The Role of Institutions in the Renewable Energy-Growth Nexus in the MENA Region: a Panel Cointegration Approach

Abstract

Institutional quality plays an undeniable role in every goal of accelerating economic growth. While the MENA region offers many natural assets that can make investments in renewable energy profitable, this region suffers from several institutional quality issues. In this line of thinking, this paper examines the relationship between renewable energy and economic growth in MENA countries taking into account institutional measures. To get a deeper insight into the relationship between this triangle of annual variables spreading from 1986 to 2015, our study considered a broader set of institutional variables, namely, corruption, bureaucracy quality, democracy accountability, law and order, and ethnic tensions. Using panel cointegration tests, we found that renewable energy, economic growth, and any institutional measures, of all considered in this study, are cointegrated. Furthermore, we found a strong causality running from renewable energy and any institutional measure, except law and order, to growth. A reverse path is also observed since there is also a strong causality running from growth to renewable energy when the causal regression includes any institutional measure. Our findings corroborate the fact that establishing an attractive institutional framework in MENA countries could be of ultimate importance in the profitability of renewable energy investments and in accelerating economic growth.