Research Article

Electricity Consumption South Asia Economic Journal

17(2) 1–16
and Economic Growth in ©2016 Research and Information
System for Developing Countries &
South Asia Institute of Policy Studies of Sri Lanka
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/1391561416649721
http://sae.sagepub.com

Syed Ali Raza1

Syed Tehseen Jawaid2
Mohammad Haris Siddiqui3

Abstract
This study investigates the effect of electricity consumption on economic growth
of four South Asian countries, namely Pakistan, India, Bangladesh and Sri Lanka,
by employing time series annual data from 1980 to 2010. Pedroni’s panel cointe-
gration results confirm that there exists valid long-run relationship between
electricity consumption and economic growth in South Asia. Results of random
effects model suggest the positive and significant impact of electricity consumption
on economic growth of South Asian countries. Robustness of the initial findings
of positive and significant relationship is confirmed by four different sensitivity
analyses. Results of panel Granger causality test confirm the unidirectional causal
relationship runs from electricity consumption to economic growth. It is therefore
recommended that the South Asian countries should consider the development
initiative and low-cost mode to produce electricity to enhance economic growth
in the region.

JEL: O13, F43, C33, N15

Keywords
Energy, economic growth, panel data, South Asia

1
Assistant Professor, IQRA University Karachi, Karachi, Pakistan.
2
Assistant Professor, Applied Economics Research Centre, University of Karachi, Karachi, Pakistan.
3
Business Graduate, IQRA University, Karachi, Pakistan.

Corresponding author:
Syed Tehseen Jawaid, Applied Economics Research Centre, University of Karachi, Karachi 75270,
Pakistan.
E-mail: stjawaid@hotmail.com

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2 South Asia Economic Journal 17(2)

1. Introduction
The importance of relationship between energy consumption and economic
growth can be seen in the literature in which it has widely been discussed. Energy
consumption is directly affected by individual consumption as well as industrial
growth. Mulegeta, Nondo, Schaeffer and Gebremedhin (2010) suggested the
growth hypothesis that energy consumption is crucially important for growth
activities, harmonization of capital and labour, directly or indirectly, as an input in
the process of production. While economic theories do not clarify directly the
relationship between energy consumption and economic growth, a large number
of studies have been conducted on causal relationship between energy consump-
tion and economic growth (Cheng & Lai, 1997; Ghosh, 2002; Hondroyiannis,
Lolos & Papapetrou, 2002; Masih & Masih, 1996; Narayan & Smyth, 2009;
Wolde-Rufael, 2004; Zachariadis & Pashourtidou, 2007). However, a study based
on panel data has been missing on South Asia.
Electricity is one of the important component of energy sector (Sharif & Raza,
2016, Nathan et al., 2016). However, the direct relationship of power sector with
growth is yet to be determine for developing countries particularly for Pakistan,
India, Sri Lanka and Bangladesh. In this era of advanced technology, the
consumption of electricity has risen rapidly within households as more electrical
appliances are introduced in the market. On the other hand, this behavior is
different with respect to the industry. The large manufacturers have installed
their own power producing plants to generate electricity due to power shortage.1
In a globalized world, the demand for electricity has been increasing rapidly, and
the dependency of countries on electricity highlights the most important problem
for the next century.
For last three decades, the rising South Asian economies, namely Bangladesh,
India, Pakistan and Sri Lanka, have drawn prominent attention to its outstanding
growth performance. At the same time, electricity demand also rose significantly
in the region.
Figure 1 shows that there is no clear relationship between growth in electricity
consumption and economic growth in selected South Asian countries in the study.
We cannot conclude anything about the relationship between electricity consump-
tion and economic growth. Therefore, this article intends to examine the effect of
electricity consumption on economic growth by using new panel data and more
rigorous econometric techniques.
The rest of the article is organized as follows. Following the introduction,
Section 2 reviews some selected studies, Section 3 discusses methodology, Section
4 presents estimations and results, and Section 5 identifies different models to
address the issue of robustness. Section 6 discuss the causal relationship. Finally,
concluding remarks are made in Section 7.

