Modelling the impact of Energy Use on Economic Growth:

The case of Zimbabwe

Adam Willie1 (MSc, PGDTF)

Abstract
This study investigated the impact energy use has on Zimbabwes economic growth using time
series data spanning the period 1980-2011. Pesaran et al (2001) bounds testing approach,
which does not require pretesting of variables for unit root and its associated error correction
model has been employed in data analysis. The findings show that energy use and economic
growth are cointegrated and that energy use Granger cause economic growth. Increase in
current energy use was found to more than proportionately increase economic growth in
Zimbabwe. Policy interventions that promote energy generation and use are recommended to
stimulate economic growth.

Key words: Energy Use, Economic Growth, Zimbabwe

1
Willie Adam is a Principal Economist with the Ministry of Industry and Commerce, Zimbabwe.
Email: willieadam80@gmail.com
Cell: +263773616631
 1. INTRODUCTION
The paper is motivated by the need to understand whether the constrained energy use in
Zimbabwe has any impact on economic growth. The link between energy use and economic
growth has been subject to a number of empirical investigations, however, most of the inquiries
interrogated the causal nexus only with no attempts to assess the magnitude of the impact
energy use may have on economic growth. The previous studies, particularly in the case of
Zimbabwe, analysed the energy and economic growth linkage in a bivariate framework, an
approach which this study is arguing to lack theoretical roots. Thus, this paper, using a
multivariate modelling framework, will investigate the magnitude of impact energy use have on
Zimbabwes economic growth.

1.1 Background of the energy supply and use in Zimbabwe

Major energy sources used in the country include petroleum fuels, coal, electricity generated
from both thermal and hydropower stations, and wood fuel. These sources accounted for 18%,
8%, 13%, and 61% of total energy supply in 2009 (MoEPD, 2012).

1.1.1 Electricity
Electricity is generated from Kariba hydropower station, Hwange, Harare, Bulawayo, and
Munyati thermal power stations. There are also independent power producers.

The government of Zimbabwe have to date installed a 1960MW capacity for generation of
electricity. Available capacity as at March 2013 was 1026MW against an estimated country
peak demand of 2200MW (MoEPIP, 2013). The country has more than a decade experiencing
electricity supply deficits and rolling load shedding as shown by table 1in appendix 1. Lack of
fresh investment in generation, non-maintenance of existing plants and suboptimal tariffs are
cited as contributing factors to supply shortages.

1.1.2 Petroleum fuels

The country depends on imported petroleum fuels. Petroleum fuels imports per year averages
540 million litres of petrol and 630 million litres of diesel. In 1998, peak daily consumption of
liquid fuels was 3 million litres of diesel and 2 million litres of petrol. To reduce dependence on
imported liquid fuels the country introduced 10% ethanol mandatory blending for petrol
(MoEPD, 2012).

1.1.3 Coal
Coal is locally mined. The bulk of it is used to produce electricity. It is also used for industrial
heating and for agricultural purposes such as curing of tobacco. At the peak of economic
activities, the countrys annual consumption of coal stood at 4.5 million tonnes. Of this coal
consumption, 77.8% goes to electricity generation, while the remaining 22.2% is shared equally
between industrial heating and tobacco curing. However, the supply of coal has since declined
to 3 million tonnes by 2012, which was far below what is required for electricity generation
only (MoEPD, 2012).

2
 1.1.4 Wood fuel
Wood fuel is the major source of energy for most rural areas and new tobacco farmers who
cannot afford coal. Increased demand for agricultural land and wood harvesting for tobacco
curing, cooking and heating has recently threatened the supply of wood fuel. In fact, the wood
fuel supply is already in deficit given that an annual sustainable supply of wood fuel is 4.6
million tonnes against the annual demand of 6 million tonnes. In Manicaland, Mashonaland
East, Midlands, and Masvingo provinces, the deficit supply of wood fuel is well pronounced
(MoEPD, 2012).

1.2 Problem of study, objectives and justification

Zimbabwes energy supply continued for more than a decade below the required consumption
levels demanded by household, industry, agriculture and commerce. Electricity energy supply is
and has been in deficit since the 1990s, resulting in high frequency and prolonged power
outages being the order of the day. Coal supply has also declined from 4.5 million tonnes per
year to 3 million tonnes per year, which is not enough to service power generation only without
talking of industrial heating and agro- processing needs. On the other hand, woodlands are
being harvested at the rate of 6 million tonnes per year far above the sustainable rate of 4.6
million tonnes per year. The shortages in energy supply imply that energy available for use by
all sectors of the economy is restricted. What effects does this current usage of energy in
Zimbabwe have on economic growth?

There is no agreement in economic theory and among existing empirical evidence on the impact
of energy use on economic growth. Neoclassical economics do not regard energy as a critical
factor of production whilst ecological economics regard energy very essential for production
and therefore economic growth. Chontanawat et al (2006) found that there is no long run
relationship between energy use and economic growth in Zimbabwe whilst Kahsai et al (2010)
established the long run relationship. On one hand, economic growth was found to influences
energy use in Zimbabwe (Farhani & Rejeb, 2012). On the other hand, Fowowe, (2012) found
that a two way causal relationship between energy use and economic growth exist in Zimbabwe.

The contrasting theoretical economic views and the inconclusive empirical evidence regarding
the role of energy use in Zimbabwean economic growth creates a knowledge gap as to what
implications the restricted energy use in Zimbabwe has on economic performance. This study
seeks to revisit the energy use-economic growth linkage in Zimbabwe to generate further
knowledge on the nexus. The overall objective of this study, therefore, is to assess the
magnitude of impact of energy use on Zimbabwes economic growth. The knowledge to be
gained from this study will be very instrumental in the review of energy policy, energy
investment decisions and in overall macroeconomic planning.

The remainder of this paper will proceed with section 2 reviewing the literature. Section 3 will
outline the methodology; define the data set and variables. Presentation and interpretation of
result will follow in section 4. Section 5 concludes the paper with a discussion of results, policy
recommendations and suggestions for further research.

3
 2 LITERATURE REVIEW

2.1 Theoretical Literature Review

Understanding the role of energy in production is a prerequisite to appreciate the impact energy
use has on economic growth. There exist two contrasting theoretical arguments regarding the
role of energy in production and economic growth. On one hand we have the standard theory of
growth (Solow, 1956) which places minor importance on the role energy play in production and
therefore in economic growth. Whenever energy is taken into account, it is treated as an
intermediate input, which has negligible influence on economic growth. Ecological economist
(Kummel et al., 2008; Ayres et al., 2013) on the other hand asserts that energy is a critical
primary factor of production and its use will stimulate economic growth. This sub-section will
proceed by outlining the role of energy in production before delving on energy perspectives of
economic growth postulated in standard economic growth theory and ecological economic
growth theory. A discussion on the implication of these theoretical perspectives on specification
of the model used in this study and on how energy use impact economic growth will conclude
the sub-section.

2.1.1 The role of energy in production

Production is the transformation of raw materials into semi-finished and finished goods and
services. In neoclassical economic theory, factors of production are categorised into primary
and intermediate factors. Usually capital and labour are considered the only primary factors and
energy is treated like any other materials as intermediate inputs. Intermediate inputs are created
and used up within the production period concerned while primary factors exist at the beginning
of the production period and are not used up within the production period concerned. According
to Stern and Cleveland (2004) the greater proportion of payments made to factors of
productions goes to owners of primary factors for services provided directly or embodied in
created intermediate inputs. These factors are assumed to be hired from perfect competitive
markets and firms have to hire them until they equalise the value of marginal product of each
factor with its marginal factor cost of hiring in order to maximise profit. The equality of factor
marginal productivity value and the factor marginal cost is referred to as the cost share theorem
in literature (Kummel et al., 2010; Lindenberger & Kummel, 2011).

Because owners of primary factors of production receive the greatest proportion of payments
made to all factors of production, primary factors will account for the greatest proportion of
total output if firms are rational economic argents who seek to maximise profit. Energy, being
an intermediate input accounting for a small proportion of payments to production factors
averaging 5% or less (Ayres et al., 2013; Kummel et al., 2010; Lindenberger, 2003) has a
corresponding small output elasticity. On this basis, energy use has negligible impact on
production and economic growth (Kummel et al., 2010).

In contrast, ecological economists regard energy as a critical factor of production together with
capital and labour. Capital is defined to constitute the energy conversion devices, information
processing devices and installations and buildings to ensure protection and safe use of these

4
 devices. Components of these devices include heat engines and transistors among others which
can only be activated by energy. The role of energy is to activate machinery. If production
activities require the use of the above defined capital, it therefore means that with zero energy
input and positive non-energy inputs, output will be strictly zero (Stern, 2010). Even if energy
can be substituted by either capital or labour, there is a limit to which this can happen.
Technological advancement can bring up energy saving machinery, but these cannot start up
themselves, they are energy using. Similarly, labour can perform routine work without the use
of commercial energy, but labour cannot activate industrial machinery. Thus, guided by the
energy requirement capacity installed in physical capital, there is a least amount of energy that
must be consumed without which production will be heavily constrained.

