Dynamics between energy, output, openness and financial development in sub-Saharan African countries

ABSTRACT

This study aims to establish the connection between energy use, economic output, financial development and trade, based on the panel data of 15 sub-Saharan African (SSA) countries during the period from 1983 to 2010. One full main panel and two subpanels were created by incorporating low-income and middle-income countries. The panel cointegration test results indicate a long-run relationship between the variables. The mean group (MG) estimators show that energy consumption, financial development, capital and international trade have significant impacts on economic output. In the case of middle-income countries, the Granger causality analysis reveals that rising economic output leads to higher energy consumption, but this is not true vice versa. This means that energy conservation measures are unlikely to have adverse impacts upon economic output. On the other hand, there is a complementary relationship between financial development and energy consumption. In this case, energy conservation measures should be critically analysed and implemented, so as not to have an unfavourable impact on financial development. In regard to low-income economies, there is no relationship between energy use and any of the other variables mentioned. Thus, a reduction in energy consumption has little or no significant impact on output, financial development, capital and trade.

KEYWORDS:

• Energy
• output
• trade openness
• financial development
• sub-Saharan Africa

JEL CLASSIFICATION:

• Q43

Notes

¹ However, considering pollutant emission with trade is not a particular research interest of this study and not within the scope of this study. As such, to preserve space, this study would not discuss this angle in detail in the literature review section on energy and trade.

² The use of domestic credit provided by financial sector as a measure of financial development is common in the literature, particularly in African studies, see, e.g. Acaravci, Ozturk, and Acaravci (2009).

³ Please refer to http://data.worldbank.org/about/country-and-lending-groups

⁴ Before the AMG estimator, the Di Iorio and Fachin’s (2007) test for breaks in cointegrated panels is performed to examine the stability of the relationship between the variables of interest. The results show that there is not enough evidence to reject the null hypothesis of no break. That is, the relationship among the investigated variables is stable and not subject to structural breaks during the investigation period. To conserve space, the results are not presented here, but they are available upon request.

⁵ To conserve space, the results are not presented here, but they are available upon request.

⁶ To conserve space, the results are not presented here, but they are available upon request.