2. Review of Literature
Large numbers of studies have been done to find causal relationship between
electricity consumption and economic growth.

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 900.000 Pakistan
700.000 Bangladesh
800.000 GDP Per Capita
600.000 GDP Per Capita
Electricity Consumption per capita
Electricity Consumption per capita 700.000
500.000 600.000

400.000 500.000
400.000
300.000
300.000
200.000
200.000
100.000 100.000

0.000 0.000

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1200.000 India 1800.000 Sri Lanka
GDP Per Capita 1600.000 GDP Per Capita
1000.000 Electricity Consumption per capita
1400.000 Electricity Consumption per capita

800.000 1200.000
1000.000
600.000
800.000

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400.000 600.000
400.000
200.000
200.000
0.000 0.000

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Figure 1. Relationship between Electricity Consumption and GDP per Capita Growth in Bangladesh, India, Sri Lanka and Pakistan
Source: Authors’ construction. 
4 South Asia Economic Journal 17(2)

Yu and Choi (1985), Ramcharran (1990), Masih and Masih (1996), cheng
(1999), Morimoto and Hope (2004), Wolde-Rufael (2004), Lee and Chang
(2005), Hatemi and Irandoust (2005), Altinay and Karagol (2005), Lee (2006),
Ciarreta and Zarraga (2008) and Apergis and Payne (2009) show unidirectional
causality run from electricity consumption to economic growth. On the other
hand, Akarca and Long (1980), Cheng and Lai (1997), Ghosh (2002), Soytas and
Sari (2003), Yoo and Kim (2006), Yoo (2006), Halicioglu (2007) and Hu and Lin
(2008) prove unidirectional causality run from economic growth to electricity
consumption. In contrast, Ebohon (1996), Murray and Nan (1996), Yang (2000),
Hondroyiannis et al. (2002), Yoo (2005), Zachariadis and Pashourtidou (2007),
Wolde-Rufael (2006), Squalli (2007), Chen at al. (2007), Akinlo (2008), Narayan
and Smyth (2009), Wolde-Rufael (2009) and Raza et al. (2015) provide evidence
of birectional causality between electricity consumption and economic growth.
Few studies have been conducted to find the long run relationship between
energy consumption and economic growth. The detailed literature review is pre-
sented in table 1.

3. Methodology
After reviewing the empirical studies, the models to examine the relationship
between electricity consumption and economic growth are derived by using the
production-function framework. The general production function is:

GDP = f (LAB, CAP, A) (1)

where GDP is real gross domestic product, LAB is labour and CAP is capital. The
A captures the total factor productivity effect on output growth. It is assumed that
electricity consumption operates through A (see Jawaid, 2014; Jawaid & Raza,
2013, 2014; Jawaid & Waheed, 2011; Shahbaz & Lean, 2012; Wei, 2007).

A = g (ELC) (2)

Substituting (2) in (1),

GDP = f (LAB, CAP, ELC) (3)

The model is developed for empirical estimations as follows:

GDPi,t = b0 + b1LABi,t + b2CAPi,t + b3ELCi,t + ei,t (4)

where et is the error term, ELC represents the electricity consumption. The
positive sign is expected for LAB and CAP, while the sign of ELC is to be
determined. In this study, long annual panel data of Pakistan, India, Sri Lanka
and Bangladesh have been used from 1980 to 2010. All data are gathered from
the official database of the World Bank. All variables are used in logarithm
form. Im, Pesaran and Shin unit root test are used to examine the stationary

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 Table 1. A summary of empirical studies on the electricity consumption and economic growth

