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  • 7/24/2019 Energy consumption and economic growth nexus in Tanzania- An ARDL bounds testing approach.pdf

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    Energy consumption and economic growth nexus in Tanzania: An ARDL

    bounds testing approach

    Nicholas M. Odhiambo

    Economics Department, University of South Africa (UNISA), P.O. Box 392, UNISA, 0003, Pretoria, South Africa

    a r t i c l e i n f o

    Article history:

    Received 29 August 2008

    Accepted 15 September 2008Available online 21 November 2008

    Keywords:

    Tanzania

    Energy consumption

    Economic growth

    a b s t r a c t

    In this paper, we examine the intertemporal causal relationship between energy consumption and

    economic growth in Tanzania during the period of 19712006. Unlike the majority of the previous

    studies, we employ the newly developed autoregressive distributed lag (ARDL)-bounds testing approach

    by Pesaran et al. [2001. Bounds testing approaches to the analysis of level relationships. Journal of

    Applied Econometrics 16, 289326] to examine this linkage. We also use two proxies of energy

    consumption, namely total energy consumption per capita and electricity consumption per capita.

    The results of the bounds test show that there is a stable long-run relationship between each of the

    proxies of energy consumption and economic growth. The results of the causality test, on the other

    hand, show that there is a unidirectional causal flow from total energy consumption to economic

    growth and a prima-facie causal flow from electricity consumption to economic growth. Overall, the

    study finds that energy consumption spurs economic growth in Tanzania.

    & 2008 Elsevier Ltd. All rights reserved.

    1. Introduction

    Since 1970s, a number of studies have attempted to examine

    the causal relationship between energy consumption and eco-

    nomic growth in both developed and developing countries.

    Unfortunately, the majority of the studies in developing countries

    have concentrated mainly in Asia and Latin America, affording

    sub-Saharan African (SSA) countries very little coverage and in

    some instances none at all. In fact, empirical studies on countries

    like Tanzania are almost non-existent. Even where such studies

    have been undertaken, the empirical findings on the direction of

    causality between energy consumption and economic growth

    have been largely inconclusive. Over all, the empirical evidence

    from previous studies on this subject shows that the causal

    relationship between energy consumption and economic growthdiffers from country to country and over time. In addition,

    previous studies have shown that the causality between the two

    variables may be sensitive to the choice of the energy consump-

    tion variable. Although the majority of the previous studies have

    found a direct causal relationship between the various proxies

    of energy consumption and economic growth, the literature

    regarding the possible neutrality between energy consumption

    and economic growth is growing in quantity and substance. The

    majority of the previous studies on the causality between energy

    consumption and economic growth have mainly used theresidual-based cointegration test associated with Engle and

    Granger (1987) and the maximum likelihood test based on

    Johansen (1988)and Johansen and Juselius (1990). Yet it is now

    well known that these cointegration techniques may not be

    appropriate when the sample size is too small (see Narayan and

    Smyth, 2005). In addition, some previous studies have over-relied

    on the cross-sectional data analysis, which generalises the causal

    relationship between energy consumption and economic growth

    across countries. The problem of using a cross-sectional method is

    that by grouping together countries that are at different stages

    of economic development, it fails to address the country-specific

    effects of energy consumption on economic growth and vice

    versa. In particular, the method fails to explicitly address the

    potential biases induced by the existence of cross-countryheterogeneity, which may lead to inconsistent and misleading

    estimates (see alsoOdhiambo, 2008;Ghirmay, 2004;Quah, 1993;

    Casselli et al., 1996). It is against this backdrop that the current

    study attempts to investigate the intertemporal causal relation-

    ship between energy consumption and economic growth in

    Tanzania using the autoregressive distributed lag (ARDL)-bounds

    testing approach. The study uses two proxies of energy consump-

    tion, namely the total energy consumption per capita and the

    electricity consumption per capita against the real GDP per

    capitaa proxy for economic growth. The rest of the paper is

    structured as follows: Section 2 gives an overview of the energy

    policies in Tanzania. Section 3 presents the literature review,

    while Section 4 deals with the empirical model specification, the

    ARTICLE IN PRESS

    Contents lists available atScienceDirect

    journal homepage:ww w.elsevier.com/locate/enpol

    Energy Policy

    0301-4215/$- see front matter & 2008 Elsevier Ltd. All rights reserved.doi:10.1016/j.enpol.2008.09.077

    Tel.: +27 124294829.

