Relationship of Energy Consumption and Economic Growth in Pakistan

Abstract

The paper analyzed the fundamental relationship among the uses of energy, uses of electricity and gas, total consumption of oil, and economic development of Pakistan. This analysis used time series data for the sample span of 1972-2017, retrieved from economic survey of Pakistan (ESP, 2018). Vector Auto Regressive (VAR) model is used for analyzing the causal link amongst the variables. Before estimating VAR, Augmented Dickey Fuller (ADF) and breusch-Godfrey serial correlation LM tests are applied for confirming a stationarity characteristic of every variable, initial with intercept and then, with interrupt along with the linear deterministic trend. The Schwartz Information Criterion (AIC) is applied for the selection of optimal lag. Johansen Co-integration analysis is adopted for identifying long run association. Result of the VAR model reveals that 1% increase in consumption of natural gas accelerates economic growth by 1.5%.Similarly 1% increase in consumption of petroleum increases economic growth by about 0.2%. Similarl,1% increase in electricity consumption brings about 1.03% increase in economic growth which is statistically insignificant. The findings of the research work propose that policy makers require to plan for environmental issue while making policies regarding the uses of energy and development of economy and also search for cheap and environmental friendly energy sources like construction of dams, provision of solar system and wind mills.