Methodology
Authors Data Set Variables Technique Conclusions
Adom (2011) 1971–2008 Ghana Electricity Consumption, Real GDP Toda and Yomamoto Unidirectional Causality from Economic
Per Capita Granger Causality Test Growth Electricity Consumption
Akinwale et.al 1970–2005 Nigeria Electricity Consumption, Real GDP VAR and ECM Unidirectional Causality from real GDP
(2013) to Electricity Consumption
Aktas and 1970–2004 Turkey Electricity Consumption and GNP Granger Causality Test Bidirectional Causality in short run
Yilmaz (2008)
Atif et.al (2010) 1971–2007 Pakistan Electricity Consumption and GDP Granger Causality Test Unidirectional Causality from Electricity
and Modified Wald Test Consumption to Economic Growth
Bildirici and European Countries Per Capita GDP, GDP, Electricity Granger Causality Test Unidirectional Causality from GDP to
Kayikci (2012) Consumption Electricity Consumption
Bildirici et.al 1978–2010 USA, UK, JAPAN, Electricity Consumption, Economic Granger Causality Test Unidirectional Causality from
(2012) ITALY, FRANCE, BRAZIL, Growth Electricity Consumption to GDP in
RUSSIA, CHINA, INDIA, USA, China, Canada, Brazil
SOUTH AFRICA, INDIA
Ciarreta and 1971.-2005 Spain Electricity Consumption, Economic Toda and Yomamoto Unidirectional Causality from

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Zarraga (2007) Growth Granger Causality Test Electricity Consumption to Real GDP
Gurgul and Q1 2000–Q4 2009 Poland Electricity Consumption, GDP, Granger Causality Test Bidirectional Causality between
Lach (2011) Employement Electricity Consumption and GDP
Hu and Lin 1988–2009 Hainan Island of Electricity Consumption, GDP Granger Causality Test Economic Growth causes electric
(2013) China power consumption
Ozun and 1968–2002 Turkey Electricity Consumption, GNP Granger Causality Test Bidirectinional Causality in short tun
Cifter (2007)
(Table 1 Continued)
 (Table 1 Continued)

Methodology
Authors Data Set Variables Technique Conclusions
Squalli and 1980–2003 GCC Electricity consumption and ARDL & Toda Bidirectional causality in Bahrain, Qatar
Wilson (2006) Economic Growth Yomamoto Causality test and KSA
Ho and Sui 1966–2002 Hong Kong Electricity consumption and Real Causality Test One-way causality from EC to real
(2006) GDP GDP
Pao (2009) 1980–2007 Taiwan Electricity consumption and Cointegration and ECM Long run relationship between
Economic Growth electricity consumption and economic
growth
Lean and Smyth 1980–2006 5 ASEAN Carbon dioxide, electricity Causality Test Unidirectional causality runs from
(2009) Countries consumption and economic growth emission and electricity consumption
to economic growth
Chandran et al. 1971–2003 Malaysia Electricity consumption and Real ARDL Testing Approach Long run relationship between
(2009) GDP electricity consumption and real GDP
Akinlo (2009) 1980–2006 Nigeria Electricity consumption and Real Causality Test Unidirectional causality from electricity
GDP consumption and real GDP
Ozturk and 1980–2006 Albania, Bulgaria, Energy use per capita, electric ARDL Testing Approach Long run relationship between energy
Acaravci (2010) Hungary and Romania consumption per capita, real GDP consumption and economic growth in

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per capita Hungary
Apergis and 1990–2006 88 Countries Electricity consumption and Causality Test Unidirectional causality from electricity
Payne (2011) Economic Growth consumption and economic growth in
low income countries
Shahbaz and 1971–2008 Pakistan Electricity consumption and Toda Yomamoto Economic growth leads to electricity
Feridun (2012) Economic Growth Causality consumption
Raza et al. 7

properties for long-run relationship of variables. The present study also employs
the Pedroni (1999) panel cointegration technique to analyze the long-run asso-
ciation among the variables. Random effect model is applied to find the effect
of electricity consumption on economic growth. Sensitivity analyses have been
done with the help of pooled ordinary least square (POLS), generalized method
of momemnts (GMM), dynamic ordinary least square (DOLS) and fully modified
ordinary Least square (FMOLS).