While capital is activated by energy, it is organised and supervised by labour of some levels of
skill. The raw materials are not active in the production process. It is capital, labour and energy
that are active in beneficiation and value addition processes. The three factors are responsible
for rearranging the particles of raw materials shaping them into usable products. According to
ecological economic theory, energy, capital and labour are equally important in production
process with materials being a passive ingredient.

2.1.2 Standard growth theory

The standard growth theory begins with Solow (1956). The Solow economic growth theory,
asserts that economic growth results from technological progress and the accumulation of
capital and labour inputs. The model is specified as follows:

Y Af K ; L (1)

Where Y is total output of the economy, K is capital, L is labour and A is technology.

Solow (1956) hypothesises that for a given level of technology, capital deepening increases
output per worker. Labour is assumed to grow at a constant rate proportional to the population
growth rate while capital evolution is determined by savings/investments, the rate of capital
depreciation and labour growth rate. The rate of depreciation of capital and labour growth rate
reduces capital deepening. For economic growth to occur, capital should grow at the rate
exceeding the sum of the rate of depreciation of capital and labour growth rate. However, the
resulting growth will just move the economy along the same production function to a new
equilibrium point. While capital deepening moves an economy along the same production
function, technological progress shifts upward the economys production function. However,
Solow (1956) did not explain the origins of technological progress and empirically, it is
measured as a residual of economic growth not accounted for by labour and capital. The Solow
model, being founded in neoclassical economic theory, does not take into account the role of
energy use in its explanation of economic growth.

On the basis of the neoclassical cost share theorem, the neoclassical economics estimates factor
productivity from national income accounts. Over time, factor cost shares have been observed
to be constant averaging 70% for labour, 25% for capital and about 5% for energy (Ayres et al.,
2009; Lindernberger & Kummel, 2002). The small cost share of energy is therefore reflective of

5
 the fact that it is not critical for economic growth and that oscillations in its use have negligible
influence on economic growth.

The neoclassical growth model faced serious criticisms by ecological economist when it failed
to explain the economic recessions preceded by the 1973 OPEC cartel and the 1979 war
between Iraq and Iran (Kummel et al., 2002). The two events reduced energy supply resulting in
rationing. In the first energy crisis, a 7% decline in energy supply was observed. According to
the neoclassical growth theory, the 7% decline in energy supply will restrict energy use by the
same magnitude and expected to reduce economic growth by a negligible magnitude of 0.35%,
(5% x 7%); however the actual observed decline in economic growth was ten times larger than
the neoclassical growth theory predictions (Lindenberger & Kummel, 2002). The neoclassical
growth theory by weighting production factors with their respective cost shares could not
explain how the decline in use of a resource of minor monetary importance could cause
economic recession.

2.1.4 Ecological growth theory

The failure to explain the economic recessions, (commonly referred to as energy crises), of the
1970s by the neoclassical growth theory has invited a number of criticisms by a group of
ecological economists among them, Hall et al (2001), Stern and Cleveland (2004), Ayres and
Warr (2009), Kummel et al (2010), and Stern (2010).

Firstly, they argued that since energy crises have caused economic recessions, that is evidence
enough that energy is a primary factor of production and should be given equal treatment as
given to capital and labour by the neoclassical growth theory. Furthermore, energy qualifies in
the definition of a primary factor of production offered by the neoclassical economic theory.
Brown et al, (2011), argued that energy cannot be created and neither can it be destroyed. When
it performs work it is only degraded. Energy (with high exergy2) flows from the environment to
the production system then returns to the environment as waste and low temperature heat (with
low exergy). Energy availability therefore is exogenous to the production function as it is
neither created nor used up within the production period concerned (Sorrell & Dimitropoulos,
2007).

The secondly argument followed by ecological economist is that energy output elasticity is
greater than its cost share in national income as proved during the energy crises of the 1970s.
Thus, the neoclassical theoretical basis for rejecting energy as a primary factor of production is
debatable in real life. The neoclassical growth theory arguments has founding in the profit
maximisation initial conditions that firms must hire factors of production until their marginal
product value equal the marginal cost of hiring them. This equality assertion, derived from
unconstrained optimisation calculus, is argued to be invalid. For example, given an economy
with output value given by, Y X , produced by factor inputs given by a vector , X , with w
representing a vector of factor prices, the profit function will be as follows:

Y X wX (4)

2
Exergy refers to the ability to perform useful work
6
 Differentiating equation (4) with respect to factor inputs and equating the derivatives to zero
yields

Y X Y X
wi 0 . Or wi (5)
X i X i

Xi
Multiplying both sides of equation (5) by yields
Y X

X i Y X wi X i
(6)
Y X X i Y X

Equation (5) tells us that the value of the marginal product of each factor must equal its price
while equation (6) shows that the output elasticity of each factor of production is equal to its
cost share in national income. The neoclassical theory assumes that profits are maximised by
only considering the cost of hiring factor inputs. Firms are assumed to take in inputs and
produce output without facing any physical constraints as a circular flow of income would
depict. Such a black box conception of the economys production system is criticised to be far
from reality. The neoclassical theory ignores the physical aspect of production and concentrate
on wealth distribution and the exchange of goods and services under the assumption of perfect
competitive markets.

However, in real life competitive assumptions may not hold. Firm operations face a number of
constraints in reality. For example information is costly to find, and factor combination may be
constrained either technologically, that is production plants are designed for specific level of
energy input, if energy fall less than the designed level, output will be less than optimal. All
these constraints will add costs to firms. Including these constraints in the profit maximisation
calculus, the equality of the value of marginal product of each factor and its price will not hold
(Ayres et al., 2013; Kummel et al., 2010). Suppose that for simplicity the constraints are given
by the expression, a X the profit function (4) will be:

Y X wX a X (7)

where is the Lagrange multiplier and a represents parameters of the constraints.

Differentiating equation (7) with respect to factor inputs and equating the derivatives to zero
yields

Y X a X Y X a X
wi 0 Or wi (8)
X i X i X i X i

Xi
Multiplying both sides of equation (8) by yields
Y X

X i Y X wi X i Xi a X

Y X X i (9)
Y X X i Y X

7
 Equation (8) simply shows that when firms account for constraints in their optimisation decision
making, the value of marginal product of each factor will be greater than its price while
equation (9) also shows that the output elasticity of each factor of production is greater than its
cost share in national income under constrained optimisation. The implication of this result is
that the duality theory does not hold hence output elasticity of production factors should not be
estimated from national accounts or cost functions as is the practice in neoclassical growth
theory.

This debate begs the questions that do competitive factor markets really exist. What does the
factor price really measure in the market, factor scarcity or factor usefulness? To begin with,
energy markets in most developing countries like Zimbabwe are heavily regulated and in many
cases, the government parastatals are the sole players in these markets. Prices are set rather than
left to respond to market forces. It is doubtful if these pegged prices reflect productivity of
energy. Suppose that the energy regulatory authority slash down the price of energy, can that
lead to a reduction in the usefulness of energy? If energy can still perform the work it was
performing before its price was slashed, what then does the price measure? Is this not pointing
out that the marginal productivity and marginal cost equality is just a simplifying assumption to
ease the equilibrium analysis?

Furthermore, the fact that most suppliers in the energy market are government parastatals which
provide an avenue for politicians to reach the electorate, energy prices are often deliberately
lowered to suboptimal level to buy votes especially during run up to elections. Such prices are
far below to proxy energy productivity. This scenario is very possible especially in Zimbabwe
where recently an amnesty was given to all clients that owed the Zimbabwe Electricity Supply
Authority.

The final major argument put forward was that energy and non-energy factors are not perfect
substitutes. The role of energy in the production process cannot be entirely performed by non-
energy factors. Borrowing from biophysics, the second law of thermodynamics entails that there
is a least amount of energy required to carry out work (Stern, 2003). This means that there is a
limit to which energy and non-energy factors of production substitute for each other. Thus,
given zero energy input and positive non-energy inputs, output will be strictly zero (Stern,
2010). There is no production that takes place without positive units of energy because capital is
activated by energy and that energy cannot be completely substituted by non-energy inputs.

