Energy Economics 44 (2014) 314–324

Contents lists available at ScienceDirect

Energy Economics
journal homepage: www.elsevier.com/locate/eneco

Energy–growth conundrum in energy exporting and importing

countries: Evidence from heterogeneous panel methods robust to
cross-sectional dependence
Abdul Jalil ⁎
School of Economics, Quaid-i-Azam University Islamabad, 45320, Pakistan

a r t i c l e i n f o a b s t r a c t

Article history: This article uses the panel methods for energy exporting and importing countries that discuss the heterogeneity
Received 18 November 2013 and cross sectional dependence in investigating the linkages between energy consumption and economic
Received in revised form 20 April 2014 growth. The findings of the study suggest that the energy consumption is an important input not only in the en-
Accepted 22 April 2014
ergy importing but also in energy exporting countries. Furthermore, the results of the present paper suggest that
Available online 5 May 2014
the policy options should be different for the different countries in the back drop of heterogeneous slope
JEL classification:
coefficients.
C23 © 2014 Published by Elsevier B.V.
O44
Q43

Keywords:
Energy
Economic growth
Heterogeneity
Cross sectional dependence

1. Introduction
The literature on energy economics provides a lively debate on the
linkages between energy consumption and economic growth over the
last three decades which shows that the energy is a more important fac-
tor of production than it is considered by the researchers (Ayres et al.,
2013). The proponents of energy led growth theory argue that all pro-
duction activities involve energy as an indispensable input; therefore,
it is a key factor in economic growth. On the other hand, conventional
growth theories consider capital stock, labor and residuals as the
major contributing factors in economic growth of an economy and dis-
pel the belief that energy consumption plays any important role in eco-
nomic growth. Both schools have their arguments and draw on different
data, models and methodologies to support their stance.
A major chunk of literature considers that energy consumption de-
termines the level of economic growth.1 However, it is taken for granted
that energy is an important input in only energy importing countries.
These studies do not consider the importance of energy consumption
in energy exporting countries for determining the level of economic
⁎ Tel.: +92 51 90643044.
E-mail addresses: jalil.hanif@gmail.com, abdul.jalil@qau.edu.pk.
1
The reverse causality, bidirectional causality and neutrality hypothesis is also reported
in the literature (see Jalil and Feridun, 2014; Ozturk, 2010).
growth. The energy endowment and high subsidization on energy in-
puts lead to low energy prices and therefore make energy as a cheap fac-
tor of production in energy exporting countries (Damette and Seghir,
2013). This further leads to distribution state benefits of energy endow-
ments for the welfare of population and eventually contributes to eco-
nomic growth of energy exporting country. Keeping recent increase in
demand for energy and energy-intensive industries in view, it can be
safely claimed that energy exporting countries are the energy-
intensive countries as well (Damette and Seghir, 2013).
Additionally, huge exports of energy resources and domestic utiliza-
tion of energy would lead to the rapid depletion of energy resources
which may hit the level of economic growth of these countries in near
future. Furthermore, Chen and Galbraith (2011) note that when energy
resources deplete and technological cost increases, more financial re-
sources are consumed which crowds out other economic activities.
Therefore, discussing the energy exporting countries along with energy
importing countries is the need of the hour.
Despite the above mentioned facts, the researchers have not yet se-
riously explored the panel studies of energy exporting countries. There
are few studies, for example Al-Iriani (2006), Mehrara (2007) and
Damette and Seghir (2013) that analyze the panel of oil exporting coun-
tries. The studies are based on single homogenous slope assumption
and produce mixed results. Moreover, Al-Iriani (2006) and Mehrara
(2007) note that causality runs from economic growth to energy