    E-mail address: [email protected]

    Energy Policy 37 (2009) 617622

    http://www.sciencedirect.com/science/journal/jepohttp://www.elsevier.com/locate/enpolhttp://localhost/var/www/apps/conversion/tmp/scratch_1/dx.doi.org/10.1016/j.enpol.2008.09.077mailto:[email protected]:[email protected]://localhost/var/www/apps/conversion/tmp/scratch_1/dx.doi.org/10.1016/j.enpol.2008.09.077http://www.elsevier.com/locate/enpolhttp://www.sciencedirect.com/science/journal/jepo
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    estimation technique and the empirical analysis of the regression

    results. Section 5 concludes the study.

    2. An overview of energy policies in Tanzania

    The main sources of energy in Tanzania include biofuel, woodfuel, hydroelectric power, natural gas, biogas, coal reserves, wind

    and solar energy. However, the most exploited energy source

    is wood fuel, which is considered to be cheap and accessible to

    the majority of Tanzanians who live mainly in rural areas. In fact,

    the biomass energy resource, which consists of fuel-wood and

    charcoal from natural forests and plantations, accounts for 90% of

    the total energy consumption, while petroleum accounts for 8%

    (SARDC, 2006). Petroleum and hydroelectric power on the other

    hand, account for 8% and 1.2%, respectively. The remaining energy

    sources, such as solar energy, wind, etc. account for only 0.8%. The

    vast majority of Tanzanians do not have access to electricity. In

    particular, the rural population is hard hit. While about 39% of the

    urban population have access to electricity, only 2% of the rural

    population have access to electricity. The government of Tanzaniahas implemented a number of policies which are aimed at

    addressing the countrys energy needs. Recently, the government

    decided to review the countrys energy policy of 1992, which

    culminated in the National Energy Policy of 2003. The main aims

    of this policy are to: (i) promote affordable and reliable energy

    supplies throughout the whole country; (ii) reform the market for

    energy services and establish an adequate institutional framework

    to facilitate investment in the energy sector, taking into account

    the environmental concerns in all energy activities; (iii) enhance

    the development and utilisation of indigenous and renewable

    (RE) energy sources; (iv) promote energy efficiency and conserva-

    tion; and increase energy education and build gender-balanced

    capacity in energy planning, implementation and monitoring

    (Republic of Tanzania, 2005).

    The consumption of energy in Tanzania has, however, shown a

    mixed trend, especially since the 1990s. For example, the energy

    consumption, measured in kilograms of oil equivalent per capita,

    steadily decreased from 428.142 in 1980 to 352.062 in 1994,

    before increasing to 358.427 in 1995. Although the consumption

    later decreased to 353.185 and 347.882 in 1996 and 1997,

    respectively, it later increased again to 360.055 in 1998. Since

    1999 the energy consumption in Tanzania has been increasingconsistently, with the highest level of 498.29 since 1973 being

    recorded in 2004.Fig. 1shows the trends of energy consumption

    per capita and GDP per capita during the period 19942005 as

    compared to 1980.

    3. Literature review

    The causal relationship between energy consumption and

    economic growth has important implications from the theoretical,

    empirical and policy standpoints. A unidirectional causality

    running from electricity consumption to economic growth, for

    example, implies that economic growth is dependent on energy

    consumption, and a decrease in energy consumption may restraineconomic growth (see also Narayan and Singh, 2007, p. 1142).

