ENERGY CONSUMPTION AND ECONOMIC GROWTH: THE NIGERIAN CASE Ekene Stephen Aguegboh and Stella Ifeoma Madueme, Ph.D 6th ANNUAL NAEE/IAEE INTERNATIONAL CONFERENCE 1

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. 2

 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. 3

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 4

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). 5

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; Y t = Where Y t is an L x 1 vector of innovations, and {i = 1, 2,..., k}. In this case, L = 4 and Y t = {RGDP, EC} where each variable denotes real gross domestic product (RGDP) and energy consumption (EC) respectively. 6

(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). 7

(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. 8

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 VARIABLES ADF (Intercept and Trend) Order of Integration Ln (RGDP) (-3.716)*I (0) Ln (PC) (-2.625)***I (1) Ln (GC) (-2.625)***I (1) Ln (CF)3.122 (-2.986)**I (0) Ln (LF)-4.243(-2.625)***I (1)

(B) Cointegration Test Lag-Selection Criteria Sources:- Researchers’ Estimation using Stata LAGAICHQICSBIC * *

(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 RANK TEST(TRACE) EIGENVALUE TRACE STATISTIC 5% CRITICAL VALUE *

(D) Causality Tests Sources:- Researchers’ Estimation using Stata F StatisticsLagp-value PC does not cause RGDP GC does not cause RGDP CF does not cause RGDP LF does not cause RGDP RGDP does not cause PC GC does not cause PC CF does not cause PC LF does not cause PC RGDP does not cause GC

13 Causality Tests (contd.) Sources:- Researchers’ Estimation using Stata 10. PC does not cause GC CF does not cause GC LF does not cause GC RGDP does not cause CF PC does not cause CF GC does not cause CF LF does not cause CF RGDP does not cause LF PC does not cause LF GC does not cause LF CF does not cause LF

(E) Stability Test Sources:- Researchers’ Estimation using Stata

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

(ii) Response of Real GDP to Gas Consumption Shocks Sources:- Researchers’ Estimation using Stata

(iii) Response of Real GDP to Capital Formation Shocks Sources:- Researchers’ Estimation using Stata

(iv) Response of Real GDP to Labour Force Shocks Sources:- Researchers’ Estimation using Stata

5.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. 19

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