Elsevier

Energy

Volume 221, 15 April 2021, 119793
Energy

How energy consumption, industrial growth, urbanization, and CO2 emissions affect economic growth in Pakistan? A novel dynamic ARDL simulations approach

https://doi.org/10.1016/j.energy.2021.119793Get rights and content

Highlights

  • The study examines the determinants of economic growth in Pakistan from 1972 to 2018.

  • This study employs a newly developed, dynamic ARDL simulation model.

  • The study also applied the frequency-domain causality (FDC) test.

  • Empirical results show long and short-run significant impacts on economic growth.

  • However, the FDC evidence revealed the short, medium, and long-run relationship.

Abstract

Pakistan has been confronting economic challenges for two decades due to many factors such as the electricity crisis, among others. It is therefore essential to identify such factors that may play a constructive role in economic growth. In doing so, this study investigates the determinants of economic growth in Pakistan from 1972 to 2018. The dynamic autoregressive distributed lag (ARDL) simulations approach is applied to analyze positive and negative changes in energy consumption, industrial growth, urbanization, and carbon emissions on economic growth in Pakistan. The frequency-domain causality (FDC) test is utilized to check long-, medium-, and short-run relationships. Our empirical evidence reveals that electricity consumption and industrial value-added have a short- and long-run impact on economic growth. However, carbon emissions and urbanization have positive effects on economic growth in the short run. Consequently, we conclude that energy consumption, industrial growth, urbanization, and CO2 emissions positively impact economic growth in Pakistan. The FDC also confirms the long-, medium-, and short-run causality hypothesis. The study suggests a requirement to integrate better electricity generation and management with the planning of economic policies. The government is advised to invest more in renewable energy to protect the environment from degradation, ban the import of low-efficiency electrical appliances, and evaluate the refugee reception policy.

Introduction

The primary determinant of economic development and social stability is energy supply. The use of energy resources has also increased over time due to rapid growth and technological innovations. Electricity performs a vital role in the productions and consumptions of goods and services within the economy [1]. Pakistan is attempting to overcome a severe, in terms of changing its energy mix, that is directly or indirectly affecting each sector of the economy. However, the inefficiencies of energy in the past has disintegrated the country’s economy. In 2013–18, enormous governmental projects were launched to fix congestion and bottle necks of inefficient delivery of energy services with a combined capacity of 12,230 MW integrated into the supply-side. Furthermore, high energy prices in the present and immediate future are a by-product of such aggressive additional capacity during the aforementioned period. Fig. 1 illustrates electricity generation sources of Pakistan in 2018. Further, Fig. 1 reveals that biofuels and waste, oil and natural gas are the major sources of generation with percentage share 33%, 26% and 25% in kiloton of oil equivalent (ktoe), respectively. Natural gas is an environmentally friendly, renewable, safe and reliable source. The indigenous sources make up approximately 25% of the country’s overall primary energy mix. Pakistan has a large gas network with a reach of more than 12.971 km transmission 139.827 km delivery and 37.058 gas pipelines to meet the needs of more than 9.6 million customers throughout the country. Regarding the proportions of various power generation sources, it should be noted that there has been a decline in hydro electricity generation over the last couple of decades [2]. Water scarcity is the main reason for reducing hydropower production. Biofuels and waste generation currently has the largest share. While, specific cheaper sources include wind and hydro. However, biofuels, oil and natural gas has led to massive demand growth in its energy mix. The Government has emphasized an alternative contribution to the production of electricity by renewables. However, remaining supplies are provided in fertilizer, manufacturing, and transport sectors via various power stations such as KAPCO, Havli Bahadur Shah, Balloki, Saif, Orient, Rousch, Bhiki, Halmore, and Sapphire.

The economic growth factors in Pakistan must be investigated. There is still a considerable gap to improve Pakistan’s economic growth, but the inability to provide sufficient, uninterrupted, and accessible electricity is an enormous obstacle. The main reason for Pakistan’s electricity scarcity is misleading information about future demand in the market, which is crucial for electrical generators, consumers, and policymakers. For long-term sustainable economic development, forecasting needs accurate data on electricity consumption trends, existing infrastructure, and potential challenges. However [4,5], examined energy that can be quickly addressed by referring to electricity demand management. Underestimating the electricity demand would result in possible failures, with overestimation leading to needless redundancy of capability and financial resources loss. Numerous studies have concentrated on economic growth and its factors in the last three decades, for example [6,7], but the findings remain contradictory. The literature on the causal link covers the following three broad areas: the first argues that non-linear causality goes from electricity use to economic progress, known as the theory of growth. Conversely, the second argument is that a unidirectional correlation exists, known as the recycling theory. Ultimately, the third aspect claims that there are no causal links among the variables, recognized as the neutrality hypothesis.