    A unidirectional causality running from GDP to energy consump-

    tion, on the other hand, implies that a country is not entirely

    dependent on energy for its economic growth, and that energy

    conservation policies can be implemented with little or no

    adverse effects on economic growth. Likewise, the finding of no

    causality in either direction, i.e. the so-called neutrality hypoth-

    esis, implies that energy conservation policies have no effect on

    economic growth (seeAsafu-Adjaye, 2000;Paul and Bhattacharya,

    2004).

    On the empirical front, there exist four views regarding the

    causal relationship between energy consumption and economic

    growth. The first view argues that energy consumption Granger-

    causes economic growth. This view has been widely supported by

    ARTICLE IN PRESS

    -5

    0

    5

    10

    15

    20

    25

    30

    1980

    Year

    Perc

    ent

    % Change in energy use per capita

    % Change in GDP per capita

    1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

    Fig. 1. Trends of energy consumption per capita and economic growth during the period 19942005 as compared to 1980. Source: Authors own computation from the

    World Development Indicators CD-ROM, 2007; International Financial Statistics Yearbook, 2007.

    N.M. Odhiambo / Energy Policy 37 (2009) 617622618

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    Narayan and Smyth (2008)for the case of G7 countries;Narayan

    and Prasad (2008)for the case Australia, Iceland, Italy, the Slovak

    Republic, the Czech Republic, Korea, Portugal and the UK; Narayan

    and Singh (2007)for the case of Fiji; Altinay and Karagol (2005)

    for the case of Turkey; Wolde-Rufael (2004) for the case of

    Shangai;Shiu and Lam (2004)for the case of China;Chang et al.

    (2001)for the case of Taiwan; Yang (2000)for the case of Taiwan;

    Cheng (1997)for the case of Brazil and Masih and Masih (1996)for the case of India, among others. The second view argues that it

    is economic growth that drives the energy consumption in many

    countries, and that as the economy grows the demand for energy

    from different sections of the economy increases. The empirical

    work, which is consistent with this view includes studies such as

    Kraft and Kraft (1978)for the case of the USA,Cheng (1999)for the

    case of India,Gosh (2002)for the case of India, Narayan (2005);

    Narayan and Smyth (2005)for the case of Australia,Abosedra and

    Baghestani (1989)for the case of the USA, Cheng and Lai (1997)

    for the case of Taiwan, Masih and Masih (1997) for the case of

    Indonesia,Hatemi-J and Irandoust (2005)for Sweden, Mozumder

    and Marathe (2007) for the case of Bangladesh, among others.

    The third view, however, maintains that both electricity con-

    sumption and economic growth Granger cause each other, i.e.,that there is a bidirectional causality between electricity con-

    sumption and economic growth. This view has been widely

    supported by studies such asMasih and Masih (1997)for the case

    of Korea and Taiwan, Yang (2000) for the case of Taiwan, Paul and

    Bhattacharya (2004)for the case of India and Glasure (2002)for

    the case of Korea. Finally, the fourth view maintains that there is

    no causality between energy consumption and economic growth.

    In other words, these studies assert that energy consumption

    and economic growth are neutral with respect to each other.

    This finding has been supported by the studies ofAkarca and Long

    (1980)for the case of the USA,Yu and Hwang (1984)for the case

    of the USA,Cheng (1995)for the case of the USA andCheng (1997)

    for the case of Mexico and Venezuela, among others.

    4. Estimation techniques and empirical analysis

    4.1. CointegrationARDL bounds testing procedure

    In this study the recently developed ARDL-bounds testing

    approach is used to examine the long-run cointegration relation-

    ship between each of the two proxies of energy consumption and

    economic growth. The ARDL modelling approach was originally

    introduced by Pesaran and Shin (1999) and later extended by

    Pesaran et al. (2001). The ARDL cointegration approach has

    numerous advantages in comparison with other cointegration

    methods. Unlike other cointegration techniques, the ARDL does

    not impose a restrictive assumption that all the variables understudy must be integrated of the same order. In other words, the

