The effect of export composition on energy demand: A fresh evidence in the context of economic complexity

• Published date: 01 May 2022
• Author: Muhlis Can,Jan Brusselaers,Mehmet Mercan
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12854

Rev Dev Econ. 2022;26:687–703.

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687

wileyonlinelibrary.com/journal/rode

Received: 23 August 2021

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Revised: 2 December 2021

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Accepted: 15 December 2021

DOI: 10.1111/rode.12854

REGULAR ARTICLE

The effect of export composition on energy

demand: A fresh evidence in the context of

economic complexity

MuhlisCan1

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JanBrusselaers2,3

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MehmetMercan4

This is an open access article under the terms of the Creat ive Commo ns Attri butio n- NonCo mmerc ial- NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non- commercial and no modifications or

adaptations are made.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

1BETA Akademi, Social Science Research

LAB (SSR LAB), Istanbul, Turkey

2Environmental Economics, Vrije

Universiteit Amsterdam, Amsterdam,

The Netherlands

3VITO, Unit of Sustainable Materials,

Mol, Belgium

4Freelance Researcher, Aydın, Turkey

Correspondence

Jan Brusselaers, Environmental

Economics, Vrije Universiteit

Amsterdam, De Boeleaan 1087, 1081 HV

Amsterdam, The Netherlands.

Email: jan.brusselaers@vu.nl

Abstract

Energy is pivotal for sustainable economic growth.

Undoubtedly, the role of the composition of the export

basket (measured as economic complexity) is one of

the crucial variables influencing energy consumption.

Despite its importance, the existing body of literature

does not intensively study the relationship between

economic complexity and total energy consumption.

Therefore, this study's primary aim was to examine

the effect of economic complexity on energy consump-

tion in a case study of 21 developed and 44 developing

countries for the period 1971– 2014. In this context,

economic complexity expresses the level of sophistica-

tion of a country's export basket. This paper considers

energy prices and income as explanatory variables in

Durbin- H panel cointegration analysis and applies a

cointegration test with structural breaks to check for

the long- run relationships. For the long- run estima-

tions, we employ the augmented mean group method

and dynamic seemingly unrelated regression. The find-

ings reveal that economic complexity increases energy

consumption in developing countries while it decreases

energy consumption in developed countries. This is an

important insight for countries concerned about their

688

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CAN et al.

1

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INTRODUCTION

This paper assesses the relationship between economic complexity and energy consumption

and simultaneously describes how economic complexity determines countries’ growth paths.

In this context, economic complexity represents the technological level of manufactured and

exported products. The analysis builds on different econometric approaches to obtain robust

findings against heterogeneity and cross- sectional dependence, such as Westerlund (2008) and

Basher and Westerlund (2009) cointegration tests, augmented mean group (AMG) method of

Eberhardt and Bond (2009), and dynamic seemingly unrelated regression (DSUR) method of

Mark etal.(2005) long- run estimation techniques. Those techniques are applied to a panel data

set including both developed and developing countries and spanning the period 1971– 2014 (no

more recent data is available).1

Recent literature focuses intensively on the triangular relation between international trade,

energy consumption, and economic growth. Buysse etal.(2018) and Giles and Williams (2000)

study the interaction between economic growth and international trade. Research studies cover-

ing the relation between economic growth and energy consumption include Baloch etal.(2019),

Nondo (2010), and Noor and Siddiqi (2010). And also the interplay between energy consumption

and international trade is assessed by, for example, Brini etal.(2017) and Sadorsky (2012).

The latter category of studies describes how trade affects energy consumption through three

channels: scale effect, technique effect, and composition effect. First, because of the increase in

trade, domestic production increases in the country. Second, countries import advanced tech-

nology (technique effect) that increases the technology level and energy efficiency (Shahbaz

etal.,2014). Third, a country's production basket changes as the country proceeds through its de-

velopment process (composition effect). The production basket's composition will become more

complex and require higher levels of knowledge and skill (Can etal.,2020; Zeren & Akkuş, 2020).

However, the current body of literature also neglects a crucial element. Until now, the impact

of trade on energy consumption is mainly analyzed through the scale and technique effect by

using the volume of trade (e.g., trade openness) as a proxy of international trade. The importance

of the composition effect (i.e., the type of products being traded) is not assessed.

This research contributes to current literature in different ways. First, this paper addresses

that gap in literature and provides the first holistic attempt to assess the relationship between

economic complexity (composition effect) and energy consumption in both the long and short

energy dependence. The diversification of their produc-

tion and export baskets can reduce energy needs. The

paper finally presents policy recommendations based

on the empirical estimates.

KEYWORDS

economic complexity, economic development, energy

consumption, export product diversification, sustainable

development

JEL CLASSIFICATION

Q43; Q4; O11; O19; O1; F18; F1; O33; O3