Energy use and economic growth in the Southern African Development Community (SADC)

Abstract

Energy is a very fundamental resource in the growth of any economy since all activities require energy in any given form. Literature indicates that increase in energy use leads to increase in economic growth. However, such has not been the case in Southern African Development Community (SADC) regional bloc. The main objective of the study is to determine the effect of energy use on economic growth in the SADC member states. The specific research objectives include; establishing the trend of energy use and growth of the economy of member countries of SADC and secondly, to determine the effect of energy use on growth of the economy of the SADC member states. The study sourced full year data for ten SADC member states from the World Development Indicators (WDI) database of the World Bank as well as the official government(s) publications (Statistical Abstracts, Economic Surveys) for these countries for the period 2000 to 2014. The covariates adopted in moderating the relationship include money supply, inflation rates and gross fixed capital formation. The theoretical framework followed the Solow model of long-run economic growth where a panel data modeling technique was employed in estimation of the hypothesized connection. Causality between energy use and economic growth was examined for each of SADC member state. The research found that all countries under study had bi-directional causality between energy use and economic growth except DRC and Tanzania which demonstrated a causality running in a uni-directional way from use of energy to economic growth. Causality in SADC states such as Mozambique, Namibia, South Africa, Zambia and Zimbabwe were not established as the data was missing in some years. The major pre and post estimation diagnostic issues were examined before undertaking an econometric estimation. The significance of the coefficients were tested at 5 percent level. Fixed Effects Model (FEM) was preferred to Random Effects Model (REM) based on Hausman model specification test. The study revealed that for a 1% increase in energy use, growth of economy rose by 19.07 percent (p=0.027) holding other factors constant. This implies that economic growth grows as consumption of energy rises significantly. Money supply and inflation rates were significant covariates. The study suggests to the governments to procure enough amount of energy in a quality-conscious, cost-effective and safe manner without any interruption to achieve sustainable goals of growth and to boost their standards of living. If the SADC economic bloc experiences a lack of energy resources, it will either choose to accept low growth of economy through production with the existing resources of energy or try to increase growth by meeting the uncovered part of demand for energy through imports.