ENERGY CONSUMPTION AND GROWTH CAUSALITY:
A PANEL ANALYSIS OF FIVE WEST AFRICAN COUNTRIES
Overview
Despite its rich energy resource endowment, Sub-Saharan Africa remains one of the poorest regions of the
world. Only about 8% of rural dwellers are connected to electricity (51% in the case of urban dwellers) while more
than half of the population live below the international poverty line of $1.25; 72% if the $2.00 per day benchmark is
applied (World Bank, 2008). The major source of energy remains wood and other forms of biomass such as dung,
accounting for over 80% of total energy consumption in 2005, and used mainly for domestic purposes (Adenikinju,
2008). In fact, United Nations Economic Commission for Africa, UNECA (2004) identifies inadequate provision of
energy services such as lighting, transportation, telecommunications, cooking and industrial power generation as a
limiting factor to economic growth and poverty alleviation efforts.
West Africa’s “energy poverty” has been attributed to decades of under-investment, mismanagement and a
lack of infrastructure maintenance capabilities (essentially production-side issues) that have significantly held back
its output growth (IMF, 2008). There have been little success on the part of national governments in resolving the
crisis, and as a result, recent calls for a region-wide solution to expanding infrastructure and investments in the
energy sector have emerged (see ECOWAS, 2006). However, policy makers and researchers alike have paid little
attention to the role of energy consumption in the region.
Since the seminal work by Kraft and Kraft (1978) which finds that economic growth led to increased energy
consumption in the U.S, several studies have presented evidence from individual countries. However, many recent
studies have also taken advantage of panel (multi-country) analyses such as Chontanawat et al. (2008) for over 100
countries, to improve the power of the tests over those based on individual series (Perron, 1991). In either case, a
great deal of variation exists in the findings. For selected African countries including the ones in this paper, WoldeRufael (2005) and Akinlo (2008) also present conflicting results on the direction of causality. Nevertheless, even
though countries from the region have been investigated individually or included in other groupings, no study has
examined the energy-income causality for the West African region. The importance of this lies in the seeming
mismatch between its abundant energy resource endowment and regional economic growth, raising the question of
whether energy consumption causes income growth, or vice-versa. In theory, if energy consumption causes economic
growth, then any constraint on energy use will have deleterious effects on growth (Squalli, 2007). This would also
occur if both energy consumption and growth granger cause each other in a ‘feedback’ (Wolde-Rufael, 2004).
However, if output growth causes energy consumption to increase, then a constraint on energy use will not hurt the
economy (Jumbe, 2004). A similar outcome will occur if no relationship exists between energy consumption and
income (Asafu-Adjaye, 2000). Being a poor region, income level is likely to have an effect on energy consumption
which will in turn affect output growth.
This paper examines the relationship between energy consumption and economic growth in West Africa,
using data from 5 countries: Benin, Cote d’Ivoire, Ghana, Nigeria and Togo, from 1970 – 2005. The five countries
are member states participating in the West Africa Power Pool (WAPP) project. Three – Cote d’Ivoire, Ghana and
Nigeria - account for the largest share of the region’s GDP (about 70%), which was about US$139 billion in 2005.
The region’s poverty rate was about 44% in 2005, while a third of household earnings are spent on energy services.
The predominant energy source particularly for domestic use is biomass (wood, dung, waste), representing 80%, on
average, in the 2005 energy consumption mix. Cleaner fuels, such as liquefied petroleum gas (LPG) reach only 5%
of the ECOWAS population, while about 10% have access to electricity, which falls to less than 1% in the rural
areas (Adenikinju, 2008). Considering that individual country studies have been inconclusive, an examination of the
relationship between energy consumption and economic growth in the West African region is necessary to provide a
useful foundation for implementing a regional energy strategy.
Methods
The study uses data on 5 West African countries to test whether energy consumption causes economic
growth. Similar to several previous studies, a modified production function is employed including capital stock and
labor variables. Oil price is also included considering the importance of oil in the regional economy. Stationarity and
cointegration tests are applied within a panel error-correction framework, with appropriate lags selected. Granger
causality tests are carried out to determine the direction of causality, while energy consumption and GDP are
simultaneously set as dependent variables. Reasons for the choice of countries includes not only data availability, but
also the fact that these countries are contiguous, participate in some form of intra-regional energy trade, are part of
the first phase of the West African Power Pool, and will probably constitute the core of any regional energy strategy
for West Africa. The data covers the period 1970-2005 and are obtained mainly from the World Bank’s World
Development Indicators (2008) and BP Statistical Review of World Energy Report (2009).
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Results
Panel stationarity tests suggest the presence of unit roots at levels for most series, which become stationary
at first difference. The null of “no cointegration” was also rejected for energy consumption and GDP suggesting that
some relationship exists between them. Granger causality tests show that we cannot reject the hypothesis that energy
consumption does not cause GDP growth in West Africa. The result of the energy consumption equation however
shows that GDP growth granger causes energy consumption. Further, an increase in oil price causes a decline in
energy consumption after a one-year lag and an increase in energy consumption with a two-year lag. The errorcorrection term was found to be insignificant.
Conclusions
The econometric tests show that energy consumption does not granger cause economic growth, possibly
because of the rapid increases in oil prices over the years which resulted in a shift in consumption towards less
efficient sources of energy (mainly biomass) and consequently no effect on growth. Rather, economic growth as a
result of some other factors led to higher energy consumption although this is still not high enough to impact
significantly on the region’s economic growth. This suggests that inefficient energy sources which dominate the
consumption mix in the region as well as marginal increases in energy consumption, such as through individual
national efforts may be inadequate. Rather, regional cooperation to lower oil prices, increase access to cheaper
renewable energy sources as well as increased intra-region trade to boost consumption should be encouraged.
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