    ARDL approach can be applied regardless of whether the under-

    lying regressors are integrated of order one [I(1)], order zero [I(0)]

    or fractionally integrated. Secondly, while other cointegration

    techniques are sensitive to the size of the sample, the ARDL test is

    suitable even if the sample size is small. Thirdly, the ARDL

    technique generally provides unbiased estimates of the long-run

    model and validt-statistics even when some of the regressors are

    endogenous (see also Harris and Sollis, 2003). The ARDL model

    used in this study can be expressed as follows:

    Model 1total energy consumption and economic growth

    DInyt a0 Xn

    i1

    a1iDInyti Xn

    i0

    a2iDInENCti a3Inyt1 a4InENCt1 mt

    (1)

    DInENCt b0 Xn

    i1

    b1iDInENCti Xn

    i0

    b2iDInyti b3Inyt1 b4IInENCt1 mt

    (2)

    Model 2electricity consumption and economic growth

    DInyt f0 Xn

    i1

    f1iDInyti Xn

    i0

    f2iDInELECti f3Inyt1 f4InELECt1 mt

    (3)

    DInELECt d0 Xn

    i1

    d1iDInELECti Xn

    i0

    d2iDInyti d3Inyt1 d4InELECt1 mt

    (4)

    where Iny is the log of per capita real GDP; InENCthe log of total

    energy consumption per capita; InELEC the log of electricity

    consumption per capita; m the white noise error term and D thefirst difference operator. The per capita real GDP data was

    computed from the International Financial Statistics Yearbook

    (2007), while the total energy data and the electricity consump-

    tion were obtained from the World Development Indicators

    CD-ROM (2007).

    The bounds testing procedure is based on the joint F-statistic

    (or Wald statistic) for cointegration analysis. The asymptoticdistribution of the F-statistics is non-standard under the null

    hypothesis of no cointegration between examined variables.

    The null hypothesis of no cointegration among the variables in

    Eq. (1) is (Ho: a3 a4 0) against the alternative hypothesis

    (H1: a3aa4a0). In Eq. (2), the null hypothesis of no cointegra-

    tion is (Ho: b3 b4 0) against the alternative hypothesis

    (H1: b3ab4a0), while in Eq. (3), the null hypothesis of no

    cointegration is (Ho:f3 f4 0) against the alternative hypoth-

    esis (H1: f3af4a0). Finally, in Eq. (4), where the electricity

    consumption per capita is the dependent variable, the null

    hypothesis of no cointegration is (Ho: d3 d4 0) against the

    alternative hypothesis (H1: d3ad4a0). Pesaran and Pesaran

    (1997)and Pesaran et al. (2001)report two sets of critical values

    for a given significance level. One set of critical values assumesthat all variables included in the ARDL model are I(0), while the

    other is calculated on the assumption that the variables are I(1). If

    the computed test statistic exceeds the upper critical bounds

    value, then the Ho hypothesis is rejected. If the F-statistic falls into

    the bounds then the cointegration test becomes inconclusive. If

    theF-statistic is lower than the lower bounds value, then the null

    hypothesis of no cointegration cannot be rejected.

    4.2. Granger non-causality test

    Once the long-run relationships have been identified in

    Section 4.1, the next step is to examine the short-run and long-

    run Granger causality between the two proxies of energy

    consumption and economic growth. The traditional Grangersdefinition of causality is based on the notion that the future

    cannot cause the past, but that the past can cause the future

    (see also Takaendesa and Odhiambo, 2007). According to

    Grangers definition of causality, a time series, Xt, causes another

    time series, Yt, ifYt can be predicted better (in a mean-squared-

    error sense) using past values ofXtthan by not doing so. That is if

    past values ofXtsignificantly contribute to forecasting Yt, then Xtis said to Granger cause Yt. Causality from Y to X can also be

    defined in the same way. That is, when past values of Ytsignificantly contribute to forecasting future values ofXt, then Ytis said to Granger cause Xt.