4. Results and Estimations

To check the stationary properties of variables, we use Im, Pesaran and Shin unit
root test. Table 2 represents the results of stationary tests. This test is applied on
level of variables and then on their first difference.
Results in Table 2 show that all variables are stationary and integrated at first
difference. This implies that the series of variables may exhibit a valid long-run
relationship.
Since the stationary test results of two different unit root test confirm that each
series of variable having a valid long-run relationship in our dataset, we use the
panel cointegration technique developed by Pedroni (1999) to analyze the long-run
relationship between the considered variables. The Pedroni’s panel cointegration
approach has several advantages upon other cointegration methods of panel data.
This approach controls the biasness of country size and also solves the issue
of heterogeneity (Das & Choudhary, 2011). A panel cointegration technique is
examined by analyzing the variables and residuals of a model. The variables
should be cointegrated on I(1), while the residuals should be I(0), if the variables
are cointegrated. The residuals of the hypothesized cointegration equation can be
established from the following equation:

GDPi,t = ai + b1i LABi,t + b2iCAPi,t + b3iELCi,t + Øit + eit (5)

where i = 1, . . . , N; t = 1, . . . , T, and N is the number of countries in the panel

and T is the number of observations over time. The estimated residuals become:

Table 2. Stationary Test Results

Im, Pesaran and Shin

I(0) I(1)
Variables C C&T C C&T
GDP 6.431 2.181 –6.272* –6.025*
LAB 0.711 0.773 –3.489* –2.531*
CAP 3.996 0.676 –4.264* –3.686*
ELC –0.278 –0.319 –5.161* –4.644*
Source: Authors’ estimation.
Note: * indicates significance level at 1%.

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8 South Asia Economic Journal 17(2)

eit = ri eit – 1 + nit (6)

With the null hypothesis of no cointegration, the residual is I(1) and ri = 1. There
are two alternative hypotheses. First, the homogenous alternative (within dimen-
sion test), (ri = r) < 1 for all i, and second, heterogeneous alternative (between
dimension or group statistics) ri < 1 for all i.
Pedroni’s (1999) panel cointegration technique is based on seven panel cointe-
gration statistics. Four of these statistics are based on within-dimension test, while
the other three statistics is based on group statistics approach by using the appro-
priate mean and variance. The asymptotic distribution of these statistics follows a
normal distribution (Pedroni, 1997).

K NT − m N
K= => N (0,1) (7)


where KNT represents the corresponding form of test statistics with respect to N
and T. m and v are the moments of the Brownian function that are given by
Pedroni (1999). Numerical values of m and v depend upon the presence of a
constant, time trend and the number of regressors in the cointegration test
regression.
Results of Pedroni’s panel cointegration are presented in Table 3. Results indi-
cate that all the seven test statistics based on both within dimension and group-
based approach statistics demonstrate the rejection of null hypothesis of no
cointegration in the favour of alternative that the electricity consumption and eco-
nomic growth are cointegrated in South Asian countries. Guterrez (2003) argues
that group statistics has the best power to judge the cointegration among the test
statistics of Pedroni (1999). It is concluded that our considered variables exhibit a
valid long-run relationship.
Wald test (Greene, 2000, pp. 390–391) is used to analyze the country effects
and period effects in the model. First, we test the country effects where the null

Table 3. Panel Cointegration

Estimates Stats. Prob.

Panel v-statistic –3.888 0.000
Panel rho-statistic 4.005 0.000
Panel PP statistic –3.859 0.000
Panel ADF statistic –3.325 0.000
Alternative Hypothesis: Individual AR Coefficient
Group rho-statistic 6.321 0.000
Group PP statistic –4.301 0.000
Group ADF statistic –3.991 0.000
Source: Authors’ estimation.
Note: The null hypothesis of Pedroni’s (1999) panel cointegration procedure is no cointegration.

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Raza et al. 9

Table 4. Hypothesis Test

Null Hypothesis Stats. Prob.

Country Effects 1627.56 0.000
Time Effects 1830.048 0.000
Hausman Test 0.541 0.909
Wu–Hausman Test 1.928 0.587
Source: Authors’ estimation.

