Energy, economic growth and causality in developing countries - A case study of Tanzania and Nigeria

The debate about the precise role of energy in economic development remains contentious, Existing empirical studies have produced varying results: some have argued the complementarity between energy and other factors of production, and others have indicated that energy can be substituted for other factors of production, Commonly, these studies have focused primarily on the developed countries, one explanation being that supply constraints and price rigidities render any study on factor substitutions in developing countries meaningless, However, the functional relationship between energy consumption and income in developing countries is constantly investigated with the use of regression techniques, While such techniques are useful in empirical analysis, no mechanism exists for indicating causal directions between variables, This limits the scope for policy analysis and prescription, The need to identify causal direction between energy consumption and income growth in developing countries is overwhelming, Apart from providing further insights into the role of energy in economic development, it provides policy analysts with a clearer understanding of the likely impact of energy supply constraints on economic growth, This article examines the causal directions between energy consumption and economic growth (proxied by GDP and GNP) for Nigeria and Tanzania, The results show a simultaneous causal relationship between energy and economic growth for both countries, the implication being that, unless energy supply constraints are eased, economic growth and development will remain elusive to these countries, Given similar economic characteristics and profiling the same energy scenario for other developing countries, our finding supports the view that energy plays a key role in economic development. (C) 1996 Elsevier Science Ltd.