    The Granger causality test method has been chosen in this

    paper over other alternative techniques because of its favourable

    response to both large and small samples. Guilkey and Salemi(1982), andGeweke et al. (1983), for example, have all shown that

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    the Granger test outperforms the other methods in both large and

    small samples. Other alternative test procedures that have been

    suggested in the literature include:Sims (1972),Pierce and Haugh

    (1977), and Geweke (1982), among others. The conventional

    Granger causality test involves the testing of the null hypothesis

    that Xt does not cause Yt and vice versa by simply running the

    following two regressions

    Yt a0 Xn

    i1

    a1iYti Xn

    i1

    b1iXti ut (5)

    Xt b0 Xn

    i1

    a2iYti Xn

    i1

    b2iXti t (6)

    whereut,etare the white noise error processes and n denotes thenumber of lagged variables.

    The Null hypothesis that Xt does not Granger cause Yt is

    rejected ifb1iare jointly significant (Granger, 1969). Likewise, the

    null hypothesis that economic growth does not Granger cause

    financial development is rejected if ais are jointly rejected.

    However, the traditional causality tests suffer from two metho-

    dological deficiencies (see also Odhiambo, 2004). First, these

    standard tests do not examine the basic time series properties ofthe variables. If the variables are cointegrated, then these tests

    incorporating different variables will be mis-specified unless the

    lagged error-correction term is included (Granger, 1988). Second,

    these tests turn the series stationary mechanically by differencing

    the variables and consequently eliminate the long-run informa-

    tion embodied in the original form of the variables. As opposed to

    the conventional Granger causality method, the error-correction-

    based causality test allows for the inclusion of the lagged error-

    correction term derived from the cointegration equation. By

    including the lagged error-correction term, the long-run informa-

    tion lost through differencing is reintroduced in a statistically

    acceptable way. The Granger causality model used in the current

    study is based on the following model (see Odhiambo, 2007;

    Narayan and Smyth, 2008).Model 1Causality test between total energy consumption

    and economic growth

    DInyt a0 Xn

    i1

    a1iDInyti Xn

    i0

    a2iDInENCti ECMt1 mt (7)

    DInENCt b0 Xn

    i1

    b1iDInENCti Xn

    i0

    b2iDInyti ECMt1 mt

    (8)

    Model 2Causality test between electricity consumption and

    economic growth

    DInyt f

    0X

    n

    i1

    f1iDIny

    tiX

    n

    i0

    f2iDInELEC

    t

    i ECM

    t

    1 m

    t

    (9)

    DInELECt d0 Xn

    i1

    d1iDInELECti Xn

    i0

    d2iDInyti ECMt1 mt

    (10)

    where ECMt1 is the lagged error-correction term obtained from

    the long-run equilibrium relationship.

    Although the existence of a long-run relationship between

    [ENC, y] a n d [ELEc, y] suggests that there must be Granger

    causality in at least one direction, it does not indicate the

    direction of temporal causality between the variables. The

    direction of the causality in this case can only be determined by

    the F-statistic and the lagged error-correction term. While thet-statistic on the coefficient of the lagged error-correction term

    represents the long-run causal relationship, the F-statistic on the

    explanatory variables represents the short-run causal effect

    (see Odhiambo, 2008; Narayan and Smyth, 2006). It should,

    however, be noted that even though the error-correction term has

    been incorporated in all the equations (7)(10), only equations

    where the null hypothesis of no cointegration is rejected will be

    estimated with an error-correction term (see also Narayan and

    Smyth, 2006;Morley, 2006).

    4.3. Empirical analysis

    4.3.1. Stationarity test

    Although the bounds test for cointegration does not require

    that all variables be integrated of order 1 [ I(1)], it is important to

    conduct the stationarity tests in order to ensure that the variables

    are not integrated of order 2 [I(2)]. In fact, the F-test would be

    spurious in the presence ofI(2) because both the critical values of

    the F-statistics computed by Pesaran et al. (2001) and Narayan

    (2005)are based on the assumption that the variables are I(0) or

    I(1). The results of the stationarity tests on differenced variables

    based on the PhillipsPerron and NgPerron tests are presented in

    Tables 1 and 2.The results reported in Tables 1 and 2 show that after

    differencing the variables once, all the variables were confirmed

    to be stationary. The PhillipsPerron and NgPerron tests applied

    to the first difference of the data series reject the null hypothesis

    of non-stationarity for all the variables used in this study. It is,

    therefore, worth concluding that all the variables used in this

    study are not I(2).