http://dx.doi.org/10.1016/j.eneco.2014.04.015
0140-9883/© 2014 Published by Elsevier B.V.
 A. Jalil / Energy Economics 44 (2014) 314–324
consumption. Damette and Seghir (2013), using heterogeneous panel
data, document that the pace of economic growth sets the consumption
of energy in short run and vice versa in long run. Importantly, none of
these studies take structural breaks into account despite using the lon-
ger time series panel data. Furthermore, we may expect that the results
are sensitive to the selection of econometric technique. Therefore, tak-
ing heterogeneity of slope and structural breaks into account may
alter the findings of Al-Iriani (2006), Mehrara (2007) and Damette
and Seghir (2013).
The linkages between energy consumption and economic growth
are explored in several studies, for example Lee (2005), Al-Iriani
(2006), Mehrara (2007), Lee and Chang (2008), Mahadevan and
Asafu-Adjaye (2007), Lee and Chang (2008), Huang et al. (2008),
Narayan and Smyth (2008), Lee and Chang (2008), Apergis and
PayneJ (2009) and Ozturk et al. (2010) by using panel data and present
inconclusive empirical findings. But almost all of them assume homog-
enous slope parameters in the panel. This implies that the single slope
parameter will be generalized for the whole sample space of the
study. The implications of single slope parameter may be more severe
in the presence of inconclusive findings on the energy–growth nexus.
In addition, since the policies in oil importing and oil exporting coun-
tries are different in relation to the nature of the macroeconomic deter-
minant of the economic growth, therefore, the homogeneity condition
may lead to misleading results for the countries. Furthermore, the pat-
terns of economic growth and energy consumption are not homoge-
neous in different regions of the world; hence, the assumption of
slope homogeneity is not very attractive in this case. Keeping this draw-
back in view, the theoretical studies of Pesaran and Smith (1995) and
Pesaran et al. (1999) provide an opportunity for estimating the hetero-
geneous slopes of regression. Thus, the energy–growth nexus should be
revisited in the context of heterogonous panel data.
Furthermore, Lee (2005), Al-Iriani (2006), Mehrara (2007), Lee and
Chang (2008), Mahadevan and Asafu-Adjaye (2007), Lee and Chang
(2008), Huang et al. (2008), Narayan and Smyth (2008), Lee and
Chang (2008), Apergis and Payne (2009) and Ozturk et al. (2010)
don't consider cross section dependence. The possibility of cross sec-
tional dependence cannot be denied in the present macroeconomic, fi-
nancial and trade integration. Specifically, this is a more relevant
argument in the backdrop of common global shocks like oil crises and
financial crises, shared institutions like International Monetary Fund
and World Trade Organization, and the spillover effects among the re-
gions and countries (Liddle and Lung, 2014). Therefore, Kapetanios
et al. (2011) note that the validity of conventional econometric tools,
like first generation panel unit root tests, the cointegration tests and
the estimators which estimate the cointegration vector, which are
based on the assumption of cross section independence, become ques-
tionable. In addition to this, the existence of structural breaks may
lead to misleading inferences regarding the order of integration, that
is, a stationary series may be taken as non-stationary and can bias the
examination of cointegration (Narayan and Smyth, 2008).
In this backdrop, this study separates itself from the existing litera-
ture in many respects. First, we shall test the energy–growth nexus for
energy exporting countries as well as the energy importing countries.
Several studies like Damette and Seghir (2013) and Mehrara (2007)
consider the oil exporting countries as energy exporting countries, how-
ever, Ayres et al. (2013) note that coal and natural gas along with oil
have become an important input in the last two decades, therefore,
we shall take the net energy exporting and the net energy importing
countries into consideration. Secondly, the article tests the cross sec-
tional dependence and concludes that the first generation panel unit
root tests and cointegration tests invalidate the findings of previous
studies, therefore, we shall consider second generation panel unit root
tests and Westerlund (2007) tests of cointegration. Thirdly, we test
slope homogeneity condition through Swamy (1970) test and conclude
that the slope homogeneity condition is violated in a panel of long time
series (T), therefore heterogeneous panel data estimators like mean
315
group estimators and pooled mean group estimators are more appro-
priate in our case. Finally, the issue of structural breaks is taken into ac-
count in estimating the unit root and cointegration testing procedures.
Importantly, according to the best of our knowledge, none of the studies
on the energy–growth nexus tests the slope homogeneity condition in
panel data and provides the heterogeneous slope parameters for the
short run.2
Although, there are numerous investigations regarding the energy–
growth nexus but there is controversy among the researchers. It may
be due to the subject/country selections, data time spans, empirical
econometric model settings or other explanatory variable selections.
Therefore, it can be further investigated by taking the heterogeneity,
structural breaks and cross sectional dependence into account. The em-
pirical results will show how energy–growth relationship is affected by
these factors. This study finds that most of the data series are stationary
at first difference with and without structural breaks. The null hypothesis
of slope homogeneity is clearly rejected; therefore, we prefer the hetero-
geneous panel methods for the estimation of our specified models. We
find that energy consumption, capital stock, investment flows, level of
employment and trade openness have a positive impact on the economic
growth of both energy net exporter and importer countries.
The conventional style is followed for the organization of the article,
that is, Section 2 will present the brief literature review, Section 3 will
discuss estimation strategy, data and variable construction will be pre-
sented in Section 4, Section 5 will discuss the empirical results and
Section 6 will conclude the article.
2. Literature review
The empirical investigation on energy–growth nexus can be traced
back to Kraft and Kraft (1978). Since then a plethora of research pro-
vides inconclusive results based on the different samples of countries,
data, estimation techniques and variables. Lee (2006), Zachariadis
(2007) and Ozturk (2010) provide the excellent reviews on the subject.
Importantly, Ozturk (2010) reviews the four possible hypotheses in the
context of energy–growth nexus, that is, growth hypothesis, conservation
hypothesis, feedback hypothesis and neutrality hypothesis.
The major chunk of the literature advocates the growth hypothesis
which implies that the energy consumption determines the level of eco-
nomic growth of an economy. For example Yu and Choi (1985), Masih
and Masih (1996), Asafu-Adjaye (2000), Yang (2000), Lee and Chang
(2005), Soytas and Sari (2003), Altinay and Karagol (2005), Shiu and
Lam (2004), Morimoto and Hope (2004), Oh and Lee (2004), Narayan
and Smyth (2008), Squalli (2007), Ho and Siu (2007), and Belloumi
(2009) document that energy is the vital input in the production of a
country. Therefore, the limitations of energy consumptions may hurt
the process of economic growth.
The conservation hypothesis implies that the economic growth
drives energy consumption not the other way round. Even Kraft and
Kraft (1978), the pioneer study on the subject, document that the in-
crease in income is a cause of increased energy consumption. Then
Cheng (1998), Cheng (1999), Chang and Wong (2001), Soytas and
Sari (2003), Narayan and Smyth (2005), Zamani (2007), Ang (2008)
and Zhang and Cheng (2009) find unidirectional causality from eco-
nomic growth to energy.
The Erol and Yu (1988), Hwang and Gum (1991), Hondroyiannis
et al. (2002), Glasure (2002), Soytas and Sari (2003), Jumbe (2004),
Masih and Masih (1996), Paul and Bhattacharya (2004), Ghali and El-
Sakka (2004), Zachariadis and Pashouortidou (2007), and Erdal et al.
(2008) document that the energy consumption and economic growth
jointly determine each other. Ozturk (2010) termed this line of research
as feedback hypothesis.
2
Recently, Damette and Seghir (2013) and Liddle and Lung (2014) use the heteroge-
neous panel data but these studies don't speak on the heterogeneous coefficients in the
short run.
316 A. Jalil / Energy Economics 44 (2014) 314–324
Then Akarca and Long (1980), Yu and Hwang (1984), Yu and Choi
(1985), Yu and Jin (1992), Stern (1993), Cheng (1995) Fatai et al.
(2002), Altinay and Karagol (2004), Jobert and Karanfil (2007), Payne
(2009), Soytas and Sari (2009) and Halicioglu (2009) think that ener-
gy–growth nexus is an over stressed term. According to them there is
no link between energy and economic growth. Neither energy deter-
mines economic growth nor growth is a source of increased consump-
tion of energy. Ozturk (2010) termed it neutrality hypothesis.
Specifically, Paul and Salahuddin (2010) document that the neutrality
hypothesis mainly prevails in developed countries.
Most of the above mentioned studies are based on the single country
cases. Therefore, the researchers utilize time series data for estimating
causality and dynamic relationships between energy consumption and
economic growth. The time series analysis, despite having some advan-
tages, may be sensitive to span of time period, number of variables on
independent side and estimation techniques. Therefore, the analyses
based on panel data are more reliable (Huang et al., 2008) which com-
pensate for the deficiency of small sample size. The studies of Lee
(2005), Al-Iriani (2006), Mehrara (2007), Lee and Chang (2008),
Mahadevan and Asafu-Adjaye (2007), Lee and Chang (2008), Huang
et al. (2008), Narayan and Smyth (2008), Lee and Chang (2008),
Apergis and Payne (2009) and Ozturk et al. (2010) can be referred to
see energy–growth nexus in panel data context. However, it is impor-
tant to mention here that the empirical evidence on the energy–growth
nexus is mixed and researchers provide contradictory findings with re-
spect to the direction of causation. One possible justification is that the
empirical results are sensitive to the methodological weakness. More
clearly, country-specific heterogeneity in climate conditions, economic
development and energy consumption patterns may alter the results.
The above mentioned studies are based on the assumption that all coun-
tries are homogenous when it comes to the patterns of economic
growth and energy consumption.
This assumption postulates that a single slope parameter will be
generalized for the whole sample of the countries in the study. Since
the countries regarding consumption of energy and nature of macroeco-
nomic determinant are different from on another, therefore, homogene-
ity condition may lead to misleading results for all countries. Keeping
this drawback in mind, Damette and Seghir (2013) attempt to differen-
tiate the long run and short run coefficients in a panel data setting, how-
ever, calculate the long run coefficients with slope homogeneity
assumption and don't allow the slope heterogeneity for the short run
analysis. Furthermore, the issue of cross sectional dependence is not
well discussed in the existing literature on energy consumption and
economic growth conundrum. In addition to this, the existence of struc-
tural breaks may lead to misleading inferences regarding the order of in-
tegration, that is, a stationary series may be taken as non-stationary and
can bias the examination of cointegration (Narayan and Smyth, 2008).
The issue of structural break is not taken into account in the study of
Damette and Seghir (2013). Therefore, the finding of Damette and
Seghir (2013), that energy is determined by the pace of economic
growth in the oil exporting countries, is questionable. The present arti-
cle contributes in the existing literature on energy–growth nexus by
taking heterogeneity of slope, cross section dependence and structural
breaks into account.
3. Model and methodology
The earlier attempts by Hudson and Jorgenson (1974) and Jorgenson
(1978) to treat energy as an explicit factor of production next to labor
and capital show the importance of energy in response to Arab oil em-
bargo and energy crises of 1973–74. Then there is a large and still grow-
ing literature which still considers energy as an important factor in the
production function. One of the most recent studies by Damette and
Seghir (2013) proposes a bivariate model for investigating the linkages
between energy consumption and economic growth for the oil
exporting countries. However, the findings of Damette and Seghir
(2013) appear unconvincing as they do not take into account capital
stock, labor and other controlling factors in the production function.
Therefore, we follow the multivariate setting of Ghali and El-Sakka
(2004), Soytas and Sari (2007), Yuan et al. (2008) and Jalil and
Feridun (2014) who think that energy is a chief candidate in determin-
ing the level of economic growth. The specified function is as follows:


Y i;t ¼ f K i;t ; Li;t ; Ei;t ð1Þ
where Y is real GDP, K is the capita stock, L is level of employment, E is
total energy consumption, i is for cross sectional group and t is for time.
However, Jayadevappa and Chhatre (2000) point out that trade
openness, energy and economic growth are interlinked. Furthermore,
Cole et al. (1998), Ades and Glaeser (1999), Choudhri and Hakura
(2000) and Beck (2002) also reinforce that trade openness should
enter positively in the growth regression. Therefore, we also allow
trade in the above function for converting it from closed economy to
open economy's production function. The augmented production func-
tion is:


