Identifying Causality Relationship between Energy Consumption and Economic Growth in Developed Countries

Info Articles ____________________ History Articles: Received 1 December 2016 Accepted 15 January 2017 Published 8 August 2017 ____________________


INTRODUCTION
Energy plays an essential role for the people to satisfy their daily needs.In other words, it is a very significant factor to improve the life standards of the people and to provide sustainable development.In addition to those aspects, it is one of the most critical factors that influence political factors in the world (McKenna et. al., 2013), (Asafu-Adjaye, 2000), (Ebohon, 1996).
It can be classified into two different categories, such as primary and secondary energy (Perez-Lombard et. al., 2008).Primary energy refers to the energy that can be produced directly.Petrol and coal are the main examples of this type of energy.On the other side, secondary energy means the energy which is converted from the primary energy, such as electricity (Bullard and Herendeen, 1975).
Energy is also important for the economies of the countries.However, there are different views in the literature with respect to the relationship between energy consumption and economic improvement.Some researchers argue that energy consumption increases GDP growth rate.The main reason is that it is accepted as the driving force of the industry.Because it contributes the increase of the production level, it can be said that it supports to the improvement of the economy (Aqeel and Butt, 2001), (Özcan, 2013).
In addition to this aspect, there is also another view that supports bidirectional causality relationship between energy consumption and economic improvement.In this situation, the countries, which have high economic growth, tend to consume more energy.On the other side, according to other researchers, energy consumption does not influence economic growth.According to this view, it is necessary to decrease consumption level to enhance cost efficiency (Oh and Lee, 2004), (Zhang and Cheng, 2009).
Owing to this condition, it can be said that studies, which analyze the relationship between energy consumption and GDP growth rate, are very significant.While searching similar studies in the literature, it was defined that there are many studies regarding this subject which were analyzed by different methodologies.However, it was also identified that generally a single country was chosen in the studies.This issue shows that a new study that covers a group of countries will be very beneficial.
Parallel to this issue, this study aims to see the relationship between energy consumption and economic improvement in developed countries.For this purpose, annual data of 22 developed countries for the period between 1971 and 2014 was evaluated by Dumitrescu Hurlin causality analysis.According to the results of the analysis, it will be possible to give some recommendation to these countries regarding this concept.
There are four different parts in this study.After this introduction part, the second part reviews the literature.In this part, different studies related to this issue will be detailed.Additionally, the third part includes research and methodology.Within this scope, information about data, method and analysis results will be emphasized.Moreover, the final part summarizes results and underlines recommendation.

LITERATURE REVIEW
The subjects of energy consumption and economic growth are so popular subject in the literature that it attracted the attention of many different researchers.Some of them are emphasized on table 1. Table 1 shows that energy consumption affects economic growth positively in many different studies.Many researchers conducted a study to reach this objective by using Granger causality analysis (Asafu-Adjaye, 2000), (Aqeel and Butt, 2001), (Hondroyiannis et. al., 2002), (Lee and Chang, 2005), (Chontanawat et. al., 2008), (Apergis and Payne, 2009a), (Apergis and Payne, 2009b), (Özturk and Acaravci, 2010), (Lin and Wesseh, 2014).However, Mehrara (2007), Lee and Chang (2008), Li and Leung (2012), Yavuz (2014) also emphasized the similar result by using regression method.Furthermore, Yuan et. al. (2008), Chang (2010) and Wang et. al. (2011) identified that energy consumption is an important aspect to spur economic growth with the help of vector error correction method.
Additionally, Wolde-Rufael ( 2009) and Alshehry and Belloumi (2015) used VAR method to understand whether energy consumption influence economic development.As a result, it was determined that energy conservation policies can likely hinder the economy.Moreover, Shahbaz et. al. (2014) tried to evaluate this relationship for Pakistan in their study.According to the results of the ARDL analysis, it was underlined that energy consumption is the primary source of economic growth.Furthermore, Odhiambo (2009) reached the similar conclusion by using the same method.Also, Balat (2008) conducted a study for Turkey and identified that energy consumption improves economic development.
In spite of the studies emphasized above, there are some studies in which economic growth is not associated with energy consumption.In other words, they indicate that energy conservation policies can be implemented to create healthy environment without the fear of economic shrinkage.Zhang and Cheng (2009) tried to evaluate this situation in China.According to the results of VAR, it was concluded that energy consumption does not influence economic improvement.Cheng (1995) andÖcal et. al. (2013) used different methodology and underlined the same conclusion.Oh and Lee (2004) made a study to define this issue in Korea by using VECM.It was stressed that there is not a relationship between those variables.
Furthermore, some studies underlined bidirectional causality relationship between energy consumption and GDP growth rate.Tang and Tan (2014) made a study to define this aspect in Malaysia.As a result of Granger causality analysis, it was underlined that energy consumption and economic growth are dependent to each other.Apergis and Payne (2010), Paul and Bhattacharya (2004) and Wang et. al. (2016) also reached similar conclusion by using the same method.Besides, with the help of VECM, Kaplan et. al. (2011), Pao andTsai (2010) Belke et. al. (2011) determined that there is a bidirectional relationship between energy consumption and GDP growth.Özturk et. al. (2010) and Özcan (2013) conducted analysis by using regression method and indicated the same conclusion.
Additionally, the relation between electricity consumption and economic growth was also emphasized in some other studies.Ghosh (2002) made a study for India by using VAR method.It was identified that there is not a relationship between these variables in the short run.Nazlioglu et .al. (2014) emphasized this similar conclusion by Granger causality analysis.However, Iyke (2015) underlined the different conclusion that enhancing electricity consumption is beneficial for economic growth by using VECM.Nevertheless, mutual relation between electricity consumption and economic growth was underlined by Aslan (2014) for Turkey.
In addition to them, there are also some studies that focus on renewable energy consumption and economic growth.With the help of ARDL, Alper and Oguz (2016) concluded that renewable energy consumption spurs the economic output.Bhattacharya et. al. (2016) defined the similar result by using a different methodology.Furthermore, Ocal and Aslan (2013) determined that renewable energy consumption has a negative influence on economic growth in Turkey by using ARDL analysis.Also, this relationahip was underlined by Sebri and Ben-Salha (2014) for BRICS countries with the help of the same method.
As it can be seen from table 1, it was understood that there are lots of studies regarding this concept.Additionally, it was also seen that different analysis methodologies in these studies were taken into the consideration, such as Granger causality analysis, vector error correction method, regression and ARDL.Furthermore, with respect to the scope, generally a single country was chosen in the studies.Therefore, it can be understood that there is need of new study which evaluates a group of a country, such as developed countries.