    4.3.2. Cointegration test

    In this section, the long-run relationship between [ENC,y] and

    [ELEC,y] is examined using the ARDL bounds testing procedure. In

    the first step, the order of lags on the first differenced variables in

    Eqs. (1)(4) is obtained from the unrestricted models by using an

    Akaike Information Criterion and Schwartz Bayesian Criterion

    (see the results of the above tests (not reported here)) show that

    the optimal lag for both Models 1 and 2 is lag 2. Having

    established the optimal lag length for Eqs. (1)(4), the next

    step is to apply a boundsF-test to Eqs. (1)(4) in order to establish

    ARTICLE IN PRESS

    Table 1

    Stationarity tests of variables on first differencePhilipsPerron (PP) test

    Variable No trend Trend Stationarity status

    DLy 10.1436*** 4.1167** Stationary

    DLENC 3.6053** 6.2966*** Stati onary

    DLELEC 6.0846*** 5.9431*** Stati onary

    Note: (1) the truncation lag is based on Newey and West (1987)bandwidth.

    (2) **and ***denote significance at 5% and 1%, respectively.

    Table 2

    Stationarity tests of variables on first differenceNgPerron test

    Variable NgPerron test statistics (with trend) Stationarity status

    MZ MZt MSB MPT

    DLy 34.1774 3.94463 0.11542 3.68770 Stationary

    DLENC 78.8378 6.26157 0.07942 1.22526 Stationary

    DLELEC 66.7107 5.77029 0.08650 1.38849 Stationary

    Asymptotic critical values(Ng and Perron, 2001,Table 1)

    1% 23.8000 3.42000 0.14300 4.03000

    5% 17.3000 2.91000 0.16800 5.48000

    10% 14.2000 2.62000 0.18500 6.67000

    N.M. Odhiambo / Energy Policy 37 (2009) 617622620

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    a long-run relationship between the variables under study.

    The results of the bounds test are reported inTable 3.

    The results reported in Table 3show that when the real GDP (y)

    per capita is used as the dependent variable in Model 1 and Model

    2, the calculatedF-statistic is higher than the critical value at 10%

    and 5% levels, respectively. However, when the total energy

    consumption (ENC) in Model 1 and electricity consumption (ELEC)

    in Model 2 are used as dependent variables, the calculatedF-statistics are lower than the lower-bound critical values at the

    10% level. This implies that there is a unique cointegration vector

    in Model 1 and also in Model 2.

    4.3.3. Analysis of causality test based on error-correction model

    Having found that there is a long-run relationship between

    [y, ENC] in Model 1 and [y, ELEC] in Model 2, the next step is to

    test for the causality between the variables used by incorporating

    the lagged error-correction term into Eqs. (7) and (9), respectively.

    The causality in this case is examined through the significance

    of the coefficient of the lagged error-correction term and joint

    significance of the lagged differences of the explanatory variables

    using the Wald test. The results of these causality tests are

    reported inTable 4.

    The empirical results reported inTable 4show that there is a

    distinct unidirectional causal flow from total energy consumption

    to economic growth, both in the short run and in the long run

    (see Model 1). The long-run causality from total energy con-

    sumption to economic growth is supported by the coefficient

    of the lagged error-correction term in the economic growth

    function, which is negative and statistically significant, as

    expected. The short-run causality from total energy consumption

    to economic growth, on the other hand, is supported by the

    F-statistic in the economic growth function, which is statistically

    significant. The reverse causality from economic growth to total

    energy consumption, however, is rejected by the lagged error-

    correction term and the F-statistic in the energy function, which

    are all statistically insignificant. The results also show that there is

    a prima facie (short-run) causal flow from electricity consumption

    to economic growth (see Model 2). The short-run causal flow from

    electricity consumption to economic growth is supported by the

    F-statistic in the economic growth function in the second model,which is statistically significant. The long-run causal flow from

    electricity consumption to economic growth is, however, rejected

    by the lagged error-correction term in the economic growth

    function (Eq. (7)), which is statistically insignificant. A summary

    of the causality test between the three variables is presented in

    Table 5.

