Investigating the Relationship Between Electricity Consumption and Economic Growth in Pakistan

Abstract

This study investigates the intricate relationship between electricity consumption and economic growth in Pakistan, incorporating the role of financial development within the framework of the neoclassical production function. Utilizing data spanning from 1972 to 2021. The analysis reveals a significant cointegration among the variables, suggesting a stable, long-term equilibrium relationship. Specifically, the results demonstrate that financial development, electricity consumption, capital, and labor collectively contribute to the promotion of economic growth in Pakistan. This underscores the critical role of these factors in driving the nation's economic expansion. The causality analysis yields compelling insights, particularly the feedback effect observed between electricity consumption and economic growth. This indicates that not only does economic growth spur higher electricity consumption, but increased electricity consumption also fosters further economic growth, creating a virtuous cycle. Additionally, a similar feedback relationship is found between financial development and electricity consumption, highlighting the interdependence of these factors. Moreover, the study establishes that economic growth and financial development Granger cause each other, implying a bidirectional causality. This finding suggests that improvements in financial development can stimulate economic growth, while economic growth can, in turn, enhance financial development. The implication of this result is profound, as it suggests that policies aimed at conserving electricity may not be beneficial for economic growth. Instead, the focus should be on policies that promote sustainable energy use and technological innovation. In light of these findings, the study recommends that the government of Pakistan should prioritize research and development efforts to develop new energy-saving technologies. By doing so, the country can achieve sustained economic growth without compromising on energy consumption. The promotion of energy-efficient technologies and practices can help mitigate the environmental impact of increased electricity consumption while supporting the economic objectives of the nation. Furthermore, the study highlights the importance of enhancing financial development to support economic growth. Strengthening the financial sector can facilitate investments in energy infrastructure and other critical areas, thereby supporting the overall economic development. Policymakers should consider strategies that integrate financial development with energy policy to create a holistic approach to sustainable economic growth.