The policy implications of the relationship between energy consumption, energy intensity and economic growth in Ghana

AuthorSolomon Aboagye
DOIhttp://doi.org/10.1111/opec.12114
Published date01 December 2017
Date01 December 2017
The policy implications of the relationship
between energy consumption, energy
intensity and economic growth in Ghana
Solomon Aboagye
Department of Economics and Department of Distance Education, University of Ghana, Box LG 57, Accra,
Ghana. Emails: sbaboagye@gmail.com and soaboagye@ug.edu.gh
Abstract
The 19739/74 and 1979/1980 oil price shocks coupled with the unreliability of its supply as against
the ever-increasing demand for energy-based inputs, further reinforced the stern implications that
energy may have on economic development reducing energy intensity is often advocated as a way
to ensure efcient utilisation of energy resources and minimising the adverse effects of its shortage
on economic development. Using the annual time series data set spanning 19812014 this study
examined, in Ghana where energy crises continue to immense adverse effects on the economy, the
relationships between energy consumption and economic growth at the one hand, and that between
energy intensity and economic growth on the other hand within the standard Environmental
Kuznets Curve framework. In Autoregressive Distributed Lagged model estimation, there was
strong evidence of the existence of a valid long-run relationship between energy consumption and
economic growth as well as energy intensity and economic growth.
Introduction
The neoclassical theorists argue that production depends mainly on labour and capital.
With the passage of time however, it is becoming more evident that energy-based inputs
inuence production outcomes very substantially. Recent surveys and research have
provided some evidence to this effect. Today, energy inputs underpin all econ omic
activities be it production of goods and services, their distribution and eventual
consumption. For instance, at the economy wide level, energy is needed by the transport
sector, manufacturing sector, agricultural sector, mining sector, construction sector, and
public and commercial services for their operations. Energy also provides a means for
households to achieve basic economic needs from cooking, lighting, warming, heating
and washing to entertainment. The role of energy especially in the industrial,
manufacturing, service and even the agricultural activities underscores its crucial link
JEL classication: L9, O1, O.
©2017 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.
344
with economic growth and development. Energy-based resources and inputs constitute
major components of industrial raw materials in both developed and developing
countries. Energy is thus critical to sustainable economic development. In fact, some
recent studies have reported that energy plays a more important role compared to many
other variables included in the production and consumption function for countries which
are at intermediate stages of economic development (Khan and Ahmed, 2009). The
aftermath of the 1973/1974 and 1979/1980 oil price shocks (Erbaykal, 2008) further
reinforced the stern implications that energy may have on economic development . The
seminal work by Kraft and Kraft (1978) represented the rst major empirical enquiry
into the relationship between energy and economic development as well as the potential
causalities that may exist between them. The authors observed a unidirectional causality
relation from GNP to energy consumption which implies that the United States could
pursue energy conservation policies without impairing its economic performance. Since
then, research into the linkages between energy and economic development has
intensied as the indispensability of energy in economic growth becomes more evident.
Extant literature suggests that while the relationship between energy and economic
growth appears to have been well established, ascertaining a causal relationship remains
controversial. That is, there is no overall consensus among researchers and concrete evidence
as to whether economic growth leads to energy consumption or that energy consumption is
theengineofeconomicgrowth.Meanwhile,froma policy perspective, knowing the direction
of cause between energy consumption and economic development is essential for energy
conservation purposes. For instance, as noted by Jumbe (2004) among others, if causality
runs from energy consumption to GDP then it implies that an economy is energy dependent
and hence energy is a stimulus to growth implying that a shortage of energy may negatively
affect economic growth or may cause poor economic performance, leading to a fall in income
and employment. In other words, energy is a limiting factor in economic growth (Stern 2000).
However, if causality only runs from GDP to energy consumption then it coul d be concluded
that that economy is not energy dependent and hence, energy conservation policies may be
implemented with no adverse effect on growth and e mployment (Masih and Masih, 1997). If,
on the other hand, there is no causality in either direction (referred to as the neutrality
hypothesis), then it implies that energy consumption is not correlated with GDP, so that
energy conservation policies may be pursued without adversely affecting the economy
(Jumbe 2004). To manage Ghanas energy demand side it is therefore imperative to know not
only the drivers of energy consumption demand over the years in Ghana but also to know
whether economic growth (activities) actually causes energy consumption and/or the vice
versa. Empirical investigation is therefore required to examine whether the relationship
between energy and economic development is actually causal or is a case of mere association.
In the wake of rising population coupled with rapid urbanisation and increased
industrial activities, energy consumption/demand could be expected to rise
©2017 Organization of the Petroleum Exporting Countries OPEC Energy Review December 2017
Energy use, energy intensity and growth in Ghana 345

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