Energy Economics 34 (2012) 476488

Contents lists available at SciVerse ScienceDirect

Energy Economics
journal homepage: www.elsevier.com/locate/eneco

Energy consumption, output and trade in South America

Perry Sadorsky
Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3

a r t i c l e i n f o a b s t r a c t

Article history: This study uses panel cointegration regression techniques to examine the relationship between energy con-
Received 28 March 2011 sumption, output and trade in a sample of 7 South American countries covering the period 1980 to 2007.
Received in revised form 15 December 2011 Panel cointegration tests show a long-run relationship between 1) output, capital, labor, energy, and exports
Accepted 17 December 2011
and 2) output, capital, labor, energy, and imports. Short-run dynamics show a bi-directional feedback rela-
Available online 23 December 2011
tionship between energy consumption and exports, output and exports and output and imports. There is ev-
JEL classication:
idence of a one way short-run relationship from energy consumption to imports. In the long-run there is
Q43 evidence of a causal relationship between trade (exports or imports) and energy consumption. These results
F14 have implications for energy policy and environmental policy. One important implication of these results is
O54 that environmental policies designed to reduce energy use will reduce trade. This puts environmental policy
aimed at reducing energy consumption at odds with trade policy.
Keywords: 2011 Elsevier B.V. All rights reserved.
Energy consumption
South America
Panel cointegration
Export led growth

1. Introduction causality is found to run from trade to energy consumption or no

Economic output, trade and energy consumption tend to move to-
gether across time and as countries around the world continue to
grow and develop there is an interest in learning more about the dy-
namic relationship between these variables. The relationship between
energy consumption and economic output is one of the most widely
studied areas in energy economics (e.g. Ozturk, 2010; Payne, 2010)
while the relationship between exports and output is one of the most
widely studied areas in international economics (e.g. Giles and
Williams, 2000a, 2000b). The relationship between energy consump-
tion and trade is an important yet understudied area. Understanding
the relationship between energy consumption, trade and output is cru-
cial to understanding current energy and environmental policy and de-
veloping new effective energy and environmental policy.
The relationship between energy consumption and trade is an im-
portant topic to study for several reasons. If energy consumption is
found to Granger cause trade, then any reductions in energy con-
sumption, coming from say energy conservation polices designed to
reduce greenhouse gas emissions, will reduce trade and lessen the
benets of trade. Energy conservation policies which reduce energy
consumption will offset trade liberalization policies designed to pro-
mote economic growth. This places energy reduction policies at
odds with trade liberalization policies. If unidirectional Granger
Tel.: + 1 416 736 5067; fax: + 1 416 736 5687.
E-mail address: psadorsk@schulich.yorku.ca.
Granger causal relationship is found then energy reduction policies
will not affect trade liberalization policies designed to increase eco-
nomic growth.
At the time of writing, the papers by Lean and Smyth (2010a,
2010b), Narayan and Smyth (2009), and Sadorsky (2011) appear to
be the only published papers specically investigating the relation-
ship between energy consumption and trade. In particular, Narayan
and Smyth (2009) nd for a panel of six Middle Eastern countries
(Iran, Israel, Kuwait, Oman, Saudi Arabia, and Syria), short-run Grang-
er causality running from electricity consumption to real GDP and
from income to exports. They also nd evidence of a long-run Granger
causality relationship running from exports and electricity consump-
tion to real income and from exports and real income to electricity
consumption. In two very similar papers, studying electricity genera-
tion and consumption in Malaysia, Lean and Smyth (2010a) nd evi-
dence of Granger causality running from electricity generation to
exports while Lean and Smyth (2010b) do not nd any evidence of
a Granger causal relationship between exports and electricity con-
sumption. While Lean and Smyth (2010a, 2010b) and Narayan and
Smyth (2009) focus on the relationship between exports and electric-
ity, Sadorsky (2011) focuses on the more general relationship be-
tween energy consumption and trade (measured using either
exports or imports). Sadorsky (2011) nds that for a panel of Middle
Eastern economies (Bahrain, Iran, Jordan, Oman, Qatar, Saudi Arabia,
Syria, and United Arab Emirates) short-run dynamics show causality
running from exports to energy consumption and a feedback relation-
ship between imports and energy consumption.