Y i;t ¼ f K i;t ; Li;t ; Ei;t ; TRi;t ð2Þ
where TR is total trade to GDP ratio.
We can write the growth equation by using this augmented produc-
tion function which is as follows:
yi;t ¼ α 0 þ β1 ln ki;t þ β2 ln li;t þ β3 lnei;t þ β4 ln tr i;t þ εit ð3Þ
where y, k, l, e and tr indicate the natural logarithms of Y, K, L E and TR. β,s
refers to the long-run elasticities and ε is Gaussian errors.
We have to consider several econometric problems in estimating
Eq. (3). For example, the traditional panel data methods consider all
countries as a single entity and therefore provide a single homogenous
slope parameter for all countries. Furthermore, these methods are based
on the assumption of cross sectional dependence. More importantly,
these methods don't take into account the structural break in the data
series. Consequently, this paper uses panel methods that consider the
slope heterogeneity and cross sectional dependence with and without
structural breaks. The following steps are taken to accomplish this
task. First, we shall set Eq. (3) in an autoregressive distributed lag
(ARDL) framework as suggested by Pesaran et al. (1999). Second, we
shall test the slope heterogeneity. Third, we shall test the unit root prob-
lems and cointegration with and without structural breaks. Finally, the
pooled mean group (PMG), mean group (MG) and common correlated
effect mean group (CCEMG) estimators are used to estimate the long
run and short coefficients along with the error correction terms.
Huang et al. (2008) use dynamic panel estimator for the estimation
of Eq. (3). However, Huang et al. (2008) themselves recognize that
panel data estimation consider all countries as a single entity, therefore,
we cannot identify the differences in the dynamic relationship between
energy consumption and economic growth for individual countries. As
the level of economic development in each country is different, there-
fore, the dynamic relationship among the variables should also be dif-
ferent for each country. Specifically, Lee (2006) notes that the
relationship between energy and economic growth should be different
when the level of economic development is different.
Keeping this discussion in view, we follow the argument of
Blackburne and Frank (2007) who note that datasets are now large
enough in time (T) dimension such that each country can be estimated
separately. Therefore, Pesaran and Smith (1995), Pesaran et al. (1999),
Phillips and Moon (2000) and Im et al. (2003) document that assump-
tion of homogeneity of slope parameters is often inappropriate in case
of large cross section (N) and large time. Therefore, Pesaran et al.
(1999) suggest that one should estimate the N time series regressions,
in the case of large T. Additionally, when assumption of homogenous
 A. Jalil / Energy Economics 44 (2014) 314–324 317

slope is being violated, then panel data is termed as heterogeneous where βi are the estimates from pooled Ordinary Least Square (OLS) es-
(Blackburne and Frank, 2007). timators, β e are the estimates from the weighted fixed effect estimators
w
Pesaran and Smith (1995) propose mean group (MG) estimator and and M is the identity matrix. The test has an asymptotic normal distribu-
pooled mean group (PMG) estimators for estimating the heterogeneous tion under the null hypothesis with condition of (N, T) → ∞.
panel data. The idea behind MG estimator is very simple. It estimates a Furthermore, Pesaran and Smith (1995) also point out that countries
long run model for each cross section and then takes the average of the may have a common long run despite the fact that they have different
slope parameters for each cross section. Therefore, MG estimator allows slope parameters in the short run. This argument is more relevant in
variability in intercepts, slopes and variance of error terms across groups. our context when we are explaining the economic growth through en-
The estimates of the MG estimator are reliable and consistent only if the ergy and other relevant variables. Because, Parente and Prescott (1994)
data consists of long time series for large cross sections. Pesaran et al. and Eaton and Kortum (1996) document that all countries grow at com-
(1999) set the MG estimator in an autoregressive distributed lag mon rate due to the transfer of technology which keeps the growth rate
(ARDL) model settings due to its various advantages over other constant among the countries (Hall and Jones, 1999). This scenario
autoregressive models (Pesaran et al., 2001). Then, it is super consistent paves way for using PMG estimator which is proposed by Pesaran
in the small sample size and takes care of the problem of endogeneity et al. (1999). The PMG estimator follows the MG estimator, that is, it al-
which is more relevant in our case as some of the studies mention that lows the varying intercepts, slope coefficients and standard error across
the causality runs from growth to energy consumption. However, the as- the cross sectional units. However in long run coefficients should be the
sumption of strict exogeneity makes the model more restrictive. same across countries. We are also interested in the different dynamics
The ARDL model takes the following form in our case: of the short run in different countries. The PMG estimators lie between
the mean group estimators and fixed effect approach.
X
p X
q It is important to mention here that both unit roots and cointegration
yi;t ¼ ηi þ λi; j yi;t− j þ δi; j zi;t− j þ εi;t ð4Þ testing have to consider the presence of potential breaks, given the long
j¼1 j¼0
period under study as well as the fact that a number of serious events re-
lated to energy occurred during the period 1970 to 2012. The existence
where yi,t is the level of GDP in i group at t time, ηi represents the fixed
of structural breaks may lead to misleading inferences regarding the
effects in the data and zit is vector of explanatory variables which in-
order of integration, that is, a stationary series may be taken as non-
cludes k, l, e, and tr. After re-parameterization Eq. (4) can be written
stationary (Perron, 1989) and can bias the examination of cointegration
as first difference form.
(Narayan and Smyth, 2008). Furthermore, as mentioned earlier, Breitung
and Pesaran (2008) point out that it is inappropriate to assume the cross
section independence in the usage of panel data methods because the as-
X
p−1

X
q−1
 sumption of independence is often not valid in the use of macroeconom-
Δyi;t ¼ ηi þ ϕi yi;t−1 þ φi zi;t þ λi; j Δyi;t− j þ δi; j Δzi;t− j þ εi;t ð5Þ
j¼1 j¼0 ic indicators (Urbain and Westerlund, 2006). Keeping this in view, the
! present study uses the recently developed methodologies which take
p p p
where ϕi ¼ − 1−∑ λi; j , φi ¼ −∑ δi; j , λi; j ¼ − ∑ λi;m , and δi; j ¼ into account both potential structural breaks and cross-sectional
q j¼1 j¼0 m¼ jþ1 dependence.
− ∑ δi;m with j = 1, 2, ….p − 1. The cross-section dependence (CD) test is proposed by Pesaran
m¼ Jþ1
(2004) under the null hypothesis of no dependence across the section
Eq. (5) can be written as follows when we group the variables in
of panel. Pesaran (2004) documents that CD test can be applied for
levels,
the variety of models, especially for the dynamic heterogeneous panels
with structural breaks. The test is defined as:
h i Xp−1 X 
q−1

