DSpace at VNU: Energy Cosumption and Economic Development: Granger Causality Analysis for Vietnam tài liệu, giáo án, bài...
ENERGY CONSUMPTION AND ECONOMIC DEVELOPMENT: GRANGER CAUSALITY ANALYSIS FOR VIETNAM Loi, Nguyen Duy Abstract In the 1980s, after two oil crises, the studies on this relationship mainly focused on the effects o f energy prices, particularly oil prices, on economic activities In recent years, the relationship between energy consumption and economic growth was examined Because energy is not only considered as an input for the process o f productions in enterprises and the consumption o f households but also reckoned as an indirect source o f many serious environmental problems, particularly air pollution Since the adaptation o f reform policy, domestic and international trade were liberalized, tariff and non- tariff barriers were also reduced and then alleviated gradually, exports were promoted by the government through many economic policies and measures such as tax preferences, export- processing zones and industrial zones, etc As a result together with FD1, trade has been become one of the sources to speed up the hieh rate o f economic growth during the period of reform The paper aims at investigating the causal relationship between energy consumption, GDP and trade in Vietnam for the period o f reform (Doi moi),19862006 We apply the method o f Granger causality test to exam ine this relationship in order to answer some questions such as: Is high economic growth due to the energy - led growth or export - led growth? Does energy saving harm economic growth? Does the rapid trade growth intensify the level o f energy consumption - a source to cause environmental pollution? On the basis o f this empirical study, some policy implications will be proposed for Vietnam ’s economic sustainable policy Keywords: Granger causality, energy consumption, GDP, trade JEL: F14, F18, o i l * The author is s e n i o r researcher, vice director, Institute o f W o rld E c o n o m ic and Politics The views expressed in this p aper are those o f the author an d d o no t necessarily reflect the views o f IWEP A n y errors b elo n g to the author 440 ENERGY CONSUMPTION AND ECONOMIC DEVELOPMENT 1.1 Literature review The literature has recently concentrated in the Environmental Kuznets curve (EKC) which represents the relationship between environmental degradation and income by an inverted U-shape Many environmental degradation indicators, which energy consumption is one of, have been investigated Many studies on the relationship between economic growth and energy consumption are dominated by panel and time series analyses, employing Granger causality test for the relationship between economic growth and energy consumption The finding o f the first study by Kraft and Kraft (1978) was the Granger causality running from income to energy consumption in the u s, with the data of the period o f 1947-1974 He drew policy implications that energy conservation policy may not be affected negatively on the economic side Later, empirical studies have been investigated to include many developing countries with the aim of seeking a relevant energy policy Masih and Masih (1996), Glasure and Lee (1997) and Asafu- Adjaye (2000) examined the causal relationship between energy consumption and income for developing countries, with the use o f cointegration and vector error correction (VEC) The results are mixed Soytas and Sari (2003) investigated the causal relationship for emerging market for the period o f 19501992 The result was also mixed, bidirectional causality for some countries, and no cointegration for others Oh and Lee (2004) estimated the causal links between energy and in come in South Korea for the period o f 1970- 1999 The result shows that the lonR run bidirectional causal relationship between energy and GDP and short- run unidirectional causality running from energy to GDP exist Data on time series have been tested for investigation o f the causal relationship between energy and economic development Chieng- Chiang Lee and Chun- Ping Chang (2005), who examined the causal relationship between energy consumption and economic growth for the period o f 1954- 2003 in Taiwan, found that energy acts as an engine of economic growth in the long run, unstable cointegration relation between energy consumption and GDP, and their policy implications implies that energy conservation policy may harm economic growth Mehrzad Zamini (2007) studied the causal relationship between GDP and value added in Industry and Agriculture in the period o f 1967- 2003 in Iran, and found that there is a long- run unidirectional relation from GDP to energy Jia- Hai Yuan, Jian- Gang Kang, Chang- Hong Zhao and Zhao- Guang Hu (2008) investigated this relationship in China and discovered a short- run Granger causality running from GDP to energy They proposed enhancing energy efficiency, diversifying energy resources and exploiting renewable energy Wietze Lise and Kees Van Montfort 441 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TÉ LÀN THÚ TƯ (2007) examined the Granger causality link between energy consumption and GDP in the period o f 1970- 2003 and figured out that there is a unidirectional causality running from GDP to energy consumption, and the saving o f energy would harm economic growth Ugur Soytas and Ramazan Sari (2007) used the cross- sector data to research the causal links between energy and productions in Turkish manufacturing industry, with the use o f