Our research is distinguished from previous studies and refers to the current literature regarding collecting variables and empirical analysis methods. This study contributes and addresses the gap in the literature by using various determinants not recognized in earlier studies, such as [[8], [9], [10], [11], [12]]. These studies have used different variables, period, and methodology in Pakistan, and the economic structure changed significantly during the study period. It is vital to understand to what extent the relationship established in existing literature still holds for Pakistan. Using multivariate time series data from 1972 to 2018, the current study explores the relationship between energy consumption, energy prices, industrial value-added, urbanization, and CO2 emissions and Pakistan’s economic growth. This study also contributes to the literature by incorporating new factors, such as urban population and industry value-added, that, to the best of our knowledge, have not previously been applied in this case. It reveals the time series’ statistical properties and specifies the positive and negative presence of a long- and short-run associations among the determinants. For empirical analysis, we use a novel dynamic autoregressive distributed lag (ARDL) model recently introduced by Ref. [13]. Finally, we applied [14] frequency domain causality (FDC) test because it helps to differentiate permanent causality for long, short and medium-term among time series variables, we also use this test for the robustness check. Our results reveal that electricity consumption and industrial value-added have a long-run impact on Pakistan’s economic growth. This current research helps officials in the energy sector make strategic planning and long-term decisions after reviewing the outcomes.

The remainder of this paper organized as follows. Section II presents a review of the literature. The material and methods are outlined in section III while section IV outlines the empirical results and discussion. Finally, conclusions and policy implications are provided in section V.

Section snippets

Literature review

Energy plays a significant role in economic development. The first study by Ref. [15] investigated the relationship between energy use and economic development through various econometric approaches over different periods. From the perspective of an economist, energy is an input for output; however, empirical data reveals that the source of energy growth is complex. Partly due to the vital role of electricity in viable economic development, there are comprehensive theoretical and empirical

Data collection

The time series secondary data for 1972–2018 are used for empirical analysis. Table 2 reposits the data sources for the variables used in this study.

Model specification

This study empirically analyzes qualitative and inferential statistics methods. A multivariate time series approach is applied for empirical purposes. The main advantage of yearly secondary data excludes the consequences of seasonal variation. All series were transformed into logarithmic form to eliminate the heteroscedasticity issue. Time series

Empirical results and their discussion

We scrutinize the descriptive statistical analysis reported in Table 3 to investigate the characteristics of the variables. Table 3 provides an overview of statistics showing the mean, maximum, minimum, and standard deviations of the variables. In addition to characterizing the summary statistics, it also represents the peak by Kurtosis, and the normal pattern of distribution with the support of Jarque−Bera test statistics where the mean of energy prices is 24.89 greater than other variables.

Conclusion and policy implications

This study explored the relationship between electricity consumption (EC), electricity prices (EP), industrial value-added (IVA), urbanization population growth (UPG), and CO2 emissions with gross domestic product (GDP) for the period 1972–2018 for Pakistan. After carefully reviewing the literature, this study selected distinct determinants to examine the impact of various factors on economic growth in Pakistan. In earlier studies, a simple ARDL bounds testing approach was used for long- and

CRediT author statement

Kashif Raza Abbasi: Conceptualization, Methodology, Formal analysis, Software Data curation, Writing- Original draft preparation Muhammad Shahbaz: Supervision Zhilun Jiao: Software, Validation, Review & Editing Writing Muhammad Tufail: Visualization, Investigation, Resources, Data Curation.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

References (95)

  • Fei Ge et al.

    The analysis of the underlying reasons of the inconsistent relationship between economic growth and the consumption of electricity in China – A case study of Anhui province

    Energy

    (2017)
  • A. Kumari et al.

    Causal relationships among electricity consumption , foreign direct investment and economic growth in India

    The Electricity Journal

    (2018)
  • C. Zhang et al.

    Analysis of electricity consumption in China (1990–2016) using index decomposition and decoupling approach

    J Clean Prod

    (2019)
  • G.N. Ike et al.

    Environmental quality effects of income, energy prices and trade: the role of renewable energy consumption in G-7 countries

    Sci Total Environ

    (2020)
  • A. Hussain et al.

    Forecasting electricity consumption in Pakistan: the way forward

    Energy Pol

    (2016)
  • Danish et al.

    Role of renewable energy and non-renewable energy consumption on EKC: evidence from Pakistan

    J Clean Prod

    (2017)
  • G. Altinay et al.