Δyi;t ¼ ηi þ φi yi;t−1 −θi zi;t þ λi; j Δyi;t− j þ δi; j Δzi;t− j þ εi;t ð6Þ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi0 1
j¼1 j¼0 2T @NX −1 X
N
CD ¼ ^ ijA→Nð0; 1Þ
ρ ð8Þ
NðN−1Þ i¼1 j¼iþ1
φ
where θi ¼ − ϕi .
This shows the long run relationship between the var-
i
iable involved and ϕi is the speed of adjustment towards the long run ^ ij is the sample estimate of correlation of residuals. More clearly:
where ρ
equilibrium.
We should not use MG estimators or PMG estimators without test- XT
u^ u
^
ing the homogeneity condition as Catao and Terrones (2005) note that ^ ij ¼ ρ
^ ji ¼
X t¼1 it jt
ρ 1 =
X 1 = : ð9Þ
T T
if restriction of slope homogeneity holds then the estimates derived ^ 2 it
u 2
^ 2 jt
u 2
t¼1 t¼1
from mean group will be inefficient and slope homogeneity condition
does not capture heterogeneity due to country specific characteristics
(Breitung, 2005). Interestingly, Damette and Seghir (2013) apply PMG Testing stationary properties in long T as compared to N cross sec-
estimator without testing homogeneity condition, therefore, their find- tions is a natural start to avoid the spurious regressions. The literature
ings are not very convincing. offers several tests for testing the stationary properties of the panel
Swamy (1970) proposes a slope homogeneity test on slope parame- data series. These tests can be distinguished as first generation panel
ters which are obtained from panel data estimators. However, Pesaran unit root tests and second generation panel unit root tests. The first gen-
and Yamagata (2008) criticize the restriction of Swamy (1970) test eration panel unit root tests, for example Maddala and Wu (1999), Levin
that it requires small T as compared to N. Keeping this drawback of et al. (2002) and Im et al. (2003) are based on the assumption of no
Swamy test in mind Pesaran and Yamagata (2008) proposed a modified cross section dependence. While the second generation panel unit
version of Swamy test which does not have any restriction on N or T. The root test, for example Bai and Ng (2004), Moon and Perron (2004),
modified version is as follows3: Choi (2001) and Pesaran (2007) assume that there is a cross section de-
pendence. But there are several reasons for cross sectional dependence
Xn
0 x0 M−x2
 in the modern economy. For example, the higher economic integration,
0
S ¼ e
β i −β i i e
βi −β ð7Þ financial integration of countries, and trade interdependence may be
w w
σ 2
i¼1 the chief reasons.
To avoid the problem, Pesaran (2007) panel unit root test is estimat-
3
Pesaran and Yamagata (2008) is referred for the details of Swamy test. ed which is based on the assumption of cross section independence.
318 A. Jalil / Energy Economics 44 (2014) 314–324
However, the unit root problem testing has to consider the presence of
potential breaks, given the long period under study as well as the fact
that a number of serious events related to energy occurred during the
last four decades. Therefore, the present study will use Bai and
Carrion-i-Silvestre (2009) panel unit root test which takes into account
the problem of structural breaks and cross section dependence.
Before moving to long run and short run estimates of the energy
growth nexus, it is advisable to test the long run relationship among
the variables. For this purpose we shall use four different statistics
which are developed by Westerlund (2007). Two of them test the null
hypothesis that the panel is not cointegrated as a whole and named as
‘panel test’, Pt and Pa. Whereas the rest of the two statistics test the alter-
native hypothesis that at least one element in the panel is cointegrated
and named as ‘group mean test’ Ga and Gt. Importantly, all these four
tests are applicable in the presence of cross section dependence and het-
erogeneous panel data.
However, the panel cointegration test of Westerlund (2007) does
not take account of the structural breaks in the longer data series. For
this purpose we shall use Westerlund and Edgerton (2008) panel
cointegration test that considers not only the cross sectional depen-
dence but the structural breaks as well. More specifically, Westerlund
and Edgerton (2008) give two statistics under the null hypothesis of
no cointegration. Finally, we shall use common correlated effect mean
group (CCEMG) estimator, along with MG and PMG estimators, which
is proposed by Pesaran (2006) and which take into account structural
breaks and cross sectional dependence. Furthermore, Kapetanios et al.
(2011) document that CCEMG estimators are consistent and robust in
the presence of structural breaks.4
4. Data and variable construction
Our empirical analysis is based on two samples of countries over the
period of 1970 to 2012, that is, 29 countries which are net energy im-
porter and 19 net energy exporter countries. One of the major short-
comings of the previous studies, for example Damette and Seghir
(2013), is that they take the oil exporting countries as a proxy of energy
exporting countries. Obviously, this is not a comprehensive definition of
energy exporting countries. We shall use the definition of International
Energy Agency (2012) in this regard which states that the net energy
imports are estimated as energy use minus production and both are
measured in oil equivalents.5 Specifically, and a negative value indicates
that the country is a net exporter. Some of the countries like Libya,
Kuwait, Iraq, Angola, Oman, Yemen and Brunei Darussalam are exclud-
ed from our sample due to unavailability of data. Similarly, Argentina is
also excluded from the sample due to its different dynamics, because
she was a net importer from 1971 to 1982 and from 1986 to 1988 and
net exporter from 1983 to 1985 and from 1989 to 2010 and recently
she is again a net importer.
In order to apply MG and PMG estimation techniques, per capita real
GDP, real energy consumption and trade openness data are directly ob-
tained from the World Development Indicators. Trade openness ratio tr,
is the total value of exports and imports as share of nominal GDP.
Since there are no official estimates for aggregate capital stock,
therefore researchers try different options. For example, Lee and Chien
(2010) use net capital stock constructed by Kamps (2006) and several
other studies on energy–growth nexus use gross fixed capital formation
to GDP ratio. We shall take both data series keeping robustness of the
estimates in mind. However, we shall not use the Kamps (2006)
4
The mathematical derivation and expressions are deliberately dropped from the text
keeping brevity in mind. We refer to the original papers for technicalities.
5
Energy use refers to the use of primary energy before transformation to other end-use
fuels, which is equal to indigenous production plus imports and stock changes, minus ex-
ports and fuels supplied to ships and aircraft engaged in international transport. Browse
http://data.worldbank.org/indicator/EG.IMP.CONS.ZS for more details.
estimates of capital stocks but we shall generate capital stock series
for each country by using perpetual inventory method.
The basic idea of the perpetual inventory flow method is that if the
rate of decay of capital is κ then capital series will be Kt + 1 = It +
(1 − κ)Kt. It is assumed that there is a constant rate of depreciation,
then Kt + 1 = (1 − κ)Kt + It. The word perpetual implies that all as-
sets are endlessly part of inventory capital stocks and the quantity of
services provided by the capital declines over time but never reaches at
∞
zero. Therefore we can obtain K tþ1 ¼ ∑ ð1−κ Þi It−i by repeatedly
i¼0
substituting Kt + 1 = (1 − κ)Kt + It for the capital stock. In practice
∞
Nehru and Dhareshwar (1993) replaced K tþ1 ¼ ∑ð1−κ Þi It−i by K tþ1 ¼
i¼0
t−1
t i
ð1−κ Þ K ð0Þ þ ∑ I t ð1−κ Þ due to non-availability of infinite number of
i¼0
past investment flows. The K(0) is the initial stock in period zero, in our
case the capital stock is beginning in 1970, and It is the level of invest-
ment. The researchers estimate K(0) through several methods. For ex-
ample, it is assumed that the initial capital is three times of the
output. Some of the researchers estimate a linear regression of the log
of investment against time. The fitted value of initial investment
is used to calculate initial capital stock using the following equation:
Kt = It/(g + κ). Here, g is the rate of growth of output (GDP). We shall
prefer the second method because first method is not advisable in the
context of panel data estimation. As every country has a different level
of GDP at the initial point, therefore, the results of initial capital esti-
mates will not be suitable for comparison.
The other important decision in the perpetual flow method is about
the rate of depreciation of capital stock. Kamps (2006) suggests differ-
ent rates of depreciation based on the nature of assets and time span
of the data series. Specifically, it varies from 4 to 8.25% for government
assets and private residential assets respectively. Similarly, Khan
(2005) documents that capital depreciation rate may be 4 to 5% for
the developing countries. Similarly, Nadiri and Purcha (1996) estimate
the depreciation rate as 5% for the developed countries. Therefore, we
shall take 5% rate of depreciation for all countries which are included
in our sample. However, the rate of depreciation may vary from country
to country and the capital series may change accordingly. Keeping this
point in view, we shall use real investment to GDP ratio as an alternative
variable for testing robustness of our model.
Before going for the estimation, we shall take the natural log of every
variable for mitigating the risk of several econometric problems. There-
fore, the estimated coefficients are the economic growth elasticities
with respect to the independent variables.
5. Empirical results
Testing the unit root problem is a natural start in a long time series
panel model. In addition to this the structural breaks may also occur in
a longer time series. Therefore, as mentioned earlier, we shall use
three different panel unit root tests to test the unit root problems with
and without cross sectional dependence and structural breaks. The re-
sults of Maddala and Wu (1999) panel unit root test are presented in
the upper panel of Table 1. The p-values suggest that the order of inte-
gration is sensitive to the number of lags. However, most of the variables
are I (1).
However, Maddala and Wu (1999) test is developed on the assump-
tion of cross section independence. But there are several reasons for
cross sectional dependence in the modern economy. For example, the
higher economic integration, financial integration of countries, and
trade interdependence may be the chief reasons. We are not taking all
these factors into our regression models; therefore, cross section inter-
dependence may exhibit in the residuals. Breusch and Pagan (1980) La-
grange Multiplier (LM) test and Pesaran (2004) cross sectional
dependence test are used in this article. The LM statistics of Breusch–
 A. Jalil / Energy Economics 44 (2014) 314–324 319

Table 1 Table 3
Panel unit root tests without structural breaks: p-values are given with null hypothesis Slope heterogeneity test.
that series is I (1).
Swamy stats 6.0323***
Energy net exporter Energy net importer Adjusted Swamy stats 5.1149***

Lag 0 Lag 1 Lag 2 Lag 0 Lag 1 Lag 2 *** 1% level of significance.

