Energy Consumption and Economic Growth in South and Southeast Asian Countries: Evidence from a Dynamic Panel Data Approach

Abstract

This study examines the dynamic relationship between energy consumption and economic growth in nine South and Southeast Asian countries (i.e. Bangladesh, Brunei Darussalam, India, Indonesia, Malaysia, Pakistan, the Philippines, Sri Lanka and Thailand) in a panel data framework. The time period for the study is 1990–2012, and the World Bank Development Indicators data set is used. This study undertakes panel cointegration analysis to investigate the relationship between energy consumption and economic growth. In addition, the panel vector error correction model (VECM) and impulse response functions (IRFs) are employed to examine the short- and long-run direction of causality and the effect of responses between energy consumption and economic growth. The panel cointegration analysis reveals that the long-run equilibrium relationship between real gross domestic product, energy consumption, real gross fixed capital formation and total labor force are positive and statistically significant, indicating the existence of long-run co-movement among the variables. The short- and long-run causality results support the growth hypothesis in which unidirectional causality runs from energy consumption to economic growth, meaning that the economy of these countries is energy dependent. Thus, the policy regarding energy consumption should be considered carefully. The IRFs show that the shocks of all the variables reach the equilibrium level within three to four years from the initial shock.