Observations have shown that organisations tend to substitute away labour as they become more
capital intensive. Increasing capital use therefore implies increase in energy use whilst
decreasing labour use. In fact, it is routine labour that is replaced as new technologically
embodied capital would need to be activated by energy whilst being organised and manned by
skilled labour. There is empirical consensus that the elasticity of substitution between energy
and non-energy inputs is less than unity. Energy and capital were found to be compliments
(Berndt & Wood, 1975; Magnus, 1979; Alameda & Mann, 1984; Kander & Schon, 2005;
Miyazawa, 2009; Stern & Kander, 2012). Berndt and Wood (1975) and Alameda and Mann
(1984) have also found that energy and labour substitute each other to a lesser degree while

8
 Magnus (1979) found that energy substitute with unskilled labour and compliment with skilled
labour.

The three arguments presented by ecological economists meant that the neoclassical growth
theory objection of the role of energy in economic growth is unjustified and an alternative
theory of growth that articulate interactions of factor inputs in the physical production base of
the economy should be proposed. Using endogenous growth theory framework, Toman and
Jemelkova, (2003), developed a more convincing model that explains the role of energy use in
economic growth as follows:

Y F AK K , AL L, E (10)

Where Y denote total output of the economy, K , L and E , represents the use of capital, labour
and energy in the economy respectively. AK and AL are capital and labour augmenting
parameters that show how performance of capital and labour is improved by energy use. The
model assumes that the elasticity of substitution between energy and non-energy inputs is less
than unity.

The model presents three channels through which energy use influence economic growth as
follows:

i. Energy use directly increases economic growth. For any production process to take
place energy is required to activate capital. It is energy, capital and labour that are active
in value addition creation. They rearrange the particles, or molecules of raw materials
shaping them into desired products.
ii. Energy use increases the productivity of capital and labour. Energy use speed up the
production processes increasing the rate of throughput per given unit of capital and
labour. The increased volume of output per unit of capital and labour reduce the cost of
production and permits savings and further investments. The economies of scale are
resulting from the speeding up of the production process enabled by energy use rather
than increasing the quantities of labour and capital.

Energy use also increase the productivity of labour through extending the working day
and enabling to study after hours. Availability of cheap cleaner energy improves the
health delivery system which also increases worker productivity. Energy use enables
access to safe drinking water, improves indoor air quality, facilitate refrigeration of food
and medicines, enabling better sanitation and provision of health services.

iii. Availability and use of cheap energy increases the profitability of existing vintage of
capital. A lower price of energy makes the surviving vintage of capital more profitable
such that it induces decisions to expand the current capital stock (Berndt, 1990; Foster,
2013). To the extent that new capital is the carrier of new knowledge embodied in it, this
will result in high total factor productivity leading to economic growth (Magnus, 1979).

9
 It has been observed that the evolution of capital stock over time is a gradual adjustment
to changes in energy prices (Berndt, 1990). Therefore, a significant and sustained fall in
energy prices makes current investments in capital more profitable and thus induces
initiatives to expand the current capital stock.

Furthermore, dependable supply and use of quality energy increases the rate of
innovation which also increases economic growth. A transition by an economy from
poor to higher quality energy forms augments the adjustment of capital stock and hence
increases economic growth. For example, a transition from wood, animal power, dung,
and charcoal to liquid fuels, gas and electricity induced changes in the capital stock
structure from more of animal powered vehicles, ploughs, workshops powered by
charcoal, water driven mills to capital structure with more of capital driven by liquid
fuels and electricity (Kander & Stern, 2013). Low energy prices and quality adjustments
in the energy mix enabled the capital turnover leading to a surge of growth rate of
capital stock resulting in increased rate of economic growth.

Though energy use increase the productivity of capital and labour, it is possible that
improvements in technology embodied in capital and new knowledge acquired by employees
through on job training or experience could improve the way energy is used. Thus the presented
ecological growth model, (equation 10), could be extended by adding an energy augmenting
parameter, ( AE ). The addition could make the model reflect a real situation where all inputs are
interdependent unlike the presented view that only capital and labour are augmented by energy
use. It is important to understand the economic welfare impact of increase in factor specific
productivity versus increase in total factor productivity. Increase in total factor productivity
communicates that output growth is a result of saving or efficient use of a bundle of inputs. The
increase in a single factor productivity imply that the use of another factor will increase and
there is no guarantee that the total input cost to the economy might be the same or larger than
before (Berndt, 1990). Thus, technological augmentation of all inputs may be preferable.

2.1.5 Discussion and conclusion of theoretical literature review

The two theoretical perspectives reviewed above have three major points of disagreement.
Firstly, there is no agreement on the equality of energy productivity and its cost share as shown
in national accounts. Secondly, there is no agreement on the assumption that energy input and
inputs of labour and capital are substitutes. Thirdly, the disagreement is on whether energy is a
primary or an intermediate factor of production.

This debate begs the questions that do competitive factor markets really exist. What does the
factor price really measure in the market, factor scarcity or factor usefulness? To begin with,
energy markets in most developing countries like Zimbabwe are heavily regulated and in many
cases, the government parastatals are the sole players in these markets. Prices are set rather than
left to respond to market forces. It is doubtful if these pegged prices reflect productivity of
energy. Suppose that the energy regulatory authority slash down the price of energy, can that
lead to a reduction in the usefulness of energy? If energy can still perform the work it was

10
 performing before its price was slashed, what then does the price measure? Is this not pointing
out that the marginal productivity and marginal cost equality is just a simplifying assumption to
ease the equilibrium analysis?

Furthermore, the fact that most suppliers in the energy market are government parastatals which
provide an avenue for politicians to reach the electorate, energy prices are often deliberately
lowered to suboptimal level to buy votes especially during run up to elections. Such prices are
far below to proxy energy productivity. This scenario is very possible especially in Zimbabwe
where recently an amnesty was given to all clients that owed the Zimbabwe Electricity Supply
Authority.

Imagining another real situation, suppose that electricity energy supply to a fertiliser company
say, Sable Chemicals is in deficit, with the immediate implication that there will be no
production of fertilizer. Will the cost to the economy captured by price of units of electricity not
supplied to Sable Chemicals? Firstly, the company is in a contractual arrangement with its
employees and it has to pay them even if there is no production. Secondly, the company has
violated contractual obligations to supply fertilisers to its clients in the agricultural sector.
Furthermore, agricultural output will be reduced due to fertiliser shortages with the
consequential shortages of raw material supply to agro-based industries through to food supply
shortage for hotels and the general populace. The ultimate impact is greater than the monetary
cost of units of electricity not supplied to Sable Chemicals.

Given these illustrations, it is reasonable to hypothesise that energy productivity is greater than
its cost share shown in national accounts. The energy crises of the 1970s have also set an
empirical precedence that energy productivity exceeds its cost share in national accounts.
Therefore, fluctuations in energy use indeed are expected to significantly destabilise the
economic growth path much more than the prediction of the neoclassical growth theory. This
study is persuaded that energy use should be taken as an argument in the analysis of energy
impact on Zimbabwean economic growth.

The fact that it is convincing that energy productivity is greater than its cost share and that the
role of energy in production cannot be taken by either capital or labour, implies that energy
cannot be an intermediate factor of production.

The ecological economic theory arguments with regard to the role of energy use in economic
growth so far seem to be more persuasive. Regarding the object of this study, the theory
motivates a model of economic growth in which arguments of capital, labour and energy will be
independent variables.

Though the theoretical debate between the ecological economic theory and the neoclassical
theory of growth seem to remain inconclusive regarding the role of energy in economic growth,
the work of Stern (2010), seem to reconcile the two. He extended the neoclassical growth model
by adding energy variable in a nested CES production function as follows:

11

1
1
Y 1 AL L K AE E

(11)

1
Where and is the elasticity of substitution between energy and non-energy inputs,

is a measure of the relative influence of energy and non-energy inputs on economic growth,
AL and AE are labour and energy augmenting parameters respectively. Stern, however, did not
explain why there is no capital augmenting parameter in his model.

It is assumed that the elasticity of substitution between energy and non-energy inputs is less
than unity while that of capital and labour is one as in the neoclassical growth model. The
assumption that elasticity of substitution between energy and non-energy inputs is less than
unity places a restriction in the model that at least some positive quantity of energy is required
for production to take place. Model (11) shows that if energy supply is in deficit, it seriously
constrains production and therefore economic growth. However, when energy supply is in
abundance, the constraint on production is eased. When energy supply is in abundance, it ceases
to be a constraint on production and economic growth. Therefore, economic growth will be
constrained by the arguments of capital and labour as in the neoclassical growth theory. The
neoclassical growth theory thus can be excused for not considering energy in their model, if and
only if energy supply is abundant. Similarly, improvements in energy efficiency ( AE ) reduces
the amount of energy required per unit of output thus easing the constraint energy shortages
impose on production. The energy abundance and efficiency energy use have the same effect of
reducing energy prices. This may explain the small cost share reported in national accounts.