(A) Maddala and Wu panel unit root test

y 0.3601 0.4493 0.2434 0.3887 0.4621 0.3133
l 0.7946 0.2761 0.3821 0.4594 0.9531 0.9682 However, it may be possible that a different non-linear specification
e 0.2223 0.3579 0.0095 0.3113 0.7951 0.2844 would change the analysis considerably, that is, the slope homogeneity
tr 0.7121 0.5400 0.1178 0.0898 0.1690 0.1835 be more reasonable instead of slope heterogeneity. To overcome this
k 0.2857 0.0244 0.9183 0.8506 0.9441 0.9332
problem, we test functional form under the null hypothesis that the
(B) Pesaran panel unit root test model is correctly specified. The results are presented in Table 8. We
y 0.1964 0.1589 0.0907 0.9624 0.9815 0.7486 let go of this discussion for a while; however it is important to mention
l 0.5163 0.1927 0.9231 0.5576 0.7542 0.7722
e 0.6509 0.6358 0.6026 0.7979 0.7828 0.5902
that the functional forms are correctly specified.
tr 0.9835 0.8181 0.2395 0.4380 0.8780 0.2747 The next task is to estimate the long run relationship among the var-
k 0.7096 0.6255 0.0138 0.3823 0.0953 0.4996 iables. For this purpose, as mentioned earlier, we use Westerlund
(2007) and Westerlund and Edgerton (2008) panel cointegration
tests. Westerlund (2007) is applicable in the presence of cross section
Pagan is 289.0098 and Pesaran statistics is 5.9971, which clearly reject
dependence and heterogeneous panel data, but does not consider the
the null hypothesis of no cross section dependence. Therefore, this re-
structural breaks. Therefore, we shall use Westerlund and Edgerton
sult may invalidate the results of Maddala and Wu (1999). To avoid
(2008) panel cointegration test for taking structural breaks into ac-
the problem, Pesaran (2007) panel unit root test is estimated which is
count. The results of Westerlund (2007) panel cointegration test are
based on the assumption of cross section dependence. The results are
presented in Table 4 and Westerlund and Edgerton (2008) are present-
presented in the lower panel of Table 1. However, the different order
ed in Table 5.
of integration is shown at a different lag order and this suggests that
The null hypothesis of no cointegration is clearly rejected, in both
the estimation in ARDL framework is an appropriate strategy.
cases, for both energy exporting and energy importing countries. There-
However, Pesaran (2007) test doesn't take into account the structur-
fore, we can conclude that there exists a long run relationship between
al breaks. For this purpose, we are using Bai and Carrion-i-Silvestre
energy consumption and economic growth both in energy exporting
(2009) panel unit root test which takes into account the problem of
and energy importing countries.
structural breaks and cross section dependence. The results are present-
The cointegration test establishes the long relationship among the
ed in Table 2 which show that taking structural breaks into account do
variables but does not indicate the direction of the causality. In order
not alter the decision of panel series that has a different order of integra-
to ascertain the direction of causality, Granger causality test has been
tion at a different lag order.
applied by using PMG estimator. The error correction model can be es-
Next we shall test the slope homogeneity condition. For this pur-
timated through Eq. (6). Furthermore, the measure of energy consump-
pose, we shall apply two tests, the standard version of Swamy's test
tion will be a dependent variable in the other version of Eq. (6). Then the
and adjusted version of the Swamy's test adjusted for the small sample
direction of causality can be determined by testing for the significance
properties. The results are presented in Table 3.
of the coefficients of each dependent variable in equations under the
Null hypothesis of homogenous slope parameters is clearly rejected
null hypothesis of no causality. The results are reported in Table 6.
which implies that application of long run estimates based on the
We find the uni-directional causality from energy consumption to
panel vector autoregressive model or error correction model by means
economic growth in the case of energy importer and all countries
of generalized method of moments and of pooled least square estimators
cases, while we find the bi-directional causality in the case of energy
will be misleading in investigating the linkages between energy and eco-
exporting countries. One reasonable reason for this mix results is the
nomic growth. Therefore, we shall move with heterogeneous estimation.
methodical weakness or the assumption of cross sectional country-
specific heterogeneity in climate conditions, economic development
Table 2 and energy consumption patterns.
Panel unit root tests with structural breaks: p-values are given with null hypothesis that The next task is to estimate the long run and short run elasticities.
series is I (1).
Several estimators are used for estimating the cointegration vector in
Energy net exporter Energy net importer the literature based on the dynamics of data. For this purpose, we use
Lag 0 Lag 1 Lag 2 Lag 0 Lag 1 Lag 2 MG, PMG and CCEMG estimators. The long run estimates of MG, PMG
and CCEMG estimators are presented in Table 7.
Constant and trend
y 0.2628 0.5254 0.1149 0.1799 0.3743 0.7900
We estimate a number of regressions for different samples. First, we
l 0.9769 0.6458 0.6392 0.7112 0.2632 0.5775 estimate several regressions through PMG, MG and CCEMG estimators
e 0.8581 0.5610 0.9795 0.2658 0.8931 0.7314 for the energy exporting countries, keeping robustness of the coefficient
tr 0.8736 0.4893 0.1544 0.8456 0.3365 0.6983
k 0.6089 0.0898 0.3612 0.6907 0.3231 0.1887
Table 4
Mean shift
Westerlund error correction panel cointegration tests.
y 0.1816 0.6435 0.3689 0.5706 0.2657 0.1964
l 0.0308 0.7627 0.4815 0.4553 0.3645 0.8081 Null hypothesis: Null hypothesis:
e 0.5009 0.1383 0.9967 0.8431 0.6872 0.0305 No cointegration No cointegration
tr 0.2419 0.4269 0.3867 0.2074 0.0782 0.1624
k 0.0741 0.1709 0.8376 0.9782 0.1347 0.8572 Energy net exporter Energy net importer

Statistic Value p-Value Robust Value p-Value Robust

Trend shift
y 0.9264 0.0244 0.0787 0.9772 0.0049 0.4660 Gt −3.9829 0.0437 0.0002 −3.5993 0.0628 0.0001
l 0.4222 0.1541 0.8017 0.2897 0.4662 0.6177 Ga −5.3751 0.1486 0.0007 −4.7701 0.0085 0.0000
e 0.8935 0.6457 0.8875 0.3679 0.6371 0.3024 Pt −8.8647 0.0081 0.0015 −7.2994 0.0005 0.0001
tr 0.9518 0.5068 0.2213 0.0122 0.8691 0.8858 Pa −11.3036 0.0019 0.0001 −12.2150 0.0061 0.0000
k 0.2809 0.8992 0.3005 0.7614 0.6071 0.2705
Note: Gt and Ga are the group mean statistics. Pt and Pa are panel mean statistics.
320 A. Jalil / Energy Economics 44 (2014) 314–324

Table 5 Table 6
Panel cointegration test results with structural breaks and cross sectional dependence. Panel causality test results for energy consumption and GDP.

Model Zφ (N) p-Value Zτ (N) p-Value Dependent variable Sources of causation

No break 6.6951 0.007035 2.4248 0.0142 Short run Long run

Mean shift 2.7804 0.002619 1.7850 0.0281
Δy Δe Δtr Δk ECT
Regime shift 3.0880 0.001321 1.8417 0.0920
Energy net importers
Note: The test is implemented using the Campbell and Perron (1991) automatic procedure
Δy NA 0.4187⁎⁎ 0.4057⁎⁎⁎ 0.4974⁎⁎⁎ −0.0472⁎
to select the lag length.
NA (0.1960) (0.1722) (0.0876) (0.0287)
Δe 0.3556 NA 0.8055 0.7279⁎⁎ −0.0924⁎⁎⁎
in mind. The basic model is estimated using energy consumption, capi- (0.3775) NA (0.6602) (0.3414) (0.0386)
tal stock and trade openness as independent variables (see columns 1, 2
Energy net exporters
and 3) through PMG, MG and CCEMG estimators. It is important to men- Δy NA 0.6083⁎ 0.7019⁎⁎⁎ 0.6516⁎⁎⁎ −0.0987⁎⁎⁎
tion here that taking structural breaks into account through CCEMG NA (0.3170) (0.2438) (0.2364) (0.0114)
does not alter the sign and statistical significance of the major coeffi- Δe 0.2789⁎⁎ NA 0.9971⁎ 0.3635 −0.0811⁎⁎⁎
cients. More clearly, the energy enters significantly positive in the (0.1059) NA (0.5941) (0.3138) (0.0278)

