Tuesday, September 4, 2012

Which comes first: electricity or economic growth?

Economic growth leads to higher electricity consumption. But electrical capacity needs to be put in place before we can get any economic growth. So what drives what? This is kind of important in terms of policy if you think about development. In countries where there is only intermittent power supply, do we first need to fix that, or will this fix itself once they have sufficiently grown? Or, would efforts to conserve energy consumption retard growth?

Melike Bildirici tries to sort through the empirical evidence by applying Granger causality test as well as vector autoregressions to a Markov switching model for a set of African countries (and the author will be surprised to learn Brunei is actually in Asia). The Markov switching is because one can suspect that there have been regime changes. Quite a complicated analysis that concludes that the causality runs both ways.

Now, to be frank, I find this analysis a bit vacuous, especially regarding the policy questions I alluded to. First, there is a difference between electricity capacity and consumption, and once you make this distinction, the causality is quite clear. Second, the idea that energy conservation could hamper growth is quite silly. Indeed, if one manages to do just as much with less indicates there is a increase in productivity, or you can do more with the same inputs. There is growth right there.


mOOm said...

I don't think it is a silly question - if you impose a carbon tax say, what is the impact on growth via reduction in energy use? That's what they are thinking of in terms of as "energy conservation". On the other hand, innovation in energy efficiency can be a source of growth as you say. So this is a complicated question and the hundreds of papers on this topic mostly don't really tell us much about the answers to these questions.

Anonymous said...

Energy conservation doesn't hinder growth! This is a ridiculus statement from an otherwise rational website.