It can be concluded from this synthesis that:

i. Energy use is critical for economic growth and deficits in energy supply constrain
economic growth.
ii. The neoclassical growth theory, because it assumes that energy is in abundance supply
across all nations hence it is not a limiting factor to economic growth, explains
economic growth of energy abundant economies while it cannot explain economic
growth in energy scarce economies like Zimbabwe.

iii. The low cost share of energy in national accounts should be construed not to mean that
energy is not critical for economic growth but rather as a measure of the extent to which
production is constrained by energy supply. According to the law of demand, abundance
energy supply will dampen the price of energy which corresponds to lower cost share of
energy in national accounts. A deficit in energy supply will raise an energy price which
corresponds to high energy cost share in national accounts assuming perfect competition
holds. Here the price is just a measure of the degree of energy scarcity rather than the
usefulness of energy. In fact, a low cost share resulting from energy efficiency should
mean that energy is highly productive since more output will be realised with the same
amount of energy or the same output will be realised using less units of energy.

12
 So far, theoretical literature seems to point that energy is a primary factor of production. Energy
use cause economic growth. A decline in energy use will cause a reduction in economic growth.
This causal relationship is portrayed to be directly and indirectly via improving productivity of
capital and labour. Therefore, in the analysis of the object of this study, the theoretical
framework will be specified as follows:

Y f K ; L; E (12)

where Y denote total output of the economy (real GDP), K , L and E , represents the use of
capital, labour and energy in the economy respectively.

The capital and labour augmenting parameters that capture the indirect impact of energy use on
economic performance via the use of capital and labour has been dropped because the study is
restricted to analyse the direct impact of energy use only.

2.2 Empirical Literature Review

The above theoretically implied relationship between energy use and economic growth has been
subject of empirical research since the energy crises of the 1970s (Hye & Riaz, 2008; Kummel
et al., 2002). The most frequently asked question was whether increase in energy use leads to
economic growth or it is a result of economic growth. In trying to address this question, the bulk
of empirical work reviewed in this study (Aqeel & Butt, 2001; Okafor, 2012; Hou, 2009;
Ifeakachukwu & Temidayo, 2012; Farhani & Rejeb, 2012; Hye & Riaz, 2008; Asafu-Adjaye,
2000; Vlahinic-Dizdarevic & Zikovic, 2010; Ahmad et al., 2012; Stern, 1998; Odularu &
Okonkwo, 2009; Warr & Ayres, 2009; Ayres & Warr, 2009; Stern & Enflo, 2013; Tiwari, 2011;
Yalta & Cakar, 2012) shared general objectives of establishing whether there is any long run
relationship between energy use and economic growth and to assess the direction of causality
between the two variables. A few studies (Hall et al., 2001; Stresing et al., 2008; Kummel et al.,
2008; Qing & Yujie, 2012) aimed to assess the magnitude of impact energy use has on
economic growth.

Aqeel and Butt (2001), Hou (2009), Okafor (2012), and Ifeakachukwu and Temidayo (2012)
found that energy variables and economic growth are not cointegrated while Hye and Riaz
(2008) and Farhani and Rejeb (2012), found that energy and economic growth variables have a
long run relationship. On direction of causality, Asafu-Adjaye (2000), Vlahinic-Dizdarevic and
Zikovic (2010), and Ahmad et al (2012), found that economic growth causes increase in energy
use, while Stern (1998), Odularu and Okonkwo (2009), Warr and Ayres (2009), Ayres and Warr
(2009), and Stern and Enflo (2013) established that energy use Granger cause economic growth.
Tiwari (2011), and Yalta and Cakar, (2012), found that energy use have a neutral influence on
economic growth. It was also established that energy and economic growth have a bidirectional
causal relationship by Belke et al (2010), and Akan et al (2010). With such variability in
empirical results, it is difficult to make a conclusion that energy use lead to economic growth.

13
 2.2.1 Implications of varying empirical evidence on modelling energy use impact on
economic growth

Varying scope of methodologies used in these studies seems to have contributed to the
contradicting results. Although a general consensus of using cointegration and Granger
causality methods exist in the literature, these techniques were employed in either bivariate or
multivariate approach. In bivariate approaches, only energy and economic growth proxies were
used as model variables whilst multivariate models added labour and capital in most cases.
Theoretical literature reviewed above has shown that energy influence economic growth directly
and indirectly via improving the productivity of capital and labour. Therefore, it is expected that
multivariate approach and bivariate approach should yield conflicting results because the
bivariate approach ignores other alternative causal channels through which energy influence
economic growth. Hou (2009), using a bivariate approach with energy and GDP as the only
variables found that energy and economic growth is not cointegrated and that there is a short run
feedback relationship between the two variables in China. Ahmad et al (2012) using bivariate
approach found that economic growth Granger cause energy use in Pakistan. Stern (1998) and
Warr and Ayres (2009), found that energy and economic growth have a long run relationship
and energy use Granger cause economic growth for USA using multivariate approaches with
data variables of Labour, capital, energy and GDP. Stern and Enflo (2013) also using a
multivariate approach with data variables of Labour, capital, energy and GDP confirmed that
energy use and economic growth is cointegrated and energy use Granger cause economic
growth in Swedish economy. War and Ayres (2009) for Japan and USA further established
similar multivariate approach results. Results generated from multivariate approach are
consistent with economic theory. Therefore, this study will employ the generally accepted
cointegration and Granger causality methods in a multivariate framework.

Though multivariate approach seem to yield results that compliments ecological economic
theory of growth, the empirical literature seem not to agree on variables to include in a
multivariate analysis. Variables identified in theory of economic growth for macroeconomic
analysis are energy use, GDP, capital and labour. However, other variables such as household
consumption expenditure, energy prices, consumer price index, and various trade measures are
being used in empirical studies. Shahbaz et al (2012) in Romania used energy, capital and GDP
only and find a bidirectional relationship between energy and economic growth. Odhiambo
(2010), used electricity energy, labour participation and GDP data for Kenya and find that
energy use cause economic growth. The use of variables with no theoretical rooting and the
omission of variables that has theoretical backing will cause misspecification of models.

It is also demonstrated in the empirical literature that the causal relationship between energy and
economic growth is sensitive to variables definition. The energy variable is measured in various
ways that include the oil equivalent approach, divisia index, exergy and useful work. The oil
equivalent approach does not take into account changes in energy quality. Exergy, useful work
and the divisia index are argued to consider improvements in the energy mix. Improvement in
energy quality provides one of the channels through which energy influence economic growth
(Toman & Jemelkova, 2003). Warr and Ayres (2009) used exergy and useful work variables for
the USA, they found that exergy Granger cause economic growth both in the short run and the

14
 long run whilst useful work only Granger cause economic growth in the long run. Ayres and
Warr (2009) also confirmed similar results using USA and Japan data.

Data samples sizes are also source of variation of the results. The samples used in most studies
reviewed were very small ranging between 30 to 40 years. To show a few examples, Shaari et al
(2012) used data for the period 1980 to 2010 in Malaysia and found that GDP Granger cause
electricity consumption. Ahmad et al (2012) using Pakistan data spanning from 1973 to 2006
found that GDP Granger cause energy use. These can be contrasted with longer samples which
yielded completely opposite results. Stern and Enflo (2013), analysed Swedish data spanning
the period 1850 to 2000 and found that energy use Granger cause economic growth. Ayres and
Warr (2009) also analysed data of Japan and USA stretching from 1900 to 2005, they
established that energy use lead to economic growth in both countries. The results show that
cointegration and causality techniques are highly sensitive to varying data samples. Belke et al
(2011) and Huang et al (2008) reasoned that the ADF unit root test and the Johansen
cointegration test, will not yield a powerful statistical test or they fail to detect a false
hypothesis for small data samples. These analysis techniques were employed by most of the
studies reviewed in this paper in assessing the properties of time series data. Given the data
sample spanning 32 years considered in this paper, an analytical technique with relatively
superior small sample properties and whose results do not depends on power of unit root test
will be employed. The bounds testing approach to cointegration of Pesaran et al (2001) is such
an approach in which unit root test of data series is not necessary because the method is
applicable whether data series are purely I(1) or I(0), when it is not certain that variables are
trend or difference stationary or when variables are a mixture of I(1) and I(0) (Pesaran & Shin
1997; Pesaran et al., 1999, 2001). Lean and Smyth (2013) applied the bounds testing approach
on Malaysian data spanning 31 years with GDP, energy, capital and labour as the variables of
the multivariate analysis and found that energy use has a long run relationship with economic
growth and that energy Granger cause economic growth. Sultan (2011) also confirms similar
results with Mauritius data series spanning 39 years.

Furthermore, causality test carried out using the error correction model arrived at using the
bounds testing yields superior results than the error correction models derived from the Engle
Granger and the Johansen methods of cointegration (Iqbal, 2011; Iqbal & Uddin, 2013).

