Relationship Between Energy Consumption and Economic Growth in Tanzania

Abstract

Energy consumption and economic growth modeling had received a lot of attention following the oil crisis of the 1970‟s. This event led to a new approach of economic growth modeling that included energy as one of the economy‟s input. This study seeks to analysis the relationship between energy consumption and economic growth in the context of Tanzania. The main objective of this study is to understand the nature of relationship between energy consumption and economic growth. Economic growth is represented by production function and proxied with real GDP determined by capital, labor and energy. Energy consumption is determined by income level (GDP), lagged energy-consumption, urbanization and energy price. The specific objectives were to examine the effects of energy price changes on aggregate output and to examine the direction of causality between energy consumption and economic growth. The study was carried using the annual time series data for the period 1980 to 2010. The model adopted the Cobb-Douglas production function and used the Two Stage least squares (2sls) to estimate the simultaneous equations of economic growth and energy consumption. Granger-causality test was also run to test for the direction of causality. The results suggest that an increase in price of energy leads to a fall in output, however the output responded weakly to increase in price of energy. The causality test supports the unidirectional causality that run from economic growth to energy consumption, hence supporting the conservation hypothesis. This implied that as the economy grows the more the energy consumption. Therefore, the results suggest that a reduction in energy use does not have a significant impact on the total output of an economy.