    Electricity consumption and economic growth: evidence from Turkey

    Energy Econ

    (2005)
  • J. Squalli

    Electricity consumption and economic growth: bounds and causality analyses of OPEC members

    Energy Econ

    (2007)
  • M. Shahbaz et al.

    Is energy consumption effective to spur economic growth in Pakistan? New evidence from bounds test to level relationships and Granger causality tests

    Econ Modell

    (2012)
  • L. Dagher et al.

    The causal relationship between energy consumption and economic growth in Lebanon

    Energy Pol

    (2012)
  • H.A. Bekhet et al.

    Measuring output multipliers of energy consumption and manufacturing sectors in Malaysia during the global financial crisis

    Procedia Econ Financ

    (2016)
  • O. Ben-Salha et al.

    Sectoral energy consumption by source and output in the U.S.: new evidence from wavelet-based approach

    Energy Econ

    (2018)
  • A. Das et al.

    Non-linear dynamics of electric power losses, electricity consumption, and GDP in Jamaica

    Energy Econ

    (2019)
  • R. Varma

    Bridging the electricity demand and supply gap using dynamic modeling in the Indian context

    Energy Pol

    (2019)
  • Y.H. Alsaedi et al.

    The relationship between electricity consumption, peak load and GDP in Saudi Arabia: a VAR analysis

    Math Comput Simulat

    (2020)
  • A.A. Rafindadi et al.

    Impacts of renewable energy consumption on the German economic growth: evidence from combined cointegration test

    Renew Sustain Energy Rev

    (2017)
  • S. Johansen

    Statistical analysis of cointegration vectors

    J Econ Dynam Contr

    (1988)
  • D. Kwiatkowski et al.

    Testing the null hypothesis of stationarity against the alternative of a unit root. How sure are we that economic time series have a unit root?

    J Econom

    (1992)
  • S. Alvi et al.

    Dilemma of direct rebound effect and climate change on residential electricity consumption in Pakistan

    Energy Rep

    (2018)
  • S. Narayan et al.

    An investigation of renewable and non-renewable energy consumption and economic growth nexus using industrial and residential energy consumption

    Energy Econ

    (2017)
  • F.L.C. Silva et al.

    A bottom-up methodology for long term electricity consumption forecasting of an industrial sector - application to pulp and paper sector in Brazil

    Energy

    (2018)
  • S.A. Asongu et al.

    The criticality of growth, urbanization, electricity and fossil fuel consumption to environment sustainability in Africa

    Sci Total Environ

    (2020)
  • M. Kashif et al.

    Untapped renewable energy potential of crop residues in Pakistan: challenges and future directions

    J Environ Manag

    (2020)
  • O.B. Awodumi et al.

    The role of non-renewable energy consumption in economic growth and carbon emission: evidence from oil producing economies in Africa

    Energy Strateg Rev

    (2020)
  • GOP

    Pakistan economic survey 2017-18

    (2018)
  • EIA

    U.S. Energy information Administration (EIA)

  • N. Alter et al.

    An empirical analysis of electricity demand in Pakistan

    Int J Energy Econ Pol

    (2011)
  • M. Zaman et al.

    Examining relationship between electricity consumption and its major determinants in Pakistan

    Int J Energy Econ Pol

    (2015)
  • K. Abbasi et al.

    Agricultural and manufacturing sector determinants consumption , price , and real GDP from Pakistan of electricity

    North Am Acad Res

    (2020)
  • S. Jordan et al.

    Cointegration testing and dynamic simulations of autoregressive distributed lag models

    STATA J

    (2018)
  • J. Kraft et al.

    On the relationship between energy and GNP

    J Energy Dev

    (1978)
  • M. Salahuddin et al.

    The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait

    Renew Sustain Energy Rev

    (2018)
  • S. Hali et al.

    Impact of energy sources and the electricity crisis on the economic growth: policy implications for Pakistan

    (2017)
  • I. Mezghani et al.

    Energy consumption and economic growth: an empirical study of the electricity consumption in Saudi Arabia

    Renew Sustain Energy Rev

    (2016)
  • C. Magazzino et al.

    The relationship between nuclear energy consumption and economic growth: evidence from Switzerland

    Environ Res Lett

    (2020)
  • C. Magazzino et al.

    The determinants of CO2 emissions in MENA countries: a responsiveness scores approach

    Int J Sustain Dev World Ecol

    (2019)
  • S. Nasreen et al.

    Long-run causal relationship between economic growth, transport energy consumption and environmental quality in Asian countries: evidence from heterogeneous panel methods

    Energy

    (2019)
  • Cited by (192)

    View all citing articles on Scopus
    View full text