hypothesis is that the country effects are absent (Table 4). The second null hypothesis
for period effects is that the period effects are absent. Results of Wald test indicate
that both hypothesis are rejected, and there is a significant difference in economic
growth between countries over time.
Hausman test is used to identify the most preferable method between fixed
effects model (FEM) and random effects model (REM) (Greene, 2000, pp. 576–
577). The null hypothesis of Hausman test is that the country effects are uncorre-
lated with the other regressors in the model (Hausman, 1978). If the country effect
is correlated (null hypothesis is rejected), a REM violating the basic assumption
of Gauss–Markov produces biased estimators. If null hypothesis is rejected, a
fixed effect model is then preferred. Consequently, if the null hypothesis is
accepted, the estimated result of random effect model is then preferred, and one
should focus on REM’s results hereafter. The results of Hausman test indicate that
null hypothesis is accepted and random effect model is preferred.
Wu–Hausman test (Greene, 2000, pp. 385–386) is used to analyze the exogenous
properties of the estimated model. The rejection of null hypothesis indicates the
presence of endogeneity in the model. The results of Wu–Hausman test indicate that
null hypothesis is not rejected, which means there is no simultaneity between elec-
tricity consumption and economic growth. The acceptance of null hypothesis also
concludes that the estimators are unbiased and consistent (Greene, 2000, p. 654).
From above discussion, it is clear that Two-Way REM is preferred in this study.
Result of REM is presented in Table 5.

Table 5. Long-run Determinants of Economic Growth

Two-way Random
Variables Coeff. t-stats Prob.
C –0.604 –1.293 0.199
LAB 0.52 6.154 0.000
CAP 0.434 4.313 0.000
ELC 0.293 3.592 0.001
Adj. R2 0.908
F-stats (Prob.) 396.697(0.000)
Source: Authors’ estimation.

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10 South Asia Economic Journal 17(2)

From Table 5, it is clear that electricity consumption has significant positive

effect on economic growth. The coefficient of electricity consumption implies
that 1 per cent increase in electricity consumption leads to about 0.29 per cent
increase in economic growth.

5. Sensitivity Analysis
To check the robustness of initial results, four different sensitivity analyses have
been performed, namely pooled ordinary least square (POLS), generalized meth-
ods of moments (GMM), dynamic ordinary least square (DOLS) and fully modi-
fied ordinary least square (FMOLS).

Pooled Ordinary Least Square (POLS)

The robustness in the initial results of electricity consumption and economic
growth is firstly examined by using pooled ordinary least square (POLS) estima-
tions procedure. Table 6 represents the results of pooled OLS estimations of eco-
nomic growth model. It is confirmed from the results that the coefficient of focus
variable, namely electricity consumption, remains same sign and significant after
using simple POLS estimations. The coefficient of electricity consumption (0.32)
in POLS model is also almost same as in the REM. Consequently, it can be con-
cluded that the relationship between electricity consumption and economic growth
in South Asia remained same, and initial results are robust.

Generalized Methods of Moments (GMM)

The robustness in the initial results of electricity consumption and economic
growth is secondly examined by the generalized methods of moments (GMM)
estimations procedure. GMM technique for panel data was first developed by
Arrellano and Bond (1991) and subsequently was expanded by Blundell and
Bond (1998) and Bond (2002). We have employed GMM technique in order to
account for the possible endogeneity of electricity consumption. The major reason
to prefer GMM in sensitivity analysis concerns the possible endogeneity of
electricity consumption.
Table 6 presents the results of GMM estimations of economic growth model. It
is confirmed from the results that the coefficient of focus variable, namely elec-
tricity consumption, remains same sign and significant after using the GMM
estimations. The coefficient of electricity consumption (0.32) in GMM is also the
almost same as in the REM. Consequently, it can be concluded that the relationship
between electricity consumption and economic growth in South Asia remained
same, and initial results are robust.

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 Table 6. Results of Sensitivity Analysis

POLS GMM DOLS FMOLS

Variables Coeff. t-stats Prob. Coeff. t-stats Prob. Coeff. t-stats Prob. Coeff. t-stats Prob.
C –0.681 –1.701 0.092 –0.626 –1.525 0.130 –0.521 –0.738 0.470 –0.389 –0.525 0.601
LAB 0.514 6.871 0.000 0.473 6.286 0.000 0.522 3.434 0.001 0.471 3.436 0.001
CAP 0.429 4.581 0.000 0.465 4.968 0.000 0.411 2.169 0.032 0.465 2.709 0.008
MEX 0.315 4.578 0.000 0.317 4.518 0.000 0.330 2.397 0.018 0.272 2.132 0.035
Adj. R2 0.971 0.974 0.972 0.971
Source: Authors’ estimation.

