Causality analysis between electricity consumption and economic growth: Evidence from Zambia

Zambia’s economic history has, to some extent, been greatly influenced by the early 1970s energy oil crisis precipitated by the steep adjustment of the international oil prices following the Arab-Israeli war of 1972. Globally, energy is arguably one of the major determinants of economic growth. The international community, through the United Nations, have increasingly recognized universal access to clean, affordable and reliable energy services as a prerequisite to sustainable poverty reduction and improved shared prosperity. For a country like Zambia experiencing excessive electric shortages, it is important to empirically demonstrate that a well-developed energy sector is expedient in social and economic development. This paper attempted to establish the causality between electricity consumption and economic growth over the period 1971 to 2013. It employed the Johansen Maximum Likelihood Procedure and the Error Correction Model (ECM) to estimate both the short and long run causality between electricity consumption and economic growth. The application of the Johansen Maximum Likelihood procedure to the Zambian data from the World Development Indicators (WDI) indicates one co-integrating equation. The ECM results show a short-run and long-run unidirectional causality running from economic growth to electricity consumption without feedback. However, the Variance Decomposition Analysis (VDC) indicates that electricity consumption contributes more to economic growth than economic growth contributes to electricity consumption. In the short-run, the government should utilise all the possible avenues to avert the current electric energy poverty. This is because addressing an energy infrastructure bottleneck is one of the major strategies for unlocking the country’s shared growth potential