Exploring the Relationship Between Economic Freedom and Energy Consumption in Pakistan

Abstract

The objective of this study is to explore the potential connections between various economic freedom indicators and energy consumption patterns in Pakistan over the period from 1995 to 2019. The research focuses on three key energy variables: coal, electricity, and oil consumption, which serve as the dependent variables. Additionally, ten economic freedom indicators are utilized as the explanatory variables. To analyze the data, the study employs the Ordinary Least Squares regression technique alongside the Granger causality test. The findings indicate that economic freedom indicators significantly contribute to increased energy consumption in Pakistan. However, the Granger causality test reveals that, in most cases, there is no cause-effect relationship between the energy variables and economic freedom indicators. An exception is observed with coal consumption, which appears to Granger cause economic freedom indicators, though the reverse is not true. The study aims to provide a comprehensive understanding of how economic freedom impacts energy usage, highlighting the nuanced dynamics between these variables. By utilizing a robust dataset spanning nearly three decades, the research ensures a thorough examination of trends and patterns. The inclusion of coal, electricity, and oil as dependent variables allows for a detailed assessment of different energy sources, acknowledging their unique roles in Pakistan's energy landscape. The ten economic freedom indicators selected for this study include aspects such as trade freedom, business freedom, investment freedom, financial freedom, property rights, government integrity, tax burden, government spending, monetary freedom, and labor freedom. These indicators provide a broad view of economic freedom, encapsulating various dimensions that might influence energy consumption. The OLS regression technique helps identify the strength and direction of the relationship between economic freedom and energy consumption. Meanwhile, the Granger causality test is employed to investigate the potential causative links between the variables. The study's results show a strong correlation between economic freedom indicators and increased energy consumption, suggesting that improvements in economic freedom may lead to higher energy usage. Despite this correlation, the Granger causality test results indicate that most economic freedom indicators do not directly cause changes in energy consumption, except in the case of coal. This exception implies that coal consumption may have a unique interaction with economic freedom, potentially due to factors specific to Pakistan's economic and energy sectors. Overall, this study contributes to the existing literature by providing new insights into the relationship between economic freedom and energy consumption in Pakistan. It underscores the complexity of these relationships and calls for more nuanced policies that consider the specific interactions between different types of energy consumption and various dimensions of economic freedom.