The electricity consumption, employment and growth nexus: evidence from Lebanon

• Published date: 01 September 2015
• Author: Ali Fakih,Walid Marrouch
• DOI: http://doi.org/10.1111/opec.12053
• Date: 01 September 2015

The electricity consumption, employment

and growth nexus: evidence from Lebanon

Ali Fakih* and Walid Marrouch**

*Department of Economics, Lebanese American University, P.O.Box: 13-5053, Beirut, Lebanon.

Email: afakih@lau.edu.lb

**Department of Economics, Lebanese American University, P.O.Box: 13-5053, Beirut, Lebanon.

Email: walid.marrouch@lau.edu.lb

Abstract

The causal relationship between electricity consumption and growth in Lebanon is examined using

aggregate employment in a trivariatesetting for the period 1980–2011. We test the main hypothesis

that electricity is an input in the aggregate production function. Our results reject the input hypoth-

esis in Lebanon in both the short run and long run. However,electricity is found to be a by-product

only when we employa stronger test for Granger causality. These results seem to suggest that elec-

tricity conservation strategies should be easier to implement without additional sacrifices to growth

in Lebanon. By contrast, we find evidence of a long-run relationship between employment and

growth. We offer some specific detailed strategy to Lebanon that provides support for carrying out

policies that increase the level of labour-promoting investmentsin the country.

1. Introduction

This paper models the electricity consumption, employment and growth nexus in a

middle-income country by investigating the case of Lebanon, which is recently suffering

from an energy-supply crisis in the electricity sector.Our main objective is to examine the

validity of the hypothesis stating that electricity is an input for economic growth within a

multivariate framework and to compare the experience of Lebanon with other countries.

Although, the energy economics literature on the energy-income nexus is vast, detailed

investigations on this issue remain scant for the Middle East and North Africa (MENA)

region. Understanding the dynamics of the relationship between electricity use and

national income has important policy implications. One important aspect facing

policymakers in Lebanon is the high operating cost of running the public utility in charge

of electricity generation and distribution (see, e.g. Ibrahim et al., 2013). Administrative

inefficiencies and rising energy prices during the past decade constituted an important

component of the incremental cost of running the electricity sector.

JEL Codes C32, Q43

298

© 2015 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

Modelling the relationship between electricity consumption and economic growth is

traditionally undertaken within the energy-growth literature. Previous studies have found

mixed evidence about the nature of the Granger causality between electricity use and

national income; see, for example, the surveys by Ozturk (2010) and Payne (2010). A

general observation is that earlier empirical studies adopted a bivariate framework (e.g.

Ferguson et al., 2000).Yetto improve model fit, more recently a number of studies started

using a multivariate framework to examine the relationship between electricity use and

income in a number of countries at various stages of economic development (e.g.

Odhiambo, 2009).

The seminal work of Kraft and Kraft (1978) established the literature on the energy-

growth nexus in the aftermath of the oil shocks in the 1970s and the subsequent debates

and controversies on the economic role of energy use. Within the said literature, there is

disagreement about the role played byenergy in general and electricity in particular in eco-

nomic growth (e.g. Abosedra and Baghestani, 1989; Narayan and Popp,2012; Ajmi et al.,

2013). An important branch that focuses on electricity use and economic growth subse-

quently developed. Ferguson et al. (2000), using a cross-sectional study of more than 100

countries, find evidence of a strong relationship between electricity usage and economic

development. Against this backdrop, the existing studies attempt to test empirically the

main hypothesis that electricity is an input in the aggregate economy.

From an economic perspective, therefore, the debate about the nature of the causal

relationship between electricity use and income has important implications (e.g. Ghosh,

2002; Narayan and Singh, 2007; Odhiambo, 2009). If electricity use is an input, then

increasing the production capacity has a direct and positive impact on economic growth,

whereas energy conservation strategies may be detrimental to growth (input hypothesis).

However, if electricity use is a by-product of economic activity, then energy conservation

strategies may be easier to implement without additional sacrifices in national income (by-

product hypothesis).While in cases showing the existence of (or lack of) feedback effects

between income and electricity policymaking becomes more challenging, which defines

the feedback hypothesis (or neutralityhypothesis).1

Evidence in support of the input hypothesis is found by Altinay and Karagol (2005),

who report the existence of a unidirectional Granger causality from electricity consump-

tion to real gross domestic product (GDP) in the short run in Turkey. Yang (2000) and Lee

and Chang (2005) find a similar relationship in Taiwan. Morimoto and Hope (2004) find

that electricity production is an input using data from Sri Lanka. By the same token, Yuan

et al. (2007) find that electricity consumption is an input for economic growth in China.

These results are in line with the traditional view stating that electricity is an important

input within the aggregate production of an economy. In fact, this view is based on the

so-called neo-classical production function framework (e.g. Ghali and El-Sakka, 2004;

Soytas and Sari, 2007). In contrast, other empirical studies find evidence in support of the

The electricity consumption, employment and growth nexus 299

OPEC Energy Review September 2015© 2015 Organization of the Petroleum Exporting Countries