multivariate framework and vector error correction, their finding indicates the unidirectional causality from electricity consumption to manufacturing value added; and their policy implications are to enhance energy saving technologies and to increase energy efficiency Many studies exploited cross country data to investigate the Granger causality relationship between energy and economic development Chieng- Chane Lee (2005) examined the c a u s a l relationship between energy consumption and GDP for 18 developing countries in the period o f 1975- 2001, and their findings indicate the long- and short- run causality running from energy consumption to GDP, but not vice versa, and their drawing lessons imply that energy conservation may harm economic growth in developing countries Other authors such as Stem (2000), Lee and Chang (2005), Altinay and Karagol (2005), Richmond and Kaufmann (2006), also investigated this causal relationship and the results are also mixed Brian M Francis, Leo Moseley, and Suanday Osaretin lyare (2007) investigated the causal relationship between energy consumption and projected growth in some Caribbean countries and found the short- run bidirectional Granger causality running from energy consumption to per capita GDP They emphasized on the increase o f efficiency in energy use, production and distribution o f energy, and the application o f new technologies Theodoroi Zachariadis (2007) exploited cross- country data to investigate the causal relationship between energy use and economic growth for G7 countries, and the results are mixed, some countries having unidirectional Grander causality from energy to economic growth, the other finding bidirectional causality Nicholas Apergis and James E Payne (2009) studied the causal relationship between energy consumption and economic growth in Central America for the period o f 19802004, application the method o f multivariate framework, panel cointegration and vector error correction They found both short- and long-run Granger causality from energy consumption to economic growth, their policy implications are increasing energy efficiency, reducing the long-run consequences o f the dependence on imported energy Yemane Wolde-Rufael (2009) investigate the causal link between energy consumption and economic growth for African countries, and their fidings 442 E N E R G Y C O N S U M P T IO N A N D E C O N O M IC D E V E L O P M E N T are conflicting because energy is no more than a contributing factor to output growth, but not as important as capital and labor and energy consumption play a minor role in economic growth in Africa Many studies, with the use o f time series or panel data, have been investigated the causal relationship between energy consumption and economic development They took some similar steps as such nonstationary test, cointegration test and then Granger causality test between enersy and economic series The findings o f the causal relationship are mixed, some finding unidirectional causality running from energy to economic growth or vice versa, others finding bidirectional causality, and the other finding the neutrality hypothesis The results o f these studies are largely depending on country and groups o f country considered, and time considered This paper aims at providing an estimation o f the Grander causality relationship between energy consumption and economic development, consisting o f per capita GDP and trade in Vietnam, which would contribute confidential evidences to enriching the discussion on the causal relationship between energy consumption and economic development This paper has some sections as follows Section shows the introduction and literature review Section presents data and methodology Section discusses estimation results and section concludes 1.2 Overview of trade development in Vietnam B efore reform or “D oi m oi”, V ietnam w as in long econom ic hardship Since the launching o f 4iDoi moi” in 1986, Vietnam has successfully transformed from a centrally-planned economy to a market one, becoming one o f the most successful transitional economies in the World; Inflation had been reduced successfully, from three digit level (780% in 1986) to two dieit level (12% in 1995) Vietnam which is regarded as an Asian tiger achieved high economic growth, with an average over 7% per annual from 1986 to 2006 Per capita Gross Domestic Product (GDP) increased almost 10 times during the period o f 1986- 2006, from about 80 u s dollars to 830 u s dollars The percentage o f population living in poverty has impressively reduced by half in one decade, from 58% in 1993 to 29% in 2002 (World Bank, various years) The overall adult literacy rate is very high, much higher than the economies having the same level o f development, with a similar rate between males and females, 95% and 91%, respectively The reform, which conducted the open up o f the Vietnam’s economy to the World, liberalization foreign trade, attraction foreign direct investment (FDI) and integration to the region and the World, contributed significantly to this prominent economic performances Figure shows per capita GDP which has increased rapidly since the economic reform in 1986 443 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LẦN THỨ TƯ F igu re 1: Per capita GDP growth, 1986- 2006 G D P Energy which is regarded as an engine for an economy plays a crucial role in economic development Energy is not only considered as an input for the process o f productions in enterprises and