growth regression in all three estimators which implies that the use of
energy has a significant impact on the economic growth of countries.
Our results are in line with those of Damette and Seghir (2013), Li
et al. (2011), Wu et al. (2008), Huang et al. (2008), and Yu and Meng
(2008). Huang et al. (2008) divide the sample into four different sam-
ples, low income, lower middle, upper middle and high income coun-
tries. The important outcome of their analysis is that the energy
consumption enters significantly positive into all four regressions.
Therefore, we can say that the inclusion of developed and underdevel-
oped countries in a single sample has no effect on the biasedness of
the results. The other control variables k and tr are statistically signifi-
cant, positive and according to a priori expectations. These imply that
the level of capital growth and increase in international trade may
raise the level of economic growth of energy exporting countries. Fur-
thermore, the results are consistent with those of Lee and Chang
(2008), Narayan and Smyth (2008) and Lee and Lee (2010). However,
most of the coefficients are smaller than our findings. For example,
Lee and Chang (2008) find a long run coefficient of energy consumption
of 0.25, Narayan and Smyth (2008) document 0.12, 0.16 and 0.39 and
Lee and Lee (2010) report 0.52. However, the size of magnitude is not
a big issue because they include energy prices with different control var-
iables along with different sets of countries.
Then we include the level of employment into regression along with
the energy consumption, capital stock and trade openness. The compa-
rable data on employment is available since 1990. Therefore, the sample
is almost half as compared to the last estimation. Westerlund (2007) ar-
gues that Ga statistics may show no cointegration in the short span of
time. However, Pa and Pt statistics show a long run relationship
among the variables.6 The long run coefficients are presented in col-
umns 4, 5 and 6 of Table 7. Energy consumption, capital stock, employ-
ment and trade openness enter significantly positive in the regression
line and are in line with the a priori expectation.
As mentioned earlier, we constructed the capital stock series based
on several assumptions. The most crucial assumption is about the rate
of depreciation of capital stock which is assumed as 5% for all countries
and capital stock series enters significantly positive in all regression
therefore we need to check the robustness of outcome. For this purpose,
we use investment to GDP as a proxy to capital stock series. The invest-
ment to GDP ratio does alter the sign or the level of significance.
The middle panel of Table 7 presents the results of 29 energy net im-
porter countries. We repeat the same strategy for the energy importer
countries. That is, first we run the regression through MG and PMG for
the basic model, then enter the level of employment into the regression
and then replace investment to GDP ratio with capital stock. The find-
ings for the energy importer countries are in line with the theory, that
is, energy, capital stock, employment and trade openness enter signifi-
cantly positive into regressions. We also estimate the same 8 regres-
sions line for all countries which are included in our sample without
6
The results are not presented here keeping brevity in mind.
All countries
Δy NA 0.3081⁎⁎ 0.2367 0.4169⁎⁎⁎ −0.0585⁎⁎
NA (0.1591) (0.1561) (0.1538) (0.0257)
Δe 0.8214 NA 0.7289⁎⁎⁎ 0.7085⁎⁎ −0.0584⁎⁎
(0.9642) NA (0.2048) (0.3169) (0.0254)
⁎⁎⁎ 1% level of significance.
⁎⁎ 5% level of significance.
⁎ 10% level of significance.
distinguishing the energy exporting and energy importing countries
keeping robustness in our mind. The lowest panel of Table 7 presents
the results.
The results of PMG and MG are not different at least in term of signs.
Even then the decision about the selection between PMG and MG is im-
portant for the policy making point of view. Pesaran et al. (1999) use
Hausman test in selecting between MG and PMG under the null hypoth-
esis that PMG estimator is better fit than MG estimator, that is, there is
slope homogeneity in the long run. The results of Hausman test is re-
ported in Table 7. The p-values of the test show that we shall select
the PMG estimates.
Huang et al. (2008) point out a disadvantage of the panel data that it
treats the whole sample as single and differences in the slope coeffi-
cients of the countries cannot be discussed. For this purpose the re-
searchers estimate the time series data on a country to country basis.
However, PMG estimators allow heterogeneity for short run estimates.
The short run results of the basic model are presented in Table 8.
The energy consumption has a significant positive impact on eco-
nomic growth in almost all energy exporting countries except Egypt
and Venezuela. It implies that energy consumption is also an important
factor for explaining the growth of energy exporting countries. Howev-
er, we find the different sizes of magnitudes for different countries.
Some of them are very high as compared to other studies for example
Korea, Sri Lanka and Turkey and some of them are very low for example
Japan and India. There are several possible reasons. One of them is that
the other studies include energy prices with different control variables
along with different samples of data and different techniques. Further-
more, the impact of energy consumption on the economic growth pro-
cess of the countries may be associated with huge global shocks. For
example the first oil crisis in 1973, Iraq's invasion of Kuwait in 1990,
the Asian crisis in 1997–1999 when there were sharp oil price decreases
and after the 9/11 attacks in 2001. Similarly, there was a large and con-
tinued rise in oil prices during the time period of 2005 to 2008. The
whole decade of 1980s cannot be neglected due to 1978 Iranian revolu-
tion and the Iran–Iraq War. More importantly, there were some other
important events which shaped the global macroeconomics, for exam-
ple, the period of high inflation during the late 1970s along with the ex-
ploding oil prices, the global economic recession in the early 1980s, the
fall in oil prices in 1986, the Wall Street stock market was crashed in
1987, and then the periods of low economic growth and inflation in
Western industrialized countries in the late 1980s. All these shocks
struck these countries differently. Therefore, the magnitude of the
 A. Jalil / Energy Economics 44 (2014) 314–324 321

Table 7
The long run effect of energy consumption on economic growth.

1 2 3 4 5 6 7 8 9 10 11 12

Regressors PMG MG CCEMG PMG MG CCEMG PMG MG CCEMG PMG MG CCEMG

Energy net exporters

e 0.3916⁎⁎⁎ 0.6005⁎⁎ 0.6837⁎⁎⁎ 0.6727⁎⁎⁎ 0.6723⁎⁎ 0.6072⁎⁎⁎ 0.2134⁎⁎ 0.3073 0.5127⁎⁎ 0.8183⁎⁎⁎ 0.6211⁎ 0.9197⁎⁎
(0.1214) (0.2869) (0.1822) (0.2525) (0.3319) (0.2109) (0.0948) (0.2823) (0.2500) (0.2126) (0.3448) (0.4377)
k 0.3747⁎⁎ 0.5174⁎⁎ 0.7759⁎⁎ 0.4939⁎⁎ 0.4744⁎⁎⁎ 0.4898⁎ NA NA NA NA NA NA
(0.1758) (0.2536) (0.3769) (0.2522) (0.1831) (0.2812) NA NA NA NA NA NA
tr 0.1301⁎⁎⁎ 0.7500⁎⁎⁎ 0.7972⁎⁎⁎ 0.7995⁎⁎ 0.7616⁎⁎ 0.5761⁎⁎⁎ 0.3997⁎⁎⁎ 0.8044⁎⁎⁎ 0.4297⁎ 0.417 0.6011⁎⁎ 0.9337⁎⁎⁎
(0.0540) (0.2462) (0.0958) (0.3911) (0.3561) (0.1368) (0.1298) (0.2570) (0.2200) (0.3294) (0.2855) (0.1163)
l NA NA NA 0.6371⁎⁎ 0.9139⁎⁎⁎ 0.7995⁎⁎⁎ NA NA NA 0.5025⁎⁎⁎ 0.1893⁎ 0.4475⁎⁎⁎
NA NA NA (0.2776) (0.3197) (0.1208) NA NA NA (0.1451) (0.0977) (0.1749)
I NA NA NA NA NA NA 0.2235⁎⁎⁎ 0.4713⁎ 0.3421⁎⁎⁎ 0.6220⁎ 0.4309⁎⁎ 0.7193⁎⁎⁎
NA NA NA NA NA NA (0.0490) (0.2784) (0.1338) (0.3425) (0.1851) (0.2078)
Housman test 0.4300 0.4954 0.5147 0.5250