Related to the sample span of analysis, is also the observation that results appear to vary
according to time period chosen for analysis, within a country. Over time economies undergo
some restructuring which change its operation mechanism. That is expected also to alter the
way energy is used in the economy. Qing and Yujie (2012) estimate the output elasticity of
energy between two periods, 1985 to 2000 and 2001 to 2009 using Chinese data. Energy output
elasticity was 0.4864 in the first period and 0.884 in the second period. Energy contribution to
economic growth increased in the second period. Similarly, Stresing et al (2008), after
establishing cointegration between energy and GDP for Germany data spanning from 1960 to
1989, they estimated the energy output elasticity and found it to 0.384. Kummel et al (2008),
using data from 1960 to 2000, also estimated energy output elasticity for Germany and found it
to be 0.47. Energy played varying role between the two periods in Germany. Interestingly, the
energy output elasticity was greater than that of labour and capital in both periods. Stern and

15
 Enflo (2013), for the period 1850 to 2000 and 1900 to 2000, found that energy use Granger
caused economic growth in Sweden, however, for the period 1950 to 2000, economic growth
Granger caused energy use. Therefore, the inconclusiveness of literature reviewed could be due
to choice of different periods to study. If over time, an economy increases its energy generation
and efficiency, energy cease to be a constraint of economic growth and growth will be
explained by the neoclassical theory. This does not mean energy is no longer important because
a reduction in supply will constrain production and therefore economic growth. In this study,
the period of study has strictly guided by the availability of data.

This review also observed that energy and economic growth relationship vary across countries
and regions. Hye and Riaz (2008), in Pakistan found that economic growth leads to expansion
in energy consumption in the long run. Okafor (2012), found that total energy use cause
economic growth in Nigeria whilst he established the opposite in South Africa. Bildirici (2012),
using Granger (1987) causality, found that GDP Granger cause Electricity consumption for
Togo, Zambia and Zimbabwe, Electricity consumption cause GDP in Brunei. Chontanawat et al
(2006), in a study comprising 30 OECD countries and 78 non- OECD developing countries, that
include Zimbabwe, found that causality running from energy use to GDP is most common in
developed OECD countries than in developing countries. Farhani and Rejeb (2012), using panel
data for 95 countries found that GDP and energy consumption are cointegrated and that GDP
granger cause energy consumption in both developing countries, Zimbabwe included, and
developed countries while in lower and middle income countries energy use Granger cause
economic growth. Kahsai et al (2010), found bidirectional causality between energy use and
economic growth in 40 low income Sub-Saharan African countries. This could be explained by
different energy use systems, varying levels of income, and different stages of technological
development across countries and regions.

Empirical literature analysis has also revealed that results are sensitive to the level of
aggregation of either economic or energy variables. National and sectoral level analyses of the
energy and economic growth relationship yielded different results. Ifeakachukwu and Temidayo
(2012) estimated the causal relationship between energy and economic growth at the sectoral
level in Nigeria and found bidirectional relationship between energy use and agricultural sector
value added, service sector value added Granger cause energy use and a neutral relationship
was found between energy use and value added of manufacturing, building and construction and
wholesale and retailing. Okafor (2012) estimated the same relationship in Nigeria at the
economy aggregate level and found that energy use Granger cause economic growth. Again,
different results are obtained when energy variables are aggregated or disaggregated.
Nanthakumar and Subramaniam (2010) used aggregated energy and GDP data for Malaysia and
found that the variables are cointegrated and that they have a bidirectional relationship. Shaari et
al (2012) estimated the same relationship for the same country using disaggregated energy data
and found that GDP Granger cause electricity use while a neutral relationship was established
between GDP and energy variables (oil and coal). Because of sensitivity of results to the level
of aggregation, assessing economy wide impact of energy use requires the use of aggregated
energy use variable and GDP as the economic variable.

16
 The analysis also notes that little attention is paid to ensure appropriate pairing of economic and
energy variables in estimating causality between energy and economic growth. Sometimes
variables paired are in different measurement units. Variables that capture varying degrees of
economic activities should not be paired. For example pairing aggregate energy consumption
for the economy with mining sector value added will yield biased results. It is clear that total
energy consumption in an economy include energy consumed in the agricultural, household,
tertiary and manufacturing sector. The energy variable captures the overall economy activity
while the economic growth variable only captures a single sector value added. Energy use in the
mining sector should be paired with mining sector value added. Similarly, pairing total
electricity used in an economy with GDP will yield biased results. There is need to understand
the proportion total electricity account for in the total energy used in an economy. In Zimbabwe,
electricity accounted only 13% of total energy supply in 2009. Abid and Sebri (2012) using
Tunisia data paired GDP as a proxy of transport sector value added with total energy use in
transport sector. Okafor (2012) in the causality analysis of South Africa and Nigeria data paired
each of these energy sources (coal, oil, hydro-electricity) with GDP. Ifeakachukwu and
Temidayo (2012) using Nigeria data paired, aggregate energy use with each sectoral value
added of agriculture, manufacturing, wholesale and retail, building and construction. Vlahinic-
Dizdarevic (2010) using Crotia data paired GDP with oil use, industry and house hold energy
consumption. Shaari et al (2012) paired GDP with each of these energy sources (oil, gas, coal
and electricity). Shahbaz et al (2012) for Romania paired electricity with GDP. Odhiambo
(2010) using data for Kenya paired total electricity use with GDP. Jumbe (2004) in Malawi also
paired total electricity use with GDP. The results of these studies are suspicious as variables
used in the regression captured varying degrees of economic activity. Variables capturing the
same degree of economic activity should be paired for example real GDP and total energy use
can be used as the economic output and energy use proxy variables as they capture the same
degree of economic activity.

2.3 Conclusion of literature review

The theoretical literature, to a reasonable degree, reconciled the ecological economists and
neoclassical theory of growth in their perspectives with regard the role energy use play in
economic growth. Energy use is established to be very critical for economic growth. A
reduction in energy use will heavily constrain economic growth as depicted by the developed
theoretical model (12).

Empirical literature review has shown that models that estimated the link between energy use
and economic growth using a different specification than shown in model (12) yielded results
that contradict the established theory that energy use leads to economic growth. However, those
studies that specified their model in line with model (12) confirmed that energy use cause
economic growth. Drawing from the literature reviewed, this study will employ the bounds
testing approach to the generally agreed data analysis techniques of cointegration and Granger
causality test in a multivariate framework with aggregated data variables of capital, labour,
energy and economic output as given in model (12).

17
 3 METHODOLOGY, DATA AND VARIABLE DEFINITIONS

3.1 Methodology

Methodology used in this study aimed to achieve the overall objective of assessing the impact
of energy use on Zimbabwes economic growth. In particular, the methodology was structured
to generate answers to the three raised research questions.

Following the theoretical model (12) developed in section 2, the estimable log linearized long
run relationship between energy use and economic growth has been specified as:

LogGDPt 0 1 LogKt 2 LogLt 3 LogEt t (13)

Where GDPt is total output of the economy (real GDP), K t is capital stock, Lt is employment
level, E t is energy use, the subscript t denote the time and t is white noise error term. It is a
priori expected that
1 , 2 , 3 0

3.1.1 Co integration (Long run Relationship) analysis: The Bounds Testing Approach

To investigate the existence of long run relationship between energy use and economic growth
portrayed by equation (13), the study employed the bounds testing approach developed by
Pesaran and Shin (1997) and Pesaran et al (1999, 2001) within Autoregressive Distributed Lag
(ARDL) model. The model is analogy to a basic vector autoregressive model of order p, in Z t ,
where Z t is a column vector of LogGDP , LogK , LogL , and LogE . The model is a combination
of the distributed lag model and the Autoregressive model. It captures the fact that current
economic variables are influenced by their past values, thus, it has lagged value of the
dependent variable as an independent variable together with other explanatory variables. The
bounds testing approach is known also as the unrestricted error correction model because it is
specified exactly as an error correction model except that in the bounds test the lagged error
term is replaced by its equivalent in the long run relationship specified in equation (19).

The smaller sample of 32 observations considered in this study have influenced the choice of
the bounds testing approach. Unlike other methods of testing for a long run relationship such as
the Engle and Granger (1987) and the Johansen (1998), the bounds testing method has high
power of detecting incorrect null hypothesis in smaller samples. The superiority of bounds
testing model is also reflected in its high degree of flexibility in that:
i. It is applicable when variable are purely non-stationary I(1) or stationary I(0), when it is
not certain that variables are trend or difference stationary or when variables are a
mixture of non-stationary I(1) and stationary I(0) whilst it is a precondition that
variables must be non-stationary I(1) / contain a unit root to apply the Engle-Granger
and the Johansen methods. Under all these circumstances, the bounds testing approach
yields unbiased and asymptotically normal long run parameter estimates, (Pesaran et al.,
1999, 2001).

18
 Pre-testing variables for unit root is therefore under bounds testing approach not an
obligation (Pesaran et al., 2001). The method thus solves the noted problem in literature
of low power of unit root test in small samples.
ii. The model allows different lag length on each independent variable besides being
applicable in cases where some of the regressors will also be endogenous.