the consumption o f households but also reckoned as a source o f environmental abatement that may cause many serious environmental problems Energy supplies for economic activities, households and government and vice versa, these actors demand for energy consumption The development o f the energy sector targets at meeting the demands for socio-economic development and ensuring national energy security The energy sector in Vietnam has expanded drastically for the post- reform period In 2005, Vietnam produced 52.28 billion KWh o f electricity, 35 million ions o f coal, 18.6 million tons o f crude oil, and 6.6 billion nr o f gas; the V ietnam ’s export o f coal which achieved ỉ Í million tons in 2004 ranked as the first exporter o f coal in the World, etc, (Ministry o f Industry, 2006) Vietnam also released national policy for energy development in 2005 Industry, transportation and households sectors consumed energy the most in Vietnam The industry sector consumed 1.5 million TOE (tons o f oil equivalent) in 1990 and 6.17 million TOE in 2003, with an average increase o f 11.4% per annual The sector o f transportation increased energy consumption from 1.64 million TOE in 1990 to 5.63 million TOE in 2003, with an an average growth o f 10% per year; the data for household sector was 0.46 million TOE in 1990 and 2.3 million TO E in 2003, with an average increase o f 13.2% per year The data for the sector o f trade and services was 0.35, 1.3 and 10.6 respectively; the data for agricultural sector was 0.26, 0.8 and 9.0% respectively The trading energy consumption per capita 444 ENERGY CONSUMPTION AND ECONOMIC DEVELOPMENT increased from 63 kgOE (oil equivalent) in 1990 to 315 kgOE in 2004; the trading electricity consumption per capita raised from 93 KWh in 1990 to 541 KWh in 2003 (Ministry o f industry) The energy consumption per capita is equal to one third of the average level in the World The Vietnam’s structure o f energy consumption mainly concentrated in coal, oil and electricity where the percentage in total energy consumption was 25.3% for coal, 54.8% for oil and 19.9% for electricity (Ministry of Industry) Figure shows the graph o f per capita energy consumption for Vietnam F igure 2: Per capita energy consumption, 1986-2006 ENERGY Since the adaptation o f reform policy, domestic and international trade were liberalized, tariff and non- tariff barriers were also reduced and then alleviated gradually, exports were promoted by the government through many economic policies and measures such as tax preferences, export- processing zones and industrial zones, etc As a result, trade has been increasing rapidly during the period of 1986- 2006, except the period o f the Asian financial crisis Trade per capita us$ in 1986 to 1008 us$ in 2006; trade rose almost times, from 29.5 billion us$ in 1986 to 88 billion us$ in 2006 increased more than 20 time, from 49 Consequently, the percentage o f trade in GDP rose from 21% in 1986 to 160% in 2006 Along with foreign direct investment (FDI), trade, particularly exports, has been the main source for high economic growth during this period The rapid 445 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LẨN THỨ T growth o f trade and the high level o f openness, however, may result in dependence in external markets and could be sensitive to any economic shocks from the outside F igure 3: Trade per capita, 1986- 2006 TRADE Data and Methodology 2.1 D ata The data, which was compiled from the World Development Indicators (WDI), the World Bank, cover the time series o f per capita GDP (Gross Domestic Product), per capita! energy consumption and per capita trade for the period 19862006 In order to reduce fluctuations o f the trade time series, we transform trade's data into trade per capita by using the equation below Variables are total primary energy consumption per capita measured in kg o f oil equivalent; GDP per capita in thousand real 2000 u s dollars from the WDI Trade per capita in current u s dollars obtaining from the WDI is estimated as follows: Trade = (IMt+EXt)/Pt Where IM is imports, EX- export, P- numbers o f population at time t, and t is time trend The structure o f the total primary consumption consists o f consumptions of petroleum, natural gas, coal, hydroelectric power, nuclear power and renewable 446 ENERGY CONSUMPTION AND ECONOMIC DEVELOPMENT electric power (geothermal, solar, wind, wood and waste) We aim at examining the Granger causality links between energy consumption and economic development as a whole, energy consumption and trade, and GDP and trade, therefore we don’t calculate the percentage o f coal, petroleum and gas, and hydroelectric, nuclear and renewable electric power in total energy consumption All variables are logarithmic for the purpose o f avoiding fluctuations and smoothing in the time series variables 2.2 Methodology In the paper, we try to examine the Granger causality links between energy, GDP and trade in both bivariate and multivariate framework for the sake o f avoidance spurious results Firstly, we test whether each variable is nonstationary or having unit root or not Secondly, if the time series variables are nonstationary and same order integration series, then we will test cointegration relations Thirdly, if cointegration relations exist, then we will test Granger causality among these time series variables 2.2.1 Unit root test We take the test o f unit root in order to judge the stationarity o f time series There are several kinds o f methods1 for