Name Ikram Aslam Roll No 53

The impact of electrical Consumption toward Economic Growth of

Pakistan:

1) Introduction

In this bifurcated world of industrial and agrarian economies, electricity has

importance for both. The develop countries need electricity to run their industries and
developing countries need to ‘catch up’ with the developed countries. An estimated 79 percent
of the people in the Third World- the 50 poorest nations -have no access to electricity, despite
decades of international development work. The total number of individuals without electric
power is put at about 1.5 billion, or a quarter of the world's population, concentrated mostly in
Africa and southern Asia ("World Energy Outlook 2009" ).

With the increasing population of the world electricity demand is increasing rapidly
and now a day’s electricity shortage has become one of the most important problem of the
world. In this globalizing world, rapidly increasing demand for electricity and dependency of
countries on electricity indicate that electricity will be one of the biggest problem in the world
in the next century. Shocks of electricity supply have negative impact on growth of any
economy. In accordance with the current situation of Pakistan, The problem of balancing
electricity supply has remained a largely unresolved matter.

Pakistan faces a significant challenge in revamping its network responsible for the
supply of electricity. Pakistan has recently been going through one of its worst electricity crises,
with a shortfall of more than 5000 MW (Pakistan economic survey 2013-2014).The resulting
power cuts in the form of load shedding not only effect the normal life of the people of Pakistan
but also badly affected the commerce, industry and agriculture sector. Power crises in Pakistan
is not a recent problem but it is considered to be the irresolvable important issue in the history.
Different things such as, rapidly increasing demand, high oil prices, corruption, high population
and inadequate supply of fuel are one of the most important factors to the current power crises
in Pakistan. These shortages of electricity causes the industries to work below the normal
production level, Due to which unemployment is increasing and Pakistan facing worse effect
on economy.
 Energy economic literature has made significant theoretical contribution towards the
casual effects of energy price fluctuations on GDP growth, it lacks linkages between electricity
and GDP growth .So for that reason, the area has been subjected to active empirical research
over the past two decades .Our study focuses on electricity consumption and gross domestic
product (GDP).therefore; we use electricity because we do not analyze the relative strength of
various inputs but an aggregate one. Electricity has importance for both production and
consumption of an economy. Electricity plays important role in socio-economic development
along with its role in production function. The casual relationship between electricity and
economic growth has been remain important topic for research.

The role of electricity in economic growth is also of special interest. Most finding
conclude that there is unidirectional linear causality running from electricity to GDP ,these
include lee and chang (2005) ciarreta and zarraga (2010).secondly there is also exist a
significant relationship between electricity consumption and GDP in the literature, see Balat
(2009),Shahbaz and Feridun (2011).

This study is different from earlier studies in two dimensions. First, earlier studies
examine the issue of causality for Pakistan but ignore the impact of changes in other source of
economic growth. This study tends to analyze the role electricity in GDP growth while
controlling for changes in demand of increasing population for electricity. Second, earlier
studies examine the impact of total energy use on economic growth, while this study will focus
on electricity effect on GDP and population of Pakistan. The rest of the study is organized as
follow. The literature review is presented in section 2.section 3 discusses the data and
methodology, the empirical results are presented in section 4 and last section offers
conclusions.

2) Literature Review:

The relationship between energy consumption and GDP growth has been studies
extensively in the literature, below the detailed study on the relationship between electricity
consumption and GDP growth has shown, the objective of this study is to fill this gap in the
literature.

MAGAZZINO (2013), this paper implies to examined the causal relationship among electricity
demand, real per capita GDP and total labor force for Italy from 1970 to 2009. The study used
time series data 1970-2007 (ADF, ERS, PP, and KPSS). The study used the following variable
electricity demand, real per capita GDP control variables (labor force participation). As regards
the robustness of the VECM, for all the equations, a Lagrange-multiplier (LM) test for auto
correlation in the residuals of VECM clarifies at the 5% significance level, the null hypothesis
cannot be rejected that there is no serial correlation in the residuals for the orders 1, 5 tested.
There is a bi-directional Granger causality flow between real per capita GDP and electricity
demand.

Javid & Abdu (2013), this paper investigated the relationships among electricity consumption,
real economic activity, electricity prices and the UEDT at the aggregate and sectorial levels,
namely, for the residential,
commercial, industrial, and agricultural sectors. A time series/1972-2010/ (ARDL). Electricity
consumption (GWH) REAL GDP. The structural time series model consists of a stochastic
trend component and an irregular term
(Harvey et al., 2005). This approach consists of subdividing the dependent variable into
explanatory variables and including recurrent and irregular components. The nature of the trend
is not linear and deterministic but stochastic in form.

Hussain Ali (2011), this study attempts to examine the causal relationship between electricity
consumption (EC) in Malaysia. consumer price index (CPI), gross domestic product (GDP)
and foreign direct investment (FDI). The study utilized Time series data from 1971-2009 and
Engle-Granger & Augmented Dickey-Fuller test. Electricity consumption (MKWh) &REAL
GDP& C.V (Consumer price index (P). If we failed to reject the null
hypothesis, we have to proceed with stationarity
test at first difference (Studenmund, 2006). If once again we
failed to reject null hypothesis, we will proceed to test stationarity at second difference.
Usually, the macroeconomics data will achieve stationarity at first or second difference. The
function of stationarity is to avoid from spurious regression results. Long run causality from
electricity was found to be significant.

