THE RELATIONSHIP BETWEEN ENERGY CONSUMPTION AND ECONOMIC GROWTH IN PAKISTAN

This paper investigates the causal relationship between energy consumption and economic growth and energy consumption and employment in Pakistan. By applying techniques of co-integration and Hsiao’s version of Granger causality, the results infer that economic growth causes total energy consumption. Economic growth also leads to growth in petroleum consumption, while on the other hand, neither economic growth nor gas consumption affect each other. However, in the power sector it has been found that electricity consumption leads to economic growth without feedback. The implications of the study are that energy conservation policy regarding petroleum consumption would not lead to any side-effects on economic growth in Pakistan. However, an energy growth policy in the case of gas and electricity consumption should be adopted in such a way that it stimulates growth in the economy and thus expands employment opportunities. The relationship between energy consumption and economic growth is now well established in the literature, yet the direction of causation of this relationship remains controversial. That is, whether economic growth leads to energy consumption or that energy consumption is the engine of economic growth. The direction of causality has significant policy implications. Empirically it has been tried to find the direction of causality between energy consumption and economic activities for the developing as well as for the developed countries employing the Granger or Sims techniques. However, results are mixed. The seminal paper by Kraft and Kraft (1978), supported the unidirectional causality from GNP growth to energy consumption in the case of the United States of America for the period 1947-1974. Erol, and Yu, (1987), tested data for six industrialized countries, and found no significant causal relationship between energy consumption and GDP growth and, energy and employment. Yu, et. al. (1988), found no relationship between energy and GNP, and