Energy net importers

e 0.8500⁎⁎ 0.7059⁎⁎ 0.3194⁎⁎⁎ 0.9153⁎⁎⁎ 0.5492⁎⁎⁎ 0.2082⁎⁎⁎ 0.1485⁎ 0.4525⁎⁎⁎ 0.9515⁎⁎⁎ 0.5021⁎⁎⁎ 0.7164⁎⁎⁎ 0.8246⁎
(0.3740) (0.3280) (0.0997) (0.2866) (0.1399) (0.0862) (0.0765) (0.1897) (0.2907) (0.1652) (0.2325) (0.4224)
k 0.2967⁎⁎⁎ 0.9296⁎⁎⁎ 0.5902⁎ 0.3224⁎⁎ 0.5322⁎⁎⁎ 0.7471⁎⁎⁎ NA NA NA NA NA NA
(0.1212) (0.2063) (0.3294) (0.1370) (0.2015) (0.2796) NA NA NA NA NA NA
tr 0.7872⁎⁎ 0.3313⁎⁎⁎ 0.4062⁎⁎⁎ 0.2665⁎⁎ 0.8375 0.7611⁎⁎⁎ 0.4629⁎⁎⁎ 0.6930⁎⁎⁎ 0.3131⁎⁎ 0.6840⁎ 0.8851⁎⁎⁎ 0.9978⁎⁎⁎
(0.3781) (0.1312) (0.1564) (0.1296) (0.5869) (0.1056) (0.1782) (0.1677) (0.1464) (0.4841) (0.2650) (0.2842)
l NA NA NA 0.6347⁎⁎⁎ 0.8499⁎⁎⁎ 0.1497⁎⁎⁎ NA NA NA 0.7231⁎⁎ 0.6901⁎⁎⁎ 0.5927⁎⁎⁎
NA NA NA (0.2615) (0.2786) (0.0586) NA NA NA (0.3647) (0.2440) (0.1681)
I NA NA NA NA NA NA 0.3376⁎⁎⁎ 0.2439 0.9156⁎⁎⁎ 0.5574⁎⁎ 0.5940⁎⁎⁎ 0.8767⁎⁎⁎
NA NA NA NA NA NA (0.1180) (0.1782) (0.1224) (0.2687) (0.2055) (0.2075)
Housman test 0.2394 0.5707 0.5295 0.5881

All countries
e 0.6853⁎⁎⁎ 0.8088⁎ 0.4977⁎⁎⁎ 0.4989⁎ 0.9501⁎⁎⁎ 0.3243⁎⁎⁎ 0.2477⁎⁎⁎ 0.2145⁎⁎⁎ 0.8466⁎⁎ 0.4274⁎⁎⁎ 0.3563⁎⁎ 0.9164⁎⁎⁎
(0.2624) (0.4248) (0.2065) (0.2560) (0.2558) (0.1299) (0.0994) (0.0713) (0.4250) (0.1623) (0.1639) (0.2033)
k 0.3176⁎⁎ 0.6683⁎⁎⁎ 0.3972⁎⁎⁎ 0.3815⁎⁎⁎ 0.3128⁎ 0.8777⁎⁎⁎ NA NA NA NA NA NA
(0.1498) (0.2442) (0.1677) (0.0778) (0.1841) (0.1349) NA NA NA NA NA NA
tr 0.2797⁎⁎ 0.4806⁎⁎⁎ 0.4092⁎ 0.4867⁎⁎⁎ 0.8765⁎ 0.4148⁎⁎⁎ 0.3382⁎ 0.6319⁎⁎⁎ 0.8177⁎⁎⁎ 0.2767⁎⁎⁎ 0.3306⁎ 0.2615⁎⁎
(0.1248) (0.1486) (0.2174) (0.2061) (0.4674) (0.1460) (0.1771) (0.2335) (0.2759) (0.1127) (0.1762) (0.1258)
l NA NA NA 0.2546 0.3679⁎⁎ 0.7238⁎⁎⁎ NA NA NA 0.3314 0.6845⁎⁎ 0.2384⁎⁎⁎
NA NA NA (0.1758) (0.1306) (0.2993) NA NA NA (0.2181) (0.2409) (0.0885)
I NA NA NA NA NA NA 0.3771⁎⁎ 0.272 0.8509⁎⁎⁎ 0.4143⁎ 0.6926⁎ 0.8466⁎⁎⁎
NA NA NA NA NA NA (0.1656) (0.2303) (0.2549) (0.2448) (0.3881) (0.1547)
Housman test 0.2084 0.4364 0.3835 0.5877

Note: The standard errors are presented in parentheses.

⁎⁎⁎ 1% level of significance.
⁎⁎ 5% level of significance.
⁎ 10% level of significance.

impact of energy may differ from country to country. Thus, setting the
policy based on the single homogenous slope is not a good strategy, es-
pecially, in the short run. Similarly, capital and trade openness are also
important determinants in the short run in energy importer countries.
Energy consumption, capital stock and trade openness also enter signif-
icantly in the energy exporter countries which is consistent with the
conventional result. This implies that any restriction on energy con-
sumption or imports of energy may hurt the growth of these countries.
The error correction (ECM) term is an important outcome. The re-
sults are presented in Table 8. The ECM term is significant for all coun-
tries and correct in sign. It is a speed of adjustment from short run
equilibrium to long run equilibrium. It varies from country to country.
Specifically it varies from 0.02 for Albania to 0.6 for New Zealand. This
implies, nearly 2% of the disequilibria of the previous year's shock adjust
back to the long run equilibrium in the current year in case of Albania
and this adjustment will move to almost 60% in the case of New
Zealand. Another important implication of these results is that if energy
reservoirs are depleted in Albania then Albania will take almost
50 years to get their long run equilibrium and New Zealand will take al-
most 2 years in case of sudden stop of energy from abroad.7
Our model passes through the diagnostic tests. The results are re-
ported in last four columns of Table 8. The p-values of the χ2 state that
there is no evidence of serial correlation and heteroscedasticity.
7
Although both these countries represent the extreme values. The rest of the countries
may be interpreted in the same way.
Furthermore, the p-value of functional form is an evidence of well spec-
ification of the model and p-value is an indication of the acceptance of
the null hypothesis of normality assumption of the residuals. Therefore,
the preferred growth equation can be used for policy decision-making
purposes, such that the impact of policy changes considering the ex-
planatory variables of growth equation will not cause major distortion
in the level of per capita GDP, since the parameters in this equation
seem to follow a stable pattern during the estimation period.
6. Conclusion
Indeed, investigating the linkages between energy consumption and
economic growth is not a unique idea. However, the present article sep-
arates itself from the existing literature in several ways. First, we inves-
tigate about the energy net exporter countries, instead of oil exporting
countries, as well as the energy importers countries. Secondly, the
cross sectional dependence is allowed and tested for the selected coun-
tries. Thirdly, the use of second generation panel unit root tests which
are based on cross section dependence. Fourth, the assumption of
slope homogeneity is no more valid for long time series data and there-
fore uses the heterogeneous panel data estimation techniques. Fifth, the
use of four different statistics which are introduced by Westerlund
(2007) based on cross sectional dependence and heterogeneous panel
data. Sixth, we estimate the homogeneous long run coefficients and het-
erogeneous short run coefficients for the cointegration vector.
322 A. Jalil / Energy Economics 44 (2014) 314–324

Table 8
Short run dynamics.

Diagnostic tests

Δe Δk Δtr ECM χ2sc χ2ff χ2nor χ2het

Energy exporter countries

Albania 0.1437** 0.8667*** 0.9571** −0.0263** 0.2949 0.1723 0.6521 0.9574
Algeria 0.2481* 0.7953** 0.1830** −0.1096** 0.5492 0.4754 0.1616 0.9838
Australia 0.1757* 0.7693** 0.9411*** −0.1492** 0.7599 0.8149 0.2259 0.3752
Bolivia 0.3850** 0.2184*** 0.3232* −0.1401** 0.2391 0.8145 0.1849 0.2327
Canada 0.4545* 0.4749** 0.1169*** −0.1283*** 0.2981 0.7715 0.7597 0.6471
Colombia 0.1407* 0.9527*** 0.7813** −0.1808** 0.8383 0.7005 0.3343 0.6383
Ecuador 0.2966* 0.3209** 0.0377** −0.1592** 0.1190 0.9343 0.7551 0.3090
Egypt −0.3347 0.7334** 0.7572*** −0.1655** 0.9701 0.3366 0.3598 0.4833
Gabon 0.6770* 0.5404** 0.1812** −0.1348** 0.6662 0.4073 0.3490 0.7245
Indonesia 0.1658*** 0.1354*** 0.8285** −0.1683** 0.1477 0.4287 0.8600 0.7247
Iran 0.2923** 0.6691** 0.2759** −0.1795** 0.2255 0.7178 0.8476 0.2917
Nigeria 0.2222* 0.9997** 0.5181*** −0.1158*** 0.1152 0.6353 0.3198 0.4163
Norway 0.3528* 0.5165** 0.6107** −0.1305** 0.5019 0.9176 0.3389 0.6433
Syria 0.4675** 0.6213** 0.1926** −0.1883* 0.4367 0.5233 0.9673 0.7199
Trinidad 0.1197** 0.4633** 0.8552* −0.1621*** 0.6712 0.7969 0.6914 0.6744
UAE 0.7871** 0.6029** 0.3533* −0.1702** 0.6697 0.2315 0.1655 0.7021
Venezuela −0.7601** 0.5756*** 0.5303*** −0.0903** 0.6156 0.3940 0.6707 0.2628
Sudan 0.3003* 0.3353*** 0.4792** −0.1869*** 0.3591 0.4460 0.6793 0.1738
South Africa 0.6124* 0.7527** 0.4139*** −0.1091** 0.1748 0.2548 0.8714 0.1177