Given that the bounds testing approach is applicable whether variables are integrated of the
order one, zero, or a mixture of the two, the starting point of analysis was to interrogate the
order of integration of variables to verify that variables are not integrated of order more than
one. The ADF test for unit root was used to determine the order of integration and it takes the
following functional form:

Yt at bYt 1 ci Yt i t (14)
i 1

Where is the difference operator, Yt is the variable being tested for unit root, , a, b, and c are
parameters to be estimated, t is the trend variable and t is white noise error term.
The null for unit root is tested against the alternative for no unit root. The null for unit root is
rejected if the calculated ADF statistic is less than the critical values from Fullers table.

After unit root test the study followed Pesaran and Shin (1997) and Pesaran et al (1999, 2001) in
transforming Equation (13) into the ARDL (p, q1, q2, q3) bounds testing model as follows:
p q q q
DLogGDPt a0 a1i DLogGDPt i a2i DLogK t i a3i DLogLt i a4i DLogEt i
i 1 i 0 i 0 i 0

b11 LogGDPt 1 b21LogKt 1 b31 LogLt 1 b41 LogEt 1 1t (15)

p q q q
DLogK t a02 a1i DLogK t i a2i DLogGDPt i a3i DLogLt i a4i DLogEt i
i 1 i 0 i 0 i 0

b12 LogGDPt 1 b22 LogKt 1 b32 LogLt 1 b42 LogEt 1 2t (16)

p q q q
DLogLt a03 a1i DLogLt i a2i DLogGDPt i a3i DLogK t i a4i DLogEt i
i 1 i 0 i 0 i 0

b13 LogGDPt 1 b23 LogKt 1 b33 LogLt 1 b43 LogEt 1 3t (17)

p q q q
DLogEt a04 a1i DLogEt i a2i DLogGDPt i a3i DLog K t i a4i DLogLt i
i 1 i 0 i 0 i 0

b14 LogGDPt 1 b24 LogKt 1 b34 LogLt 1 b44 LogEt 1 4t (18)

All variables are in logarithms and are as previously defined. D is the first difference.
Equations15 -18 have been estimated using OLS whilst the null hypothesis for non-
cointegration tested based on Wald or F -statistic. The null hypothesis is specified as:

19
 H 0 : b1i b2i b3i b4i 0 against the alternative that H1 : b1i b2i b3i b4i 0 for all
equations.

The null for non-coitegration is rejected, (confirming long run relationship), if the F statistic is
greater than the upper critical bound value. It is accepted, (case for no long run relationship),
when the F statistic fall below the lower critical bound value. If the F-statistic fall between
these critical bounds, inference will be difficult and to proceed information about the order of
integration of variables will be needed, (Pesaran et al, 1999, 2001). The critical bounds values
can be extracted from Pesaran et al (2001) or Narayan (2004). Pesaran et al (2001) generated the
critical values using large sample of 1000 observations whilst Narayan (2004) regenerated the
critical values using small samples of 30 to 80 observations. Narayans critical values are 35,5%
greater than Pesaran et al (2001) critical values and they are specific for samples like the one
considered in this study. Critical values extracted from Narayan (2004) were used in this study.
Using Pesaran et al critical values on small samples like the one considered in this study risks
accepting the presents of cointegration when there is no cointegration.

The optimal lag length was determined by the Akaike information criterion, (AIC). The results
of equation 15 to 18 are only valid in the absence of serial correlation (Pesaran et al., 2001),
hence the equations were subjected to serial correlation diagnostic test to assess the validity of
the results.

1.1.2 Estimating the Long run relationship: Long run output elasticities

The study proceeded by estimating the long run relationship between energy use and economic
growth to obtain long run factor output elasticities. To do this equation (13) was specified in an
unrestricted ARDL (p; q1; q2, q3) model as:
p q q q
LogGDPt a0 a1i LogGDPt i a2i LogK t i a3i LogLt i a4i LogEt i it (19).
i 1 i 0 i 0 i 0

3.1.3 Error Correction model: Causality test.

Finally, the direction of causality between energy use and economic growth was examined
using the Granger causality test in an error correction framework. The principle underlining
Granger causality test is that the past predict the future and not the vice versa, (Gujarati, 2004).
Given two variables X and Y, X only Granger cause Y if variations in X occur before those of
Y. Similarly, Y Granger cause X if past values of Y help explain variations in X (Gujarati,
2004). The test can be specified in a bivariate context as follows:
n n
X t i X t i jYt j 1t
i 1 j 1
(20)
n n
Yt i X t i jYt j 2t
i 1 j 1
(21)
Where 1t and 2t are uncorrelated disturbances.

20
 This conventional causality method is invalid in this study because variables are cointegrated.
Thus, causality test was done using an error correction construction arrived at from an ARDL
(p, q1, q2, q3) with the following specification:
p q q
DLogGDPt a0 a1i DLogGDPt i a2i DLogK t i a3i DLogLt i
i 1 i 0 i 0
q

a
i 0
4i DLogEt i 1 ECTt 1 t (22)

p q q
DLogK t a0 a1i DLogK t i a2i DLogGDPt i a3i DLogLt i
i 1 i 0 i 0
q

a
i 0
4i DLogEt i 2 ECTt 1 t (23)

p q q
DLogLt a0 a1i DLogLt i a2i DLogGDPt i a3i DLogK t i
i 1 i 0 i 0
q

a
i 0
4i DLogEt i 3 ECTt 1 t (24)

p q q
DLogEt a0 a1i DLogEt i a2i DLogGDPt i a3i DLogK t i
i 1 i 0 i 0
q

a
i 0
4i DLogLt i 4 ECTt 1 t (25)

Where a1i to a 4i be short term dynamics coefficients, and ECTt is the error correction term
derived from the long run regression specified in equation (19).

The error correction model employed in this study is distinguished from the one arrived at using
the Engle-Granger (1987) cointegration approach and it has a superior statistical performance.
The ECTt used in the error correction model under Engle-Granger approach is defined as:
ECTt t LogGDPt 0 1 LogKt 2 LogLt 3 LogEt (26)
Whilst the one used in this study under the ARDL model is defined as:
p q q q
ECTt t LogGDPt a0 a1i LogGDPt i a2i LogK t i a3i LogLt i a4i LogEt i
i 1 i 0 i 0 i 0

(27).
Iqbal (2011) and Iqbal and Uddin (2013) investigated the statistical properties superiority of
error correction models arrived at from Engle and Granger (1987), Johansen (1998) and Pesaran
et al (2001) cointegration techniques. The error correction model arrived at when employing the
ARDL model of Pesaran et al (2001) was found to have superior performance.

The lagged error correction term ECT 1 in equations 22 to 25 measures the speed of
adjustment to the long run equilibrium and its coefficient is expected to be negative whilst

21
 assuming absolute values of between zero and one. A statistically significant ECT 1 shows
that all explanatory variables Granger cause the dependent variable in the long run.

Short run Granger causality has been examined from equation 22 to 25 by a null of non-
causality specified as:
H1 : a2i a3i a4i 0 against the alternative that: H1 : a2i a3i a4i 0

The long run causality has been assessed by the null hypothesis of non-causality specified as:
H 0 : i 0 against the alternative that: H1 : i 0
Where i=1to4

Equations 22 to 25 were estimated individually by OLS. The lag length was determined by AIC.

ARDL model estimates are invalid in the presents of serial correlation (Pesaran et al., 2001).
For this reason and the need to ensure that the model is normal and not misspecified, the error
correction model was subjected to a number of diagnostic checks that include Breusch-Godfrey
Serial correlation LM Test, White Heteroskedasticity Test, and Jarque Bera (normality) Tests.

Furthermore, it has been assumed that from 1980 to 2011, structural changes could have taken
place in Zimbabwe. If data variables contain structural breaks, parameters estimated will not be
stable. The Ramsey RESET Test, CUSUM and CUSUMQ test was employed to assess the
stability of the estimated error correction model.

3.2 Data and Variable Definitions

This study used annual data from 1980 to 2011. The choice of time covered by this study was
determined by availability of data. Data was collected for variables that were used in this study
which are Energy use measured in kilo tonnes of oil equivalent, real gross domestic product,
(GDP), which is total output of the economy, gross capital formation proxy for capital and total
economic active population proxy for labour. GDP and gross capital formation are measured in
current US$. Energy use, gross capital formation and GDP data were accessed from the World
Development Indicators, (WDI), whilst total economic active population data was downloaded
from Food and Agricultural Organisation, (FAO)3. To enable comparability, all data series were
transformed into dimensionless measure prior estimations by dividing the yearly value with the
base year value. 1980 was taken as the base year.