0140-9883/$ see front matter 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.eneco.2011.12.008
 P. Sadorsky / Energy Economics 34 (2012) 476488
This present study contributes to the literature on energy con-
sumption, output and trade in several ways. First, most studies
focus on either the relationship between energy consumption and
output or the relationship between output and trade. Energy con-
sumption, output and trade tend to growth together across time
and it seems natural to include them together in a model. By using
a model that combines trade, output and energy consumption, a bet-
ter understanding of the dynamic relationship between these vari-
ables can be obtained. Whereas most previous papers only consider
one trade variable, exports, this present paper includes production
function based models for both exports and imports. Second, it is
also the case that most previous studies focus on the relationship
between electricity and exports while this present study uses total
energy consumption. This present paper, therefore, provides a more
comprehensive study on the relationship between energy consump-
tion and trade. Third, the long-run relationship between output, cap-
ital, labor, energy consumption and trade is estimated using panel
cointegration techniques. Panel cointegration techniques have more
power over single equation techniques and should provide more reli-
able estimates of the long-run relationship. Fourth, the short-run re-
lationship between output, capital, labor, energy consumption and
trade is estimated using panel vector error correction models
(VECMs). Panel approaches are desirable when the sample size of
each cross-section is relatively short because combing different
cross-sections together in a panel increases the sample size and de-
grees of freedom yielding more precise estimates than what would
be obtained for each cross-section individually. Causality tests from
panel VECMs are more reliable than causality tests from single equa-
tion models. Fifth, this study analyzes the trade, energy consumption
relationship for a panel of South American countries, a region of the
world experiencing rapid growth in trade and a region of the world
that has recently created the Union of South American Nations. The
purpose of the Union of South American Nations is to strengthen re-
gional economic ties and to develop a major global trading block
like the European Union. This is the rst panel study investigating
the link between trade, output and energy consumption in South
America. The results from this paper are useful for understanding
and developing energy and environmental policy in South America.
The purpose of this paper is to investigate the dynamic relation-
ship between energy consumption, output and trade for a panel of
South American economies. Empirical models are estimated using
panel cointegration regression techniques. The following sections of
the paper set out the contextual material on trade and energy con-
sumption in South America, the empirical model, data, empirical re-
sults and discussion, policy analysis, and conclusions.
2. Energy consumption, economic growth and trade in South
America
South America is a major region of the world that over the past
20 years has experienced rapid increases in trade, output, and energy
consumption but for which little is known about the dynamic interac-
tion between these variables. The importance of South America to the
global economy is evident by its output growth and trade growth.
Over the period 19902007, world real GDP grew at a compound av-
erage annual rate of 3.3% (International Energy Agency, 2009, p 62).
Over this same period of time, real GDP in the Middle East, Africa,
and Latin America grew at average annual rates of 3.8%, 3.7%, and
3.4% respectively. 1 Economic growth in the Latin America over this
time period was not as fast as in China (10.0%) or India (6.3%) but it
was higher than in OECD countries (2.5%). According to statistics
from the World Trade Organization (2009), world merchandise
exports grew at an average annual rate of 12% between 2000 and
1
According to the International Energy Agency (2009) Latin America includes coun-
tries located in South America, Central America and the Caribbean.
477
2008 (WTO, 2009, p. 8). Over this same period of time, merchandise
exports from South and Central America, Africa and the Middle East
grew at average annual rates of 15%, 18%, and 18% respectively indi-
cating that exports in these regions grew, on average, faster than
the world average. 2 While Narayan and Smyth (2009) and Sadorsky
(2011) have investigated the relationship between trade and energy
consumption for Middle Eastern countries, and Lean and Smyth
(2010a, 2010b) have investigated the relationship between trade
and energy consumption in Malaysia, there is very little known
about the relationship between trade and energy consumption in
South America.
South American countries have recently created the Union of
South American Nations. 3 The purpose of this Union is to foster great-
er political and economic integration between the member countries
and to also create a major global trading block to rival the European
Union. This Union is, in some ways being modeled after the European
Union. Economic development, energy and the environment are key
areas of interest to the Union but these initiatives are being pursued