Data and Scope
In this study, annual data of 22 developed countries for the years between 1971 and 2014 was taken into the consideration.This data was obtained from the website of World Bank.All developed data could not be included in the analysis due to the lack of data.The list of these countries was explained on table 2.

Dumitrescu Hurlin Causality Test
Dumitrescu Hurlin (DH) panel causality analysis was developed to understand the relationship for panel variables.Therefore, it can be said that it is an advanced form of Granger causality analysis.Therefore, it was accepted that Dumitrescu Hurlin panel causality analysis has some benefits over Granger causality analysis.For example, it is more successful in analyzing unbalanced panel data and cross sectional dependency between countries.The main requirement of this analysis is that all variables should be stationary on their level values.The details of this test were demonstrated below (Dumitrescu and Hurlin, 2012).In equation (1), K refers the optimum lag interval.In addition to this aspect, Y and X represent the variables of which causality analysis will be analyzed.In other words, it can be said that the aim of this analysis is to determine whether X is the cause of Y or not.

Analysis Results
In the analysis process, firstly, Levin Lin Chu panel unit root test was applied to understand whether the variables of energy consumption and GDP growth are stationary or not.Table 3 shows that both of these variables are stationary because probability values of them are less than 0.05.Owing to this condition, it is possible to implement Dumitrescu Hurlin panel causality analysis.4 shows that the null hypothesis of "Energy consumption is not the cause of economic growth" can be rejected in both three lags.The main reason is that probability values of these lags for this hypothesis are less than 0.05.This situation demonstrates that energy consumption has an impact on economic growth for developed countries.While considering this result, it can be said that limiting energy consumption will restrict economic growth for these countries.In the literature, lots of different studies achieved this conclusion (Apergis and Payne, 2009), (Tang and Tan, 2014).On the contrary, Zhang and Cheng (2009), Cheng (1995Cheng ( ), Öcal et. al. (2013) ) and Lee (2004) emphasized that economic growth is not associated with energy consumption.
In addition to this aspect, it was also concluded that there is also a causality relationship from economic growth to energy consumption because the probability values of the first and second lag are less than 0.05 with respect to the second null hypothesis.On the other hand, the probability value of the third lag is more than 0.05.While considering first two lags, it was defined that the level of economic growth has an effect on energy consumption for developed countries.This result shows that developed countries tend to have more energy consumption when they have high economic growth.Wang et. al. (2016), Sebri and Ben-Salha (2014) and Özcan (2013) also reached the similar conclusion in their studies.

CONCLUSION
Energy is a very important concept for many different aspects.For example, it plays a very strategic role for the economies of the countries.It was accepted that higher energy consumption contributes economic growth.On the other hand, there are some different views for this issue that energy consumption does not have any effect on economic growth.While considering this thought, it can be said that energy consumption level can be decreased to have cost efficiency.
Parallel to this situation, this study aims to identify the relationship between energy consumption and GDP growth in developed countries.Therefore, annual data of 22 developed countries for the period between 1971 and 2014 was taken into the consideration.Additionally, Dumitrescu Hurlin panel causality analysis was used for this purpose.
First of all, Levin Lin Chu panel unit root test was performed to determine whether the variables of energy consumption and economic growth are stationary or not.As a result, it was identified that both of these variables are stationary because their probability values are less than 0.05.After this analysis, Dumitrescu Hurlin panel causality test was applied to see the causality relationship between these variables.
According to the results of the analysis, it was defined that there is a bidirectional relationship between energy consumption and economic growth for developed countries.This situation presents two different results.Firstly, energy consumption influences economic improvement for these countries.That is to say, it means that limiting energy consumption will restrict economic growth.
Another important result of this issue is that the level of economic growth has an effect on energy consumption for developed countries.That is to say, developed countries, which have high economic growth, tend to have more energy consumption.With this study, it was aimed to make a contribution to the literature.Nevertheless, in the future, a new study that analyzes the causality relationship between these variables for developing or underdeveloped countries will be very beneficial.

Table 1 .
Similar Studies in the Literature

Table 2 .
List of 22 Developed Countries

Table 3 .
LLC Test Results Dumitrescu Hurlin panel causality analysis was used to see the causality relationship between energy consumption and economic improvement.In this analysis, the conditions in three different lags were considered.The details of this analysis were given on table 4.