ENERGY CONSUMPTION AND ECONOMIC GROWTH: THE NIGERIAN CASE

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ENERGY CONSUMPTION AND ECONOMIC GROWTH THE
NIGERIAN CASE

• Ekene Stephen Aguegboh
• and
• Stella Ifeoma Madueme, Ph.D
• 6th ANNUAL NAEE/IAEE INTERNATIONAL CONFERENCE

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• 1. INTRODUCTION
• The existence of energy and its related issues in
  economic literature and the challenges of
  economic growth despite the importance of energy
  as an input in the Nigerian growth and
  development process.
• The monocultural nature of the Nigerian economy
  and the fall-outs therein which include global
  warming, oil spillage, gas flaring and so on.
• The perspective of the resource curse phenomenon
  (paradox of plenty) being associated with the
  scenario of the Nigerian economy.

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• The concern about the impact of energy
  consumption on the economy leading economists
  like Omotor (2004), Adenikinju (2006), Omisakin
  (2008) and Adeniran (2009) in recent times to
  investigate the energy-growth nexus.
• The fact that energy-growth nexus has not been
  evaluated in line accordance with the unified
  models of the mainstream economic growth theory
  and the ecological growth theory.
• The broad objective of the study is to ascertain
  the causal relationship between energy
  consumption and economic growth in Nigeria.

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• 2. THEORETICAL EVIDENCE
• Physical Theory of Economic Growth
• The Biophysical Theory of Economic Growth
• The Classical Theory of Economic Growth
• The Neutrality Hypothesis
• The Ecological Economics Approach
• The Mainstream Economic Theory
• The Unified Model of Energy and Growth

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• 3. EMPIRICAL EVIDENCE
• Foreign Literatures include the works of Kraft
  and Kraft (1978) Stern (2000) Yang (2000)
  Asafu-Adjaye (2000) Aqeel and Butt (2001) Anjum
  and Butt (2001) Soytas et al (2001) Glasure
  (2002) Hondroyiannis et al (2002) Ghosh (2002)
  Soytas and Sari (2003, 2004) and others.
• Within the radar of domestic literature, the
  empirical works reviwed were the works of
  Adenikinju (1999) Akinlo (2008) Omisakin
  (2008) Omotor (2008) Adeniran (2009)
  Wolde-Rufael (2009) and Esso (2010).

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• 4. METHODOLOGY AND DATA
• The methodology adopted in this research work is
  the Vector-Autoregressive Model (VAR) and the
  Multivariate Cointegration Analysis of Time
  Series.
• (A) The Model
• The augmented vector autoregression (VAR)
  process of order k is given as
• Yt
• Where Yt is an L x 1 vector of innovations, and
  i 1, 2, ..., k. In this case, L 4 and Yt
  RGDP, EC where each variable denotes real gross
  domestic product (RGDP) and energy consumption
  (EC) respectively.

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• (B) ESTIMATION PROCEDURE
• (i) Unit Root Test
• The procedure adopted is the Augumented-Dickey
  Fuller (ADF) test due to Dickey and Fuller (1979,
  1981).
• (ii) Cointegration Test
• The Johansen technique was adopted because it is
  VAR-based and because it performs better than
  single-equation and alternative multivariate
  methods (Lutkepohl, 2001)
• (iii) Causality Tests
• In this research work, the researchers shall be
  looking at a case of Granger-causality that
  entails five (5) endogenous variables namely real
  gross domestic product (RGDP), petroleum
  consumption (PC), gas consumption (GP), capital
  formation (CF) and labour force (LF).

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• (iv) Stability Test
• The necessary and sufficient condition for
  stability is that all characteristic roots lie
  outside the unit circle. Then is of full rank
  and all variables are stationary.
• (v) Impulse Response Function (IRF)
• The IRF traces the response of the endogenous
  variables to one-standard deviation shock to one
  of the disturbance term in the system. This shock
  is transmitted to all of the endogenous variables
  through the dynamic structure of the VEC models
  (Lutkepohl, 2001).
• (vi) Data Source
• Data for petroleum and gas consumption were
  extracted from International Energy Agency (IEA)
  while the data for real gross domestic product
  (RGDP), gross fixed capital formation and labour
  force were extracted from Cental Bank of Nigeria
  (CBN) Statistical bulletin.