separately from each other. Whether this approach is likely to lead
to undesirable or conicting outcomes from different policies can
only be answered empirically. If it is found, for example, that there
is no causal relationship between energy and exports, then energy
conservation policies won't affect export promotion polices. If, on-
the-other hand, it is found that there is a causal relationship from en-
ergy to exports (as this paper nds) then energy conservation policies
will affect trade policies. This puts trade promotion policies at odds
with energy conservation policies. This paper offers key insights
into how energy consumption, trade and output interact and is there-
fore useful for guiding economic, energy and environmental policy
within the Union.
3. Energy consumption, economic growth and trade
This section presents the theory behind 1) the relationship
between energy consumption and economic growth, 2) the relation-
ship between economic growth and trade and 3) the relationship
between energy consumption and trade. Empirical studies relating
to the South American context are summarized.
3.1. Energy consumption and economic growth
Research looking into the relationship between energy consump-
tion and GDP developed in response to the oil price shocks of the
1970s and since then has grown into a huge literature (see for exam-
ple the surveys by Ozturk (2010) and Payne (2010)). One popular
approach to investigating this relationship is to test for Granger cau-
sality between energy consumption and GDP and this leads to four
testable hypotheses; 1) a Granger causal relationship from energy
to GDP, 2) a Granger causal relationship from GDP to energy, 3) a
feedback relationship between energy and GDP, and 4) no Granger
causal relationship between energy and GDP (neutrality). Assuming
that energy consumption and output are positively correlated, the
nding of unidirectional causality from GDP to energy or the nding
of neutrality means that energy conservation policies can take place
without harming economic growth. The nding of unidirectional cau-
sality from energy to GDP or feedback between energy and GDP
means that energy conservation policies that lower energy use will
lower economic growth.
A number of authors have studied the relationship between ener-
gy consumption and GDP in South America. Nachane et al. (1988), in
2
Membership in the WTO is often considered essential for any country serious about
increasing their international trade possibilities. All major South American countries
are members of the WTO (http://www.wto.org/english/thewto_e/whatis_e/tif_e/
org6_e.htm).
3
(http://www.comunidadandina.org/ingles/sudamerican.htm).
478 P. Sadorsky / Energy Economics 34 (2012) 476488
a 16 country study, nd unidirectional causality from commercial
energy consumption per capita to real GDP per capita for Argentina
and Chile and bidirectional causality between energy consumption
and output for Brazil, Colombia, and Venezuela. Murray and Nan
(1996) nd evidence of unidirectional causality from real GDP to
electricity consumption for Colombia. Soytas and Sari (2003), in a
12 country study of G7 and emerging markets, nd bidirectional cau-
sality between energy consumption and GDP per capita in the case of
Argentina. Cheng (1997) nds evidence of unidirectional causality
from energy consumption to real GDP for Brazil. Lee (2005), working
with a panel of 18 developing countries which includes Argentina,
Chile, Colombia, Peru, and Venezuela, nds unidirectional causality
from energy consumption to real GDP. Chontanawat et al. (2008)
nd unidirectional causality from energy consumption per capita to
real GDP per capita for Chile, Colombia, and Uruguay; unidirectional
causality from real GDP per capita to energy consumption per capita
for Bolivia, Paraguay, Peru, and Venezuela; bidirectional causality for
Argentina and Brazil; and the absence of causality for Ecuador.
Mahadevan and Asafu-Adjaye (2007), in a study of net energy export-
ing developing countries, nd evidence of bidirectional causality be-
tween energy consumption per capita and real GDP per capita for
Argentina and Venezuela. For a panel of 11 oil exporting countries
which include Ecuador and Venezuela, Mehrara (2007) nds unidi-
rectional causality from real GDP per capita to commercial energy
consumption per capita. In a study of OPEC countries, Squalli (2007)
provides evidence of unidirectional causality from electricity con-
sumption per capital to real GDP per capita in Venezuela. In an 82
country panel which includes Argentina, Bolivia, Brazil, Chile, Colom-
bia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela, Huang et al.
(2008) nd for the low income panel the absence of causality be-
tween energy consumption and real GDP per capita whereas evidence
is found for causality from real GDP per capita to energy consumption
for the middle and high income panels. Apergis and Payne (2010)
study a panel of 9 South American countries (Argentina, Bolivia, Bra-
zil, Chile, Ecuador, Paraguay, Peru, Uruguay, and Venezuela) and nd
evidence of both short-run and long-run causality from energy con-
sumption to economic growth.
3.2. Economic growth and trade
There is an extensive literature looking into the relationship be-
tween economic growth and trade (see for example the surveys by
