.12

(0.8)

DELECTt 37.2 38.2 34.2

(4.6)a (7.2)a (5.8)a

DELECTty1 25.5 30.0 24.2

(1.8)b (4.9)a (3.4)a

DELECT ty2 46.4 44.1 37.7

(2.4)a (4.5)a (3.6)a

DELECTty3 22.0

(1.5)

Adjusted R 2 0.70 0.71 0.72

The sample size is 35. The figures in parentheses are t-values; DGDPtyi, first differenced real GDP

in Sri Lanka at time tyi; DELECTtyi , first difference of electricity production in Sri Lanka at time ty

i.

a

Significant at the 5% level.

b

Significant at the 10% level.

growth at time t of Rs. 38 200, 30 000 and 44 100, respectively. The coefficient of

DELECT ty2 is larger than the coefficients of DELECTt and DELECTty1, which is

surprising, as it is generally expected that the impact decays as time passes.

However, this result could be due to time lags in the system, so that increased

electricity supply takes some time to have its full effect on GDP growth. Yang

(2000) has also used time lags ty1 and ty2 for DELECT in his analysis, though

the comparison is unfortunately not possible, as his coefficient values were not

presented in his article.10

On the basis of the above regression result, a value for the parameter EO

(expected increase in economic output) used in the CBA model in Morimoto and

Hope (2001) can be estimated. The standard error (S.E.) for the coefficients of

DELECTt, DELECTty1 and DELECT ty2 are 5.3, 6.1 and 9.7, respectively.

Therefore, the S.E. for their sum should be w5.32q6.12q9.72x1y2s12.6 with the

10

Yang (2000) has employed the Akaike final prediction error criterion for the selection of the

appropriate lag specifications for the variable DELECT.

R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85 83

Hence, the 95% confidence interval (CI) for a joint impact of DELECTt,

DELECTty1 and DELECT ty2 is w38.2q30.0q44.1x"1.96(12.6)s88–137. Then,

the 95% CI for the parameter EO may be expressed as the range Rs. 88 000–

137 000yMW h ($1120–1740yMW h).12 This range of values is much higher than

the CEB estimation of EOsRs. 26 000yMW h ($330yMW h), used in the CBA

model in Morimoto and Hope (2001).13

The range that Morimoto and Hope (2001) used for the parameter EO was

minimumsRs. 10 000yMW h ($200yMW h), most likelysRs. 26 000yMW h

($330yMW h) and maximumsRs. 118 500yMW h ($1500yMW h), respectively.

The regression results provide some support for this range since EOsRs. 88 000–

137 000yMW h ($1120–1740yMW h), estimated in this article, overlaps this range.

However, the estimates here allow the value to be much higher. The minimum value

of Rs. 10 000yMW h, which is much lower than the minimum estimated value, now

seems hard to justify. The maximum value of Rs. 118 500yMW h is not large

enough to cover the full range of the estimated results. It is possible to expect such

large economic growth due to increased power supply as predicted by the model,

since Sri Lanka is currently facing power shortages, which may slow down the

economic growth.

The above result shows that the coefficient of DELECT ty2 has the highest value,

hence it is necessary to check whether DELECTty3 also has a significant impact on

GDP growth. Thus, DELECTty3 is added to the model in order to check its impact

on DGDP. The result shown in column 3 of Table 1 indicates that the coefficient of

DELECT ty2 is again larger than the coefficients of DELECTt and DELECTty1;

however, the coefficient of DELECTty3 is the smallest and insignificant. The 95%

CI value for the parameter EO predicted by the model with this specification is Rs.

78 000–158 000yMW h, calculated using the same procedure as above; a very

similar value to the one without DELECTty3.14

11

However, if the distributions of each coefficient are correlated, S.E. (sum of the three coefficients)s

wS.E.(c0)2qS.E.(c1 )2 qS.E.(c2 )2 q2{cov(c0 , c1 )qcov(c0 , c2 )qcov(c1 , c2)}x1y2sw5.32q6.12q9.72q

2(0.25y3.8q25.1)x1y2s14.2. This calculation is carried out by the statistical package MICROFIT.

12

The value for the S.E. for the coefficients of DELECTt, DELECTty1 and DELECTty2 are 5.3, 6.1

and 9.7, respectively. Thus, the 95% CI values are calculated as follows: CI(DELECTt)s

38.2"1.96*(5.3), CI(DELECTty1 )s30.0"1.96*(6.1), CI(DELECTty2 )s44.1"1.96*(9.7). Hence, the

95% CI values for the coefficients DELECTt , DELECTty1 and DELECTty2 are w27.8–48.6x, w18.0–

42.0x and w25.1–63.1x, respectively.

