Investigating the long-run interaction between electricity consumption, foreign investment, and economic progress in Pakistan: evidence from VECM approach.

Abstract

In this study, we attempt to investigate the relationship between electricity consumption, foreign direct investment (FDI) and economic progress in Pakistan during the period from 1997 to 2017. We applied the unit root tests to cointegration approach with the vector error correction model (VECM) approach. We also authenticated the robustness of the outcomes with the help of the regression methods. The main findings indicated that variables are cointegrated in the long-run and the VECM approach verified long-run causal links among the variables. The short-run causality is running from electricity consumption and economic development to FDI. The results remained uniform under the fully modified ordinary least squares (FMOLS), dynamic ordinary least squares (DOLS), and the autoregressive distributed lag (ARDL) estimations. Correspondingly, these three methods ratified that there is a significant long-run linkage between electricity consumption and the economic development of Pakistan. Additionally, the diagnostic assessments fixed that results are free from correlations and models are stable. Thus, based on these results, electricity generation and consumption, as well as FDI, is crucial for the economic progress of Pakistan. The priority should be given to promote the optimum use of available resources to generate energy, and FDI in the energy sector should be attracted through various incentives to support the economic advancement of Pakistan. Renewable energy resources are recyclable springs that can cut the intensity of carbon emissions and encourage to the promising magnitude of FDI and also certify sustainable and economic progression of Pakistan.