testing, however we just take two methods out o f them as follows; Augmented Dickey- Fuller (ADF) and Phillips-Perron (PP) tests The test critical values (p- value) o f these methods are approximate for different sample o f small size In 1996, MacKinnon used annual data to estimate the critical values for 20 observations2 In this sample, we have 21 observations for the period o f 1986- 2006, more than the number o f observations used by MacKinnon3 This is why we use A D F unit root tests We calculate the following equation for the ADF test The equation for ADF test can be calculated with three different types: equation with constant, equation with constant and deterministic trend, and equation They are Dickey-Fuller (DF) test, ADF test, KPSS test, ERN test, pp test and NP test, of which DF and ADF tests are the most common uses 20 observations are enough for test p-values available in the econometric software of Eview 5.0 and 6.0 MacKinnon (1996) figured out the advantage to use annual data over quarterly or monthly data under error terms Annual data has been examined by us because of non- available monthly or quarterly data for energy consumption and GDP 447 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LẨN THỨ T without constant In this paper, we choose to run the test with constant and deterministic trend The ADF test, which bases on the construction a parametric correction for higher-order correlation, may be incoưect if the series having a unit root and a structural break For solving these problems, we take the pp test which produces a more robust estimation 2.2.2 Cointegration test Cointesxation links between variables are necessary for Granger causality test If two series o f nonstationary same order integration, which have a stationary linear combination, calls a cointegration equation In the paper, we explore the Johansen (1988) cointegraton test within a vector autoregressive (VAR) framework for examining the presence o f cointegration links between the variables The Trace and maximum-eigenvalue tests in the VAR model and vector error coưection (VEC) show the level series o f energy, trade and GDP and the first-difference series denergy, dtrade and dGDP respectively For mitigating the spuriousness of the regression and investigating the long-term relation, we apply a vector error correction model (VEC) 2.2.3 Granger causality test The presence o f the cointegration relation is necessary for Grander causality test We need to test whether a long- term balance relation between variables can indicate Granger causality or not We examine the causal relationships between the three series variables in both bivariate and multivariate framework Using the VEC model to test Granger causalitv with the t- statistic test includes the first difference series o f the three variables so that spuriousness may be avoided We explore the bivariate tests for the series variables with the F- statistic for investigating the short run Granger causality between the variables Multivariables o f denergy, dtrade and dgdp in the VAR model estimate the interactions amone; their p-lag variables to test the Granger causality relations The VAR (p) model is as below: Y t = n + A ,y t.i + A2yt-2 +■ ■+ Apyt.p + fit (j) Where yt is a (3x1) column vector o f the endogenous variables: denergy, dtrade and dgdp, (.1 is a (3x1) constant vector, p is the order o f lags, each of Ai A 2,„ Ap is a (3x3) coefficient matrix, each o f yt.|, yt_2, yt-p is a (3x1) vector of the lag endogenous variables, and £t is a (3x1) vector o f the random eư or term The lag length p in level series VAR is chosen by the minimum AIC with maximum lag equals to 448 ENERGY CONSUMPTION AND ECONOMIC DEVELOPMENT Etimation results 3.1 Unit root test We first take the ADF and p p tests o f level series for each variable o f energy, trade and gdp Table shows the test’ results that energy, trade and gdp are nonstationary because the test statistics not exceed the critical value Table presents the ADF and p p tests o f first difference that the series variables of first difference have first order integration Therefore, cointegration relations exist among the three variables o f energy, trade and gdp Table 1: A DF and p p unit root tests: level series ADF pp Lags Test statistic Prob Test statistic Prob Energy -1.0305 0.9162 -1.0305 0.9162 T rade -2.7623 0.2246 -1.8839 0.6269 GDP -3.6336 0.0511 -4.0880 0.0213 Table 2: ADF and pp unit root tests: first difference ADF pp Lags Test statistic Prob Test statistic Prob Energy -4.8183 0.0053 -4.8190 0.0053 Trade -3.1660 0.1178 -3.0623 0.1402 GDP -2.9436 0.1699 -2.2459 0.4424 linear combination 3.2 Cointegration test If the cointegration relations exist within the of nonstationary series, they must have Granger causality Tables from to show the results o f Johansen cointegration test1 For the bivariate cointegration test, the trace and maximum-eigenvalue tests for three pairs o f variables: energy-gdp, energy1 Johansen 1991, Greene 2003 449 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LẨN THỨ T trade and trade-gdp indicate that there is only one cointegration equation in the pairs o f GDP- trade at the 5% level (table 5) Table shows that one cointegration equation exists for the pair o f trade-gdp because the test statistic is higher than the critical value, so we reject the null hypothesis Table 3: Johansen cointegration test for a pair o f Energy-G DP Eigenvalue Trace statistic 5% critical value Prob r=0* 0.5837 24.8572 25.8721 0.0665 r