Energy importer countries

Austria 0.3024** 0.2287** 0.0846** −0.1331** 0.8893 0.7487 0.8458 0.6936
Belgium 0.7928** 0.6267*** 0.2075 −0.1646** 0.7317 0.6677 0.6536 0.1534
Bangladesh −0.1158*** 0.5231*** 0.7142 −0.1242* 0.2466 0.2036 0.6583 0.6323
Brazil 0.6998* 0.0692** 0.5534* −0.0244*** 0.5237 0.7593 0.4828 0.1936
Chile 0.3905* 0.5853** 0.8152* −0.1686*** 0.8473 0.4522 0.7403 0.5244
China 0.2923* 0.5767** 0.8398** −0.1599* 0.3453 0.3920 0.4116 0.6002
Czech Republic 0.6018* 0.9681* 0.2700 −0.1361*** 0.1592 0.8276 0.7912 0.5142
Germany 0.1962* 0.5697*** 0.8435 −0.1870** 0.2780 0.5595 0.9274 0.8153
Denmark 0.4141* 0.8165** 0.6198** −0.3410** 0.8042 0.2957 0.4665 0.1308
Spain 0.3522* 0.6638** 0.2049** −0.1935** 0.2037 0.4338 0.8757 0.7240
Finland 0.1431** 0.7413** 0.1962* −0.1413** 0.1468 0.1464 0.8859 0.3500
France 0.3361* 0.1606** 0.8423 −0.1272*** 0.2582 0.8186 0.3590 0.4491
United Kingdom 0.7974* 0.5223** 0.8321 −0.1103** 0.1166 0.3084 0.1330 0.6295
Hungry 0.6944* 0.3764** 0.2660 −0.2238** 0.2049 0.2554 0.1317 0.3021
India 0.1415* 0.8610** 0.2199 −0.1060** 0.6698 0.8312 0.8332 0.5621
Italy −0.0603* 0.9773* 0.2116* −0.3048* 0.5422 0.1941 0.2071 0.4841
Japan 0.0747* 0.5218** 0.7282 −0.2598*** 0.1371 0.4336 0.9617 0.1225
Korea 0.9439*** 0.4310** 0.0716** −0.1696** 0.7147 0.2772 0.7240 0.8648
Sri-Lanka 0.8483** 0.6508** 0.6783 −0.3247* 0.4072 0.4312 0.2718 0.3919
Netherland 0.6552* 0.7477* 0.2908* −0.3512* 0.8944 0.5473 0.8602 0.0213
New Zealand 0.2727** 0.1711* 0.9855* −0.6237** 0.3065 0.6700 0.1184 0.2731
Pakistan 0.2364** 0.2361*** 0.1199 −0.2354*** 0.2119 0.0284 0.5468 0.8340
Philippines 0.1697** 0.6065** 0.0348* −0.3580** 0.5130 0.6039 0.0637 0.7249
Portugal 0.4997** 0.0473** 0.4595 −0.7267** 0.8611 0.2818 0.7212 0.1069
Sweden −0.0378* 0.7623* 0.0700* −0.5496** 0.5981 0.7725 0.1092 0.7056
Thailand 0.4037* 0.5736* 0.7316 −0.2579* 0.4507 0.8244 0.0534 0.2578
Turkey 0.8059** 0.3819** 0.9456* −0.2683* 0.5422 0.1885 0.4300 0.1249
United States 0.6452** 0.8890** 0.3753 −0.1875** 0.8266 0.1749 0.4584 0.2565
Vietnam 0.7313** 0.2967** 0.3896* −0.2525** 0.8254 0.8360 0.1935 0.6085

Note: χ2sc, χ2ff, χ2nor, and χ2het are the p-values for serial correlation, functional form, normality and heteroscedasticity tests respectively.
***1% level of significance.
**5% level of significance.
*10% level of significance.

We find that energy consumption, capital stock, investment flows,
level of employment and trade openness have a positive impact on
the economic growth of both energy net exporter and importer coun-
tries. We postulate that energy exporter countries have subsidized en-
ergy sector; therefore, reduction in the energy sector subsidies will
hurt the economic growth. Similarly, the energy importer countries
may face a slump if they curtail the energy related import for improving
their trade balance.
Therefore, the policy-makers are advised to take the necessary ac-
tions to make an efficient use of energy. The explicit unidirectional cau-
sality implies that energy conservation policies may be adopted with
some effect on the GDP. Since it is established in this article that energy
is one of the engines of growth, along with labor, capital and interna-
tional trade; therefore any reduction in the energy use will dampen
the economic growth. Thus, the energy security becomes more chal-
lenging and immediate issue in the scenario of volatile prices of energy
and limited supply of energy resources.
However, the other part of controversy on energy–growth nexus that
energy does not contribute in the process of economic growth suggests
that the reduction of overall energy consumption to minimize the carbon
dioxide (CO2) emission for a cleaner environment is indispensible. But,
the findings of this study suggest that governments should implement
energy policies that stress the use of alternative energy sources instead
of completely trying to reduce overall energy consumption in order to at-
tain a cleaner environment. We also follow the lines of Narayan and
Smyth (2008) and Lee and Lee (2010) who suggest that the govern-
ments should take the required steps to increase the physical and
human investments in energy sector for its restructuring. This
 A. Jalil / Energy Economics 44 (2014) 314–324
infrastructure and restructuring of the energy sector should change the
composition of energy consumption to replace environmental friendly
energy sources for fossil fuels. Furthermore, the governments should
prepare such policies which encourage their industrial sector to invest
in the cleaner technologies along with direct investment in the energy
sector. Furthermore, Costantini and Martini (2010) note that the produc-
tivity of the energy sector may rise with the usage of the more efficient
option as compared to less efficient options. Therefore, shifting from
less efficient usage to more efficient usage of energy will stimulate the
economic growth along with improvements in the environment. In addi-
tion to this the efficient use may increase energy revenues of energy
exporting countries which may have a positive impact on the economic
growth when these revenues will be reinvested in the economy.
The other important finding of the paper is the existence of the cross
section dependence among the countries. More clearly, there is cross-
sectional dependence in real energy consumption, real GDP, real invest-
ment, trade and their long-run relationship. This implies that the policy
makers should take into account the dependency on the other countries
while preparing the policies for the energy sector. Therefore, the policy
makers have to consider the relations with the other countries while
setting their future targets regarding the economic growth of their
countries. In a nut shell, this paper motivates both researchers and pol-
icy makers to follow this new line of direction of research for properly
gauging energy models, robust future prediction and realistic targets
for the usage of energy consumption which may impact their future
economic growth.
This study has some important implications for academia along with
the policy makers. As this study follows growth hypothesis taking
heterogeneity, structural breaks and cross sectional dependence into ac-
count, therefore, we suggest that the researchers who confirm conserva-
tion hypothesis, feedback hypothesis and neutrality hypothesis in their
studies should re-estimate the models by considering heterogeneity,
cross sectional dependence and structural breaks, at least, in future re-
search. Similarly, the theoretical economists should incorporate hetero-
geneity and cross sectional dependence in their theoretical research.
Because having consensus on the linkage between economic growth
and energy consumption is more than necessary keeping the role of en-
ergy in production process as a vital input and its contribution towards
the environment related issues.
Acknowledgments
I thank J. Carrion-i-Silvestre and J. Westerlund for providing their
GAUSS codes. The comments from two anonymous reviewers helped
to improve the final version.
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