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12 South Asia Economic Journal 17(2)

Dynamic Ordinary Least Square (DOLS)

The robustness of the relationship between dependent variable and explanatory
variables in the long run is tested through DOLS technique developed by Stock
and Watson (1993). This method involves estimating the dependent variable on
explanatory variable by using the levels, leads and lags of the explanatory
variable. This method resolves the issues of small sample bias, endogeneity and
serial correlation problems by adding the leads or lags of explanatory variable
(Stock & Watson, 1993).
Table 6 presents the results of dynamic OLS of economic growth model. We have
run our model of DOLS by taking the lead and lag of 2. It is confirmed from results
that the coefficient of focus variable, namely electricity consumption, remains same
and significant after taking the different lag and lead in the model. The coefficient of
electricity consumption (0.33) is almost the same as in the REM. Consequently, it
can be concluded that the relationship between electricity consumption and eco-
nomic growth in South Asia remained same, and initial results are robust.

Fully Modified Ordinary Least Square (FMOLS)

The fully modified OLS technique developed by Philips and Hansen (1991) is
also used to analyze the robustness of our initial results of REM. FMOLS pro-
vides the optimal estimates of the cointegration equation (Bum & Jeon, 2005).
The FMOLS employs Kernel estimators of the Nuisance parameters that affect
the asymptotic distribution of the OLS estimators. The FMOLS modifies the OLS
to control the problems of serial correlation and endogeneity in the regressors that
results from the existence of a cointegrating relationship (Hansen, 1995; Philips
& Hansen, 1990). Results of FMOLS are presented in Table 6.
It is confirmed from the results of FMOLS that the coefficient of focus varia-
ble, namely electricity consumption remains same and significance after applying
advanced econometric techniques. The coefficient of electricity consumption
(0.27) is almost the same as in the REM. Consequently, it can be concluded that
the relationship between electricity consumption and economic growth in South
Asia is remained same, and initial results are robust.

6. Granger Causality Analysis

The direction of causality between dependent and independent variables is ana-
lyzed by the panel Granger causality test. We determine the causality analysis of
our economic growth model on lag one. Jones (1989) favours the ad hoc selection
method for lag length in Granger causality test over some of the other statistical
methods to determine optimal lag.
The results of Granger causality test are reported in Table 7. Results show that
the unidirectional causal relationship is found to run from electricity consumption
to economic growth in South Asia.

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Raza et al. 13

Table 7. Results of Panel Granger Causality Test

Variables F-Statistic Probability

ELC does not Granger Cause GDP 3.785 0.025
GDP does not Granger Cause ELC 1.404 0.249
Source: Authors’ estimation.

7. Conclusions
This article investigates the effect of electricity consumption on economic growth
in four South Asian countries, namely Pakistan, India, Bangladesh and Sri Lanka,
by employing long annual data from 1980 to 2010. Pedroni’s panel cointegration
results confirm that there exists valid long-run relationship between electricity
consumption and economic growth in South Asia. Results of REM suggest the
positive and significant impact of electricity consumption on economic growth of
South Asian countries. Robustness of the initial findings of positive and signifi-
cant relationship is confirmed by four different sensitivity analyses, namely
pooled ordinary least square, generalized methods of moments, dynamic ordinary
least square and fully modified ordinary least square estimations. Results of panel
Granger causality test confirm that unidirectional causal relationship runs from
electricity consumption to economic growth. It is recommended that policymakers
of South Asia consider the development projects and low-cost mode to produce
electricity to enhance economic growth in the region. Sudden outbreaks may
negatively affect economic growth. There is a need for sustainable supply of
electricity. There is huge potential in hydropower projects, and hydroelectricity
can be produced in the countries by construction of dams.

Acknowledgement
Authors are grateful to two anonymous referees of this journal for useful comments. Views
expressed by the authors are personal. Usual disclaimers apply.

Notes
1. Gul Ahmed, Nihsat and Orient are some of the examples of independent power
producers.

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