4. PRESENTATION AND INTERPRETATION OF RESULT

4.1 Unit root test

Table 2 in appendix1presents the results of the ADF test for unit root. The results show that the
data series are a mixture of stationary and non-stationary variables. Log (GDP) and Log (L) are
stationary in levels whilst Log (K) and Log (E), which are non-stationary in levels, turn to be

3
http://faostat.fao.org/site/550/DesktopDefault.aspx?PageID=550#ancor
22
 stationary in first difference. Whilst it is not necessary to have a priori knowledge of presence of
unit root in variables in the methodology followed by this study (Pesaran et al., 2001), the
existence of unit root has been tested to ensure that no variables are integrated of order greater
than one. This information is important because the critical bounds values used in F-test of
cointegration are generated under the assumption that variables are either integrated of order
one or zero. All variables were found to be integrated either of order one or zero hence the study
proceeded to test for the existence of a long run relationship between energy use and economic
growth.

4.3 Cointegration Test

The results for cointegration test are given in table 3in appendix1. Using the critical bounds
values extracted from Narayan (2004), a long run relationship between energy use and
economic growth is established at 5% level of significance when D(LOG(GDP)) is the
dependent variable. When D(LOG(E)) is the dependent variable, long run relationship between
energy use and economic growth is established at 10% level of significance. The null
hypothesis for no cointegration between energy use and economic growth in Zimbabwe is
rejected. Although equilibrium relationship is established when energy use is normalised, the
relationship is statistically weak. For this reason, and that the objective of this study is to assess
the impact energy use has on economic growth, the long run relationship with energy, as the
dependent variable was not estimated. The serial correlation test has been performed to validate
the results of bounds test (Pesaran et al., 2001). Table 4 in appendix1 presents the serial
correlation test results. The results show evidence of no serial correlation, thus the results of
bounds test are valid according to Pesaran et al (2001).

4.4 Estimates of the long run relationship/ long run elasticities

With the establishment of an equilibrium relationship between energy use and economic
growth, the study estimated this long run relationship using ARDL (2, 0, 2, 1) model. The
akaike information criterion determined the lag length. Table 5 in appendix1presents the results
of the estimated long run relationship between energy use and economic growth. Full regression
is shown in appendix2. A. The results show that the elasticity of capital and that of the current
period and first lag of energy are significant whilst the elasticities of the current period labour,
first and second lag of labour are insignificant.

The current period coefficient of energy use is positively related to economic growth and
significant at 5% level. An increase in the use of energy by 1% in the current period will more
than proportionately increase economic growth by approximately 1.3%. However, the
coefficient of energy use in the previous period is negatively related to economic growth and
significant at 10% level. The hypothesis that the magnitude of impact of energy use on
economic growth is not different from zero is on the basis of this evidence rejected.

Capital coefficient has the expected positive sign and significant at 5% level. The current period
labour coefficient has the expected sign though it is insignificant. Again, the coefficients of the

23
 first and second lag of labour are negatively and positively related to economic growth
respectively whilst they are all insignificant.

The estimated long run model indicates a reasonable degree of goodness of fit with the adjusted
R2 of 0.73. This implies that about 73% of variation in GDP is explained by changes in energy
use, capital and labour. The model is correctly specified and the estimated parameters are stable
as shown by various diagnostic tests shown in appendix 1, table 6 and graph 1 and 2.

4.5 Estimates of the error correction model (Causality Test)

Finally, the results of the causality test estimated in an error correction model specified as
ARDL (1, 0, 1, 1) are presented in table 7 appendix1. Full regression is shown in appendix2. B.
The akaike information criterion also determined the optimal lag length thus the model
estimated is argued to be parsimonious. The results show that the coefficient of the lagged error
correction term ECT (-1) has the expected sign, is within the required range and highly
significant at 1% level. This means that energy use, capital and labour Granger cause economic
growth in the long run. The coefficient also reconfirms the presence of a long run relationship.
It shows that any deviation from the equilibrium in the current period will be corrected 88.8% in
the next period. This speed of adjustment after a shock is comparably very high.

All short run coefficients of the error correction model are significant save for the constant. The
coefficients of capital, current period labour and energy use have positive signs. The first lag
coefficients of labour and energy have negative signs. The short run results show that current
energy use and labour use together with capital leads to economic growth in the short run. The
null hypothesis that the use of energy does not stimulate economic growth is rejected in both the
short and long run.

4.5.1 Diagnostic test of the error correction model:

The error correction model passed all diagnostic tests as shown in table 8 appendix1. Thus, the
model is Stable and correctly specified. There is no evidence of structural breaks from 1980 to
2011 as shown by the test statistic of the CUSUM and CUSUMQ, which lie within the critical
bounds of 5% significance as shown by figure 3 and 4 respectively in appendix1.

4.6 Conclusion
The results indicate that energy use and economic growth has a long run relationship in
Zimbabwe and that energy use Granger cause GDP growth in both short and long run. Increase
in the current energy use has a more than proportionate positive impact on economic growth.
The results established by this study are similar to those found by studies that employed a
similar multivariate analysis (Stern, 1998; Ayres & Warr, 2009; War & Ayres, 2009; Stern &
Enflo, 2013; Lean & Smyth, 2013; Sultan, 2011). However, they contradict with results of
previous studies on Zimbabwe that employed a bivariate analysis (Chontanawat et al., 2006;
Fowowe, 2012; Farhani & Rejeb, 2012). The results of these bivariate analyses could have been

24
 influence by omission of critical variables of labour and capital as explained in economic
growth theories.

5. DISCUSSION AND POLICY RECOMMENDATIONS

The objective of this study was to assess the impact of energy use on Zimbabwean economic
growth. The bounds testing approach to cointegration and its associated error correction model
have been employed to assess the impact energy use has on Zimbabwean economic growth. The
study has shown that energy use and economic growth have a strong long run relationship when
GDP is taken as a dependent variable whilst a weak long run linkage is established when energy
use is used as a dependent variable. Causality test has shown that energy use Granger cause
economic growth in Zimbabwe in both the short and long run.

Energy use output elasticity shows that an increase in current period energy use has more than
proportionate positive impact on economic growth in Zimbabwe. The coefficient of current
energy use (1.298481) is greater than that of capital (0.087034). Although current labour
coefficient (8.262515) is greater than that of energy and capital, it is insignificant. Thus, to the
extent permitted by the data analysed in this study, energy use had superior positive and
momentous influence on economic growth in Zimbabwe for the period considered in this study.

However, lagged energy variable was found to have a negative sign. A fact established in theory
that energy use impact economic growth directly and indirectly via increasing labour and capital
productivity could provide an explanation for the negative and weakly significant coefficient of
the lagged energy variable. Energy used in the previous period impact on current economic
growth only indirectly via the energy embodied in labour and capital. In the current period, the
energy impact on growth is both direct and indirect. Therefore, it is logical that current energy
use has a greater impact on economic growth than that used in previous periods. The influence
of lagged period energy use on economic growth is dependent on performance of other factors
of production on which energy is embodied.

Capital and current labour has positive coefficients, which confirm the standard growth theory
assertion. To the extent that capital, current labour and current energy use had expected
coefficient signs, the results of this study confirm the reconciliation of the neoclassical and
ecological economist established in chapter 2 that these three factors of production are critical
for economic growth.

In light of these established results, the high frequency and prolonged energy outages being
experience in Zimbabwe are more than proportionately reducing the countrys economic
growth. If the supply of energy remains in deficit, below the required consumption levels
demanded by all economic units, energy use will continue to be restricted hence the economys
growth path will be expected to continue declining.

25
 5.2 Policy recommendations

The results of this study have vital policy implications. To stimulate economic growth, policy
makers should formulate policies that promote increase use of energy. Any policy that reduces
energy use will reduce economic growth in Zimbabwe. Increasing energy use in Zimbabwe
would require policy makers to ensure a dependable availability and accessibility of energy in
right quantities demanded for current use by all economic agents.

5.3 Conclusion

An inquiry has been made on the impact energy use has on Zimbabwean economic growth. The
data used cover the period 1980 to 2011. The bounds testing approach to cointegration within
the ARDL framework was employed to test the existence of the long run relationship between
energy use and economic growth. The associated ECM was estimated to test causality. Results
established the long run relationship and that energy use lead to economic growth in both the
short and long run. The established long run relationship have been tested and the estimates
yielded evidence that a 1% increase in current energy use will more than proportionately
increase economic growth by 1.3% holding other things equal. The results endorse the argument
initially made by this study that energy use is vital for Zimbabwes economic growth.

Future studies could try to investigate the magnitude of both the direct and indirect impact of
energy use on economic growth.