13

The UK Electricity Pool uses the even lower value of Rs. 23 000yMW h as the value of lost load

in UK. The value of outage cost to Chilean industry lies between Rs. 6080yMW h (for 10% 1-month

equiproportional restriction) and 17 380yMW h (for 30% 10-month equiproportional restriction). See

Serra and Fierro (1997) for more details. The exchange rates of £1sRs. 184 and $1sRs. 79 are used

(Central Bank of Sri Lanka, 1998).

14

(34.2q24.2q37.7q22)"1.96(5.92q7.22q10.52q15.02 )1y2 s78y158. The value for the S.E. for

the sum of the coefficients of DELECTt , DELECTty1 , DELECTty2 and DELECTty3 is 14.5 if these

coefficients are correlated. This is calculated by w5.92q7.22q10.52q15.02q2(11.2q8.5y41.6q41.6y

59.5y65.9)x1y2.

84 R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85

3. Conclusion

examined in this study. The methodology is based on the research conducted by

Yang (2000) for Taiwan, using a simple regression analysis. The findings from the

Sri Lankan data imply that current as well as past changes in electricity supply have

a significant impact on a change in real GDP in Sri Lanka. The result can also be

used to estimate a better range for the parameter EO (increase in economic output

due to increased electricity supply in Sri Lanka) in the CBA model that we have

developed (Morimoto and Hope, 2001). The estimated figure for the parameter EO

using the regression analysis is that an extra output of Rs. 88 000–137 000 ($1120–

1740) for every 1-MW h increase in electricity supply in Sri Lanka, which seems

to support the actual range used in Morimoto and Hope (2001), though is much

higher. Having seen the serious power shortages in Sri Lanka and its adverse impact

on the country’s economic growth, using these regression results instead of the

original values might improve the result.

Finally, one should note that the above bi-variate relationship between GDP and

electricity production might be an overestimate, as the usual production function

also includes capital and labor. Hence, in future work, capital and labor parameters

could also be included in order to improve the model.

Acknowledgments

We would like to thank Mr S. Fernando and Mr N. Sandasiri from CEB, and the

Staff of the Munasinghe Institute for Development (MIND) and Lanka International

Forum on Environment (LIFE) for their help towards this study, especially for data

collection. Useful comments and suggestions from Prof. H.-Y. Yang (Department of

Economics, Shih-Hsin University, Taiwan) are also greatly acknowledged.

References

Asafu-Adjaye, J., 2000. The relationship between energy consumption, energy prices and economic

growth: time series evidence from Asian developing countries. Energy Econ. 22, 615–625.

Central Bank of Sri Lanka (CBSL), 1998. Annual Report, Central Bank of Sri Lanka (CBSL, Sri

Lanka).

Ceylon Electricity Board (CEB), 1999. Long Term Generation Expansion Plan 1999–2013 (CEB, Sri

Lanka).

Ferguson, R., Wilkinson, W., Hill, R., 2000. Electricity use and economic development. Energy Policy

28, 923–934.

Greene, W.H., 2000. Econometric Analysis. fourth ed.. Prentice Hall international Inc, London.

Huang, J.-P., 1990. Electricity consumption and economic growth: a case study of China. Energy Policy

21, 717–720.

Mashi, A.M.M., Mashi, R., 1996. Energy consumption, real income and temporal causality: results from

a multi-country study based on cointegration and error-correction modeling techniques. Energy Econ.

18, 165–183.

Morimoto, R. and C. Hope, 2001. An extended CBA model of hydro projects in Sri Lanka, Judge

Institute of Management Research Paper 15.

R. Morimoto, C. Hope / Energy Economics 26 (2004) 77–85 85

Pesaran, M.H., Smith, R.P., Akiyama, T., 1998. Energy Demand in Asian Developing Countries. Oxford

University Press, Oxford, UK.

Ramcharran, H., 1990. Electricity consumption and economic growth in Jamaica. Energy Econ. 12,

65–70.

Serra, P., Fierro, G., 1997. Outage costs in Chilean industry. Energy Econ. 19, 417–434.

Yang, H.-Y., 2000. A note on the causal relationship between energy and GDP in Taiwan. Energy Econ.

22, 309–317.

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