    5. Conclusion

    This study examines the intertemporal causal relationship

    between energy consumption and economic growth in Tanzania

    using two proxies of energy consumption, namely total energy

    consumption and electricity consumption against per capita real

    GDPa proxy for economic growth. The study attempts to answer

    one fundamental question. Does energy consumption in Tanzania

    spur economic growth? Although a number of studies have been

    conducted on the causal relationship between energy consump-

    tion and economic growth in a number of developing countries,

    the majority of these studies have concentrated mainly on Asia

    and Latin America, affording sub-Saharan African (SSA) countries

    very little coverage and in some instances none at all. In addition,

    previous studies on this subject suffer from two major weak-

    nesses. Firstly, the majority of the previous studies have mainly

    used the residual-based cointegration test associated with Engle

    and Granger (1987)and the maximum likelihood test based on

    Johansen (1988)andJohansen and Juselius (1990)to examine the

    relationship between energy consumption and economic growth.Yet it is now well known that these cointegration techniques may

    ARTICLE IN PRESS

    Table 3

    Bounds F-test for cointegration

    Dependent variable Function F-test statistic

    Model 1Total energy consumption and economic growth

    y y(ENC) 3.799*

    ENC ENC(y) 2.550

    Model 2Electricity consumption and economic growth

    y y(ELEC) 5.540**

    ELEC ELEC(y) 1.026

    Asymptotic critical values

    1% 5% 10%

    I(0) I(1) I(0) I(1) I(0) I(1)

    6.027 6.760 4.090 4.663 3.303 3.797

    Note: ** and * denote statistical significance at the 5% and 10% levels, respectively.

    Asymptotic critical value bounds are obtained from Narayan (2005), p. 1987,

    Appendix: Case II.

    Table 4

    Granger non-causality tests

    Dependent variable Causal flow F-statistic t-Test on ECM R2

    Model 1Total energy consumption and economic growth

    Economic growth (y) Total energy consumption (ENC)-economic growth (y) 3.3674 (0.0208)** 2.044** 0.43

    Total energy consumption (ENC) Economic growth (y)-total energy consumption (ENC) 9.3042 (0.0003)*** 0.77

    Model 2Electricity consumption and economic growth

    Economic growth (y) Electricity consumption (ELEC)-economic growth(y) 3.600 (0.0339)** 0.973 0.37

    Electricity consumption (ELEC) Economic growth (y)-electricity consumption (ELEC) 0.95318 (0.4761) 0.24

    ** and *** denote statistical significance at 5% and 1% levels, respectively.

    Table 5

    Summary of causality tests

    Variables Causality General conclusion

    Economic growth

    (DLy) and total

    energy

    consumption

    (DLENC)

    There is a distinct

    unidirectional causal flow

    from energy consumption to

    economic growth.

    Energy consumption

    Grangercauses economic

    growth.

    Economic growth

    (DLy) and

    electricity

    consumption(DLELEC)

    There is a short-run

    unidirectional causal flow

    from electricity consumption

    to economic growth.

    Electricity consumption

    Grangercauses economic

    growth only in the short run.

    N.M. Odhiambo / Energy Policy 37 (2009) 617622 621

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    6/6

    not be appropriate when the sample size is too small (see Narayan

    and Smyth, 2005). Secondly, some previous studies have over-

    relied on the cross-sectional data analysis, which fails to address

    the country-specific effects of energy consumption on economic

    growth and vice versa. Using the ARDL-bounds test procedure, the

    empirical results of this study show that there is a distinct

    unidirectional causal flow from total energy consumption to

    economic growth, both in the short run and in the long run. Theresults also show that there is a prima facie(short-run) causal flow

    from electricity consumption to economic growth. Overall, the

    study finds that energy consumption spurs economic growth in

    Tanzania.

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