26
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 APPENDICES

Appendix 1:

Table 1: Installed versus available electricity capacity 2000-2011

Category 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
INSTALLED
CAPACITY (MW)
Hwange 920 920 920 920 920 920 920 920 920 920 920 920
Kariba 694 722 736 750 750 750 750 750 750 750 750 750
Small thermals 290 290 290 290 290 290 290 290 290 290 290 290
Total 1904 1932 1946 1960 1960 1960 1960 1960 1960 1960 1960 1960
AVAILABLE
CAPACITY
Hwange 496 716 659 498 583 579 435 421 388 287 500 727
Kariba 511 531 588 701 723 725 711 727 747 746 750 573
Small thermals 133 105 101 43 110 42 26 26 34 13 60 100
Total 1140 1352 1348 1242 1416 1346 1172 1174 1169 1046 1310 1400
% of installed 59.9 70 69.3 63.4 72.2 68.7 59.8 59.9 59.6 53.4 66.8 71.4
capacity
Peak demand 1986 2013 2028 2007 2069 2066 1904 1758 1429 1403 2100 2100
Supply deficit (846) (661) (680) (765) (653) (720) (732) (584) (260) (357) (790) (700)
Source: Chipumho (2011).
Table 2: The ADF Unit root test results
Variable levels First Difference Status
Log(GDP) -3.012360**[1] - I(0)
Log(K) -1.689482 [6] -2.997981** [4] I(1)
Log(L) -9.325896* [0] - I(0)
Log(E) -2.497761 [0] -3.882863* [0] I(1)
*, **, *** show the level of significant at 1%, 5% and 10% respectively. Lag length based on AIC is shown in [].

Table 3: The bounds test for cointegration result

DEPENDENT F-STATISTIC DECISION
VARIABLE
D(LOG(GDP)) 5.650738** Co-integrated
D(LOG(K)) 2.471007 No co-integration
D(LOG(L)) 2.211685 No co-integration
D(LOG(E)) 4.170954*** Co-integrated
NB: ***, ** and * show significance at 10%, 5% and 1% levels, respectively.

Critical values 1% level 5% level 10% level

Upper bounds 5.928 4.252 3.566

Lower bounds 4.570 3.208 2.646

Table 4: Results for serial correlation test for the ARDL Bounds tests
VARIABLE NORMALISED LM TEST F-STATISTIC P-VALUE

D(LOG(GDP)) 2.615113 0.1061

D(LOG(K)) 0.108696 0.8978
D(LOG(L)) 0.741790 0.4896
D(LOG(E)) 2.553697 0.1056

32
 Table 5: Results of the estimated long run relationship: The dependent variable is
LOG(GDP)
INDEPENDENT VARIABLES COEFFICIENT P-VALUE
C -0.035451 0.8636
LOG(GDP(-1)) 0.705907 0.0002
LOG(GDP(-2)) -0.300795 0.1257
LOG(K) 0.087034 0.0165
LOG(L) 8.262515 0.1643
LOG(L(-1)) -16.95235 0.1265
LOG(L(-2)) 8.613638 0.1410
LOG(E) 1.298481 0.0410
LOG(E(-1)) -0.966859 0.0932

Table 6: Diagnostic test of the estimated long run relationship model

Test statistic Critical value

LM test F-statistic 1.557745 [0.2363]

Normality test (chi-square) 1.211977[0.545535]
Reset F-Statistic 0.000769[0.9782]
Heteroskedasticity Test 0.079222 [0.9995]
NB: P-values are shown in [].

Figure 1: The CUSUM Test of the of the estimated long run relationship model
15

10

-5

-10

-15
92 94 96 98 00 02 04 06 08 10

CUS UM 5% S ignific anc e

Figure 2: The CUSUMQ Test of the of the estimated long run relationship model
1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
92 94 96 98 00 02 04 06 08 10

CUS UM of S quares 5% S ignific anc e

Table 7: Results for the error correction model (ECM)

VARIABLE D(LOG(GDP))

Coefficient t- statistic P-value

C 0.024548 0.746078 0.4639

33
 D(LOG(GDP(-1))) 0.433377 2.327839 0.0300
D(LOG(K)) 0.067427 1.893415 0.0722
D(LOG(L)) 10.81632 2.292354 0.0323
D(LOG(L(-1))) -11.89079 -2.596829 0.0168
D(LOG(E)) 1.544674 2.861725 0.0093
D(LOG(E(-1))) -0.934479 -1.785324 0.0887
ECT(-1) -0.888076 -2.951493 0.0076

Table 8: Diagnostic test of the ECM

Test statistic Critical value

LM test F-statistic 0.233256 [0.7942]

Normality test (chi-square) 1.110083[0.574048]
Reset F-Statistic 2.243965[0.1498]
Heteroskedasticity Test 0.46765 [.8874]
NB: P-values are shown in [].

Figure 3: The CUSUM Test of the ECM

15

10

-5

-10

-15
92 94 96 98 00 02 04 06 08 10

CUS UM 5% S ignific anc e

Figure 4: The CUSUMQ test of the ECM

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
92 94 96 98 00 02 04 06 08 10

CUS UM of S quares 5% S ignific anc e

Appendix 2:

A. The long run relationship regression

34
 Lag order selection criteria (AIC)

VAR Lag Order Selection Criteria

Endogenous variables: LOG(GDP)
Exogenous variables: C LOG(K) LOG(L) LOG(L(-1)) LOG(L(-2)) LOG(E) LOG(E(-1))
Date: 04/07/14 Time: 16:03
Sample: 1980 2011
Included observations: 30

Lag LogL LR FPE AIC SC HQ

0 24.44085 NA 0.018466 -1.162724 -0.835778 -1.058131

1 32.79117 12.24712* 0.011363 -1.652744 -1.279092 -1.533210
2 34.50570 2.400342 0.010898* -1.700380* -1.280020* -1.565903*

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

Long run model estimated: ARDL (2, 0, 2, 1)

Dependent Variable: LOG(GDP)

Method: Least Squares
Date: 04/07/14 Time: 15:15
Sample (adjusted): 1982 2011
Included observations: 30 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.035451 0.203895 -0.173867 0.8636

LOG(GDP(-1)) 0.705907 0.158309 4.459055 0.0002
LOG(GDP(-2)) -0.300795 0.188628 -1.594648 0.1257
LOG(K) 0.087034 0.033410 2.605015 0.0165
LOG(L) 8.262515 5.733707 1.441042 0.1643
LOG(L(-1)) -16.95235 10.65227 -1.591430 0.1265
LOG(L(-2)) 8.613638 5.631334 1.529591 0.1410
LOG(E) 1.298481 0.596374 2.177292 0.0410
LOG(E(-1)) -0.966859 0.549770 -1.758660 0.0932

R-squared 0.801091 Mean dependent var 0.018602

Adjusted R-
squared 0.725316 S.D. dependent var 0.174693
S.E. of regression 0.091557 Akaike info criterion -1.700380
Sum squared
resid 0.176037 Schwarz criterion -1.280020
Log likelihood 34.50570 Hannan-Quinn criter. -1.565903
F-statistic 10.57197 Durbin-Watson stat 2.227317
Prob(F-statistic) 0.000008

B. The error correction model regression

35
 Lag order selection criteria (AIC)
VAR Lag Order Selection Criteria
Endogenous variables:
D(LOG(GDP))
Exogenous variables: C D(LOG(K)) D(LOG(L)) D(LOG(L(-1))) D(LOG(E)) D(LOG(E(-1))) ECT1(-1)
Date: 04/07/14 Time: 17:10
Sample: 1980 2011
Included observations: 29

L
ag LogL LR FPE AIC SC HQ

0 28.88355 NA 0.013071 -1.509210 -1.179173 -1.405847

1 32.21209 4.820648* 0.011187* -1.669800* -1.292615* -1.551670*
2 33.10957 1.237903 0.011340 -1.662729 -1.238396 -1.529833

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

Error correction model estimated: ARDL (1, 0, 1, 1)

Dependent Variable: D(LOG(GDP))

Method: Least Squares
Date: 04/07/14 Time: 16:57
Sample (adjusted): 1983 2011
Included observations: 29 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.024548 0.032903 0.746078 0.4639

D(LOG(GDP(-1))) 0.433377 0.186171 2.327839 0.0300
D(LOG(K)) 0.067427 0.035611 1.893415 0.0722
D(LOG(L)) 10.81632 4.718435 2.292354 0.0323
D(LOG(L(-1))) -11.89079 4.578965 -2.596829 0.0168
D(LOG(E)) 1.544674 0.539770 2.861725 0.0093
D(LOG(E(-1))) -0.934479 0.523422 -1.785324 0.0887
ECT1(-1) -0.888076 0.300891 -2.951493 0.0076

R-squared 0.648140 Mean dependent var 0.001291

Adjusted R-squared 0.530853 S.D. dependent var 0.136710
S.E. of regression 0.093638 Akaike info criterion -1.669800
Sum squared resid 0.184132 Schwarz criterion -1.292615
Log likelihood 32.21209 Hannan-Quinn criter. -1.551670
F-statistic 5.526112 Durbin-Watson stat 1.837371
Prob(F-statistic) 0.001034

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