Abdur Rashid (2010), analyzed the causality between electricity generation and economic
growth in Bangladesh. The utilized the electricity consumption (MKWh) & REAL GDP as
variable. A time series data used over the time period from 1973-2006. The Augmented
Dickey-Fuller and Phillips-Perron (PP) tests used. The application of the Granger causality test
requires the time series of the concerned variables to be stationary which means that the mean
and variance of each variable do not vary systematically over time. Because, using non-
stationary data directly in the causality tests might yield spurious results. Increase in electricity
generation would raise real GDP.

KAYHAN et.al (2010), this study analyzed the causal relationship between electricity
consumption and economic development in Romania. The study used time series from 2001 –
2010. Dolado causality test and Toda and Yamamoto was used for estimation. Electricity
consumption (GWH) and GDP (REAL) was used variable. Whether there is any structural
breaks in economy during the period we analyses. Because economic and financial crisis affect
economy policies and it makes structural breaks in data belonging variables. So econometric
analysis gives incorrect results. To see structural breaks in data belonging the Romania
economy between years 2001 – 2010, we apply Bai and Perron (1998, 2003) multiple structural
breaks test. Causality runs from electricity consumption to economic growth.

Philip Kofi Adom (2011), this study seek to investigate the direction of causality between a
types of energy in china. The study taken Electricity as independent variable and economic
growth was taken as dependent variable. The used time series data from1971-2008. The OLS,
ADF, PP tests was use for estimation in this paper. The study used electricity consumption
(KWh) Real per capita GDP (constant 2000 US$) as variable. Since it is difficult to a priori tell
the direction of Cointegration between variables. The study in testing for long-run relationships
in the variables using the Bounds Cointegration test, normalized each variable as a dependent
variable. Thus, the following ARDL equations were estimated. Exists a unidirectional causality
running from economic growth to electricity consumption.

F. Kula (2014), the article examined whether a long-run relationship between per capita
renewable electricity consumption and gross domestic product (GDP) in USA. A panel data
was used from 1980-2008.the Im, Pesaran, and Shin (IPS) test was used. Variable are
renewable energy consumption per capita& real GD &C.V (population). To determine the
optimal lag length, p, the Schwarz information criterion (SIC) was used. This criterion suggests
3 lags for our model. Then, we test long-run causalities (weak exogeneity). The study examined
by imposing zero restrictions on the insignificant short-run parameters. There was
unidirectional causality from GDP to renewable electricity consumption.

Aitor Ciarreta & Ainhoa Zarraga (2010), this article investigated the linear and nonlinear
causality between electricity consumption and economic growth in Spain. The utilized a time
series data from 1971 to 2005 and VAR model was used. Electricity consumption (gwh) &
constant GDP was used as variable. The Granger causality test is conducted at first difference
through vector auto regression (VAR) method then it will be misleading in the presence of
Cointegration. Therefore, an inclusion of an additional variable to the VAR method such as the
error-correction term would help us to capture the long run relationship. There was
unidirectional linear causality running from real GDP to electricity consumption.

Javid et.al (2012) examined the long run relationship between real GDP per capita and
electricity consumption for Pakistan. A time series data was used from 1971 to 2008 and
Granger causality test Structural Vector, Auto regression (SVAR) was used for estimation.
Electricity consumption (Kwh) & REAL GDP was used as variable. There may be
disequilibrium in the short run. Therefore the error term can be considered as equilibrium error
and this error term can be used to tie the short run behavior of the dependent variable to its long
run behavior. The Granger representation theorem states that if a set of I (1) variables or set of
non-stationary variables are co-integrated then they can be characterized as being generated by
an error correction mechanism (ECM). There was a long-run equilibrium relationship between
electricity consumption and economic growth.

Mehrara1 & Musai (2012) investigated relationship between electrical consumption and oil
prices GDP on (oil exporting countries including Iran, Kuwait, Saudi Arabia, United Arab
Emirates, Bahrain, Oman, Algeria, Nigeria, Mexico, Venezuela and Ecuador). A time series
data used over the time period from 1970-2010. The panel integration and Cointegration
techniques was used. A per capita electricity consumption in KWH& real GDP per capita &
c.v(real oil revenues per capita(OIL). To test the nature of association between the variables
while avoiding any spurious correlation, the empirical investigation in this paper follows the
three steps: We begin by testing for non-stationarity in the three variables of EC, GDP and
OIL. Prompted by the existence of unit roots in the time series, we test for long run
Cointegration relation between three variables at the second step of estimation using the panel
Cointegration technique. There was no feedback effects from electricity to GDP for oil
dependent countries.

3) Data and Methodology

Our empirical study uses the time series data of electricity consumption, constant gdp and total
population for the period of 1971-2011 for Pakistan. The data for all variables are obtained
from The World Bank’s world development indicators (wdi).In this study electricity
consumption is expressed in terms of million kilowatt hours (kwh) gdp is in constant 2005 us$
and total population.

This paper follows the ARDL bounds testing approach to cointegration developed by
pesaran(1996) and shin(1997); and latter on by pesaran et al,(2001) to examine long run
relationship between electricity consumption gdp growth and total population of Pakistan.
Pesaran and shin (1999) contented that,” appropriate modification of the orders of ARDL
model is sufficient to simultaneously correct for residual serial correlation and problem of
endogenous variables”.the equation of ARDL method is being modeled as:

𝑬𝑪𝒕 = 𝜶𝟎 + 𝜶𝟏 𝑮𝑫𝑷𝒕−𝟏 + 𝜶𝟐 𝑮𝑫𝑷𝒕−𝟐 + 𝒂𝟑 𝑷𝑶𝑷𝒕−𝟏 + 𝑷𝑶𝑷𝒕−𝟐 + 𝝁𝒕

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