Interlinkages between Energy Consumption and Economic Growth: A Review, an ARDL Bounds Testing Approach

Abstract

In this study, we re-examine the discussions on the relationship between energy consumption and economic growth by replicating the autoregressive distributed lag (ARDL) bounds testing framework for Tanzania in Odhiambo [1,2], Journal of Energy Policy, and extending it to Kenya country from 1971 to 2014. We use two proxies of energy consumption (total energy consumption and electricity consumption for each country) and GDP growth rate as a proxy of economic growth for each country. The bound F-test reveal that our results are consistent with Odhiambo [1,2] findings that there is still a stable long-run relationship between each proxy of the energy consumption and economic growth for both Tanzania and Kenya. However, when extending the study to more recent data up to 2014, the results of the causality test are inconsistent with Odhiambo [1,2] findings for Tanzania only while being consistent with Kenya results for both two energy proxies and economic growth. The findings reveal the bi-directional causal relationship between each proxy of the energy consumption and economic growth in both short-run and long-run in Tanzania. Overall, the paper finds that the recent discoveries of the substantial natural gas and significant energy project spur economic growth in Kenya and Tanzania.