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• 5. EMPIRICAL RESULTS
• (A) Unit Root Tests at first difference
• Note- and denotes significance at 1,
  5 and 10 level respectively. Figures within
  parenthesis indicate critical values. ? is the
  first difference operator. Mackinnon (1991)
  critical value for rejection of hypothesis of
  unit root applied.
• Sources- Researchers Estimation using Stata 10.

VARIABLES ADF (Intercept and Trend) Order of Integration
Ln (RGDP) -4.739 (-3.716) I (0)
Ln (PC) -6.034 (-2.625) I (1)
Ln (GC) -13.000 (-2.625) I (1)
Ln (CF) 3.122 (-2.986) I (0)
Ln (LF) -4.243(-2.625) I (1)
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• (B) Cointegration Test
• Lag-Selection Criteria
• Sources- Researchers Estimation using Stata 10.

LAG AIC HQIC SBIC
0 14.74260 14.81530 14.98050
1 4.21572 4.65207 5.64308
2 3.35999 4.15998 5.97682
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• (C) Cointegration Test
• Johansen Test for Cointegration
• denotes acceptance of the null hypothesis at
  the 0.05 percent Probability level
• Sources- Researchers Estimation using Stata 10.

RANK TEST(TRACE) EIGENVALUE TRACE STATISTIC 5 CRITICAL VALUE
0 0 101.0479 68.52
1 0.75125 62.0917 47.21
2 0.65706 32.1262 29.68
3 0.51543 11.8405 15.41
4 0.32633 0.7801 3.76
5 0.02748 0 0
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• (D) Causality Tests
• Sources- Researchers Estimation using Stata 10.

F Statistics Lag p-value
PC does not cause RGDP 22.352 2 0.000
GC does not cause RGDP 6.082 2 0.048
CF does not cause RGDP 18.064 2 0.000
LF does not cause RGDP 1.2077 2 0.547
RGDP does not cause PC 0.15131 2 0.927
GC does not cause PC 0.13613 2 0.934
CF does not cause PC 0.17838 2 0.915
LF does not cause PC 1.4121 2 0.494
RGDP does not cause GC 1.7457 2 0.418
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• Causality Tests (contd.)
• Sources- Researchers Estimation using Stata 10.

PC does not cause GC 9.415 2 0.009
CF does not cause GC 9.7397 2 0.008
LF does not cause GC 3.788 2 0.150
RGDP does not cause CF 4.4487 2 0.108
PC does not cause CF 5.9244 2 0.052
GC does not cause CF 0.9908 2 0.609
LF does not cause CF 3.6423 2 0.162
RGDP does not cause LF 0.19113 2 0.909
PC does not cause LF 0.15046 2 0.928
GC does not cause LF 2.759 2 0.252
CF does not cause LF 0.84179 2 0.656
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• (E) Stability Test
• Sources- Researchers Estimation using Stata 10.

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• (F) Impulse Response Function
• (i) Response of Real GDP to Petroleum Consumption
  Shocks
• Sources- Researchers Estimation using Stata 10.

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• (ii) Response of Real GDP to Gas Consumption
  Shocks
• Sources- Researchers Estimation using Stata 10.

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• (iii) Response of Real GDP to Capital Formation
  Shocks
• Sources- Researchers Estimation using Stata 10.

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• (iv) Response of Real GDP to Labour Force Shocks
• Sources- Researchers Estimation using Stata 10.

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• CONCLUSIONS AND POLICY IMPLICATIONS
• Petroleum and gas consumption causes real GDP to
  some extent in line with Soytas and Sari (2001).
• The government of Nigeria should make rigorous
  effort to encourage investment in energy
  generation. Thus the deregulation of the
  downstream sector is a policy the right
  direction.
• There is need to improve on infrastructure with
  particular emphasis on the current energy
  infrastructure.
• Until the elementary limitations such as lack of
  institutions, rules, financing mechanism etc.
  that are restraining the development of energy
  sector, energy supply will still persists to be a
  major obstacle for the economic and social
  development in Nigeria.

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• THANK YOU FOR YOUR RAPT ATTENTION