Energy Consumption and Economic Growth in Ethiopia: Evidence from ARDL Bound Test Approach

Abstract

The present study aims to investigate the dynamic relationship between economic growth and energy consumption. Specifically, the study tries to answer the questions whether energy consumption has any significance effect on economic growth of the country and it also determined the magnitude of the effect. In doing this, the study used an ARDL bound test approach to analyze Ethiopian data from 1970 to 2017 with real GDP as a function of energy consumption, human capital., physical capital., trade openness and policy change dummy. To do so, secondary data were obtained from WDI, UNCTAD stat and NBE. Co-integration test approves the existence of long-run relationship among the variables. Moreover, the estimation result reveals that, energy consumption found statistically insignificant in affecting economic growth in the long-run. However, it was positive and statistically significant in short-run. Likewise, the dummy variable incorporated to capture the policy change found insignificant in long-run and with positive significant result in short-run. Also, we applied the Granger causality test in linear multivariate models to evaluate how important is the causal impact of energy consumption on economic growth. The results give the evidence of causality running from economic growth to energy consumption supporting “conservation hypothesis”, implying that reducing energy consumption may be implemented with little or no adverse effect on economic growth. Hence, this study recommended the policy makers to improve the existing policies on energy consumption so as to enhance the level of efficiency in the energy sector i.e. energy regulation policies supporting the shift from lower-quality to higher-quality energy services.