Assessing the Symmetric Nature of the Energy-Led Growth Hypothesis in Pakistan

Abstract

The energy-led growth hypothesis is a prominent topic in energy economics, but the potential asymmetry in causality due to positive and negative growth shocks has often been overlooked. This study aims to address this gap by providing a fresh estimation to determine whether the energy-led growth hypothesis operates asymmetrically or symmetrically. Specifically, we examined the relationship between energy demand and economic growth in Pakistan using consistent time series data. To achieve this, we applied an asymmetric causality test, which allows us to decompose the growth series into positive and negative growth rates. The results of this analysis confirm that the energy-led growth hypothesis is symmetric in nature for Pakistan. This means that energy demand influences economic growth in a symmetric manner, without significant differences between the impacts of positive and negative growth shocks. In other words, whether there are increases or decreases in energy demand, the effect on Pakistan's economic growth remains consistent. The symmetric nature of the energy-led growth hypothesis in Pakistan suggests that energy demand is a stable driver of economic growth, regardless of the direction of the economic shock. This finding is significant because it implies that both increases and decreases in energy demand have a uniform impact on economic growth, highlighting the fundamental role of energy in the country's economic development. The use of the asymmetric causality test was crucial in decomposing the growth series and analyzing the distinct effects of positive and negative growth rates. This methodological approach provided a more nuanced understanding of the relationship between energy demand and economic growth, allowing us to determine the symmetry of the energy-led growth hypothesis accurately. From a policy perspective, the symmetric relationship between energy demand and economic growth suggests that efforts to manage energy demand, whether through increasing efficiency, expanding energy supply, or other measures, will consistently support economic growth. Policymakers in Pakistan can leverage this insight to design energy policies that are resilient to economic fluctuations, ensuring that energy supply strategies are robust and capable of sustaining economic growth under various conditions. Furthermore, understanding the symmetric nature of the energy-led growth hypothesis can help in forecasting economic outcomes based on energy demand trends. Since the impact of energy demand on economic growth is consistent, predicting economic growth in response to changes in energy demand becomes more straightforward, aiding in more accurate economic planning and policy formulation.