Energy Consumption and Economic Growth: A Panel Causality Analysis in Eastern Africa

Abstract

Addressing current and future energy needs alongside economic growth has raised global concerns about the causal relationship between energy use and economic performance, particularly in developing regions facing energy deficits. This study examines this relationship in East Africa, where remarkable economic expansion has coincided with persistently low energy consumption, presenting a paradox over whether energy consumption is a driver or merely an outcome of economic growth. The analysis uses annual panel data from 13 countries for the period 2012-2021, applying an augmented neoclassical growth model as the analytical framework. The Dumitrescu and Hurlin panel causality test and a two-step system GMM estimator are employed to assess the nature of causality and the effects of energy on growth. Results reveal unidirectional causality from energy consumption to economic growth, supporting the growth hypothesis. Energy consumption has a positive effect, while energy prices exhibit a significant negative impact. Capital formation, though statistically significant, shows a negative relationship, suggesting inefficiencies or misallocation. Labor shows a causal link to growth, though not statistically significant in the dynamic model. The study recommends that regional energy-growth policy actions focus on expanding energy infrastructure to increase energy consumption, stabilizing prices, and improving capital investment to foster regional economic growth.