Edwards, 1998; Giles and Williams, 2000a, 2000b; Lewer and Van
den Berg, 2003). Much of this literature looks directly at the link be-
tween exports and GDP. Two of the more interesting relationships
to study are the export led growth (ELG) hypothesis and the growth
led exports (GLE) hypothesis. There is also the possibility of a feed-
back effect between economic growth and exports or the possibility
of no statistically signicant relationship between exports and
growth.
There are several theoretical reasons to support the ELG hypothe-
sis (Giles and Williams, 2000a). First, export growth may increase the
demand for a country's economic output and this generates an in-
crease in real economic activity. Second, export expansion promotes
specialization in the production of exports which can lead to higher
skill levels, economies of scale and productivity gains for the economy
as a whole. Third, an increase in exports can provide foreign exchange
making it easier to import goods, services and foreign nancial capital
which can be used to help domestic capital formation. Fourth, export
growth is consistent with comparative advantage countries special-
ize in producing goods that they have a comparative advantage in and
this increases economic growth.
There are also theoretical reasons to support the GLE hypothesis
(Giles and Williams, 2000a). Economic growth theory posits an ag-
gregate production function that depends primarily on capital and
labor (like a Solow growth model). Over the long term, increasing
economic growth depends upon increasing the capital to labor ratio
and increasing technology to boost productivity (Weil, 2008). Eco-
nomic growth leads to greater skills and technology which can lead
to comparative advantage which facilitates the growth in exports.
Neoclassical trade theory supports the idea that economic growth
leads to greater exports.
Granger causality between exports and GDP for Latin American
countries has been examined by a number of authors. Bahmani-
Oskooee et al. (1991) found that ELG hypothesis was supported for
Peru while a bi-directional causal relationship was found for the Do-
minican Republic and Paraguay. Van den Berg and Schmidt (1994)
found a positive and statistically signicant effect of exports on eco-
nomic growth in Columbia and Peru but no signicant effect was
found for Argentina. Xu (1996) found support for the ELG hypothesis
in Columbia but not in Argentina. Riezman et al. (1996) found sup-
port for the ELG hypothesis in Costa Rica, Honduras, Suriname and
Uruguay. No signicant relationship between exports and growth
were found for Argentina, Columbia and Peru. Awokuse (2008)
nds little support for the ELG hypothesis in Argentina or Columbia
but does nd some evidence to support the ELG hypothesis in the
case of Peru.
Imports can play an important role in affecting domestic economic
activity via the import led growth (ILG) hypothesis. Imported goods
can increase domestic output by facilitating the transfer of technology
and factors of production into the domestic economy. Endogenous
growth models show that imports can be a channel of economic
growth because imports provide domestic rms with access to for-
eign technology and knowledge (Grossman and Helpman, 1991). For-
eign R&D knowledge can be an important source of productivity
growth and foreign imports of technology intensive intermediate fac-
tors of production implies that the imports can play a signicant role
in economic growth. Imports can also affect economic growth
through the efciencies that foreign competition brings to the domes-
tic market place. Awokuse (2008) nds empirical evidence to support
the ILG hypothesis for Argentina, Colombia and Peru.
3.3. Energy consumption and trade
Theoretically, there are a number of reasons for how exports can
affect energy consumption. Export expansion increases the demand
for the factors of production (capital, labor, energy) used to make
the exports. Once exports are produced, machinery and equipment
must be used to load and transport the exports to seaports, airports
or other docking stations where the exports are then ofoaded and
re-loaded for voyages abroad. The machinery and equipment used
in the production, processing and transportation of goods for export
require energy to operate. An increase in exports represents an in-
crease in economic activity in export oriented sectors and this should
increase the demand for energy.
It is also possible for changes in energy consumption to affect
exports because energy is an important input into the production of
goods destined for exports. The production of exports requires factors
of production like capital, labor, and energy. A dramatic decrease in
energy consumption, resulting from say an energy conservation pro-
gram, could affect the ability to produce goods for exports. It is also
possible that a feedback relationship exists between energy and ex-
ports whereby energy is important for explaining movements in ex-
ports and exports are important for explaining movements in
energy demand. In this case, energy consumption and exports share
interdependence and complementary effects. It is also possible for
the relationship between energy and exports to be neutral. In this
case, the correlation between energy consumption and exports is so
small that it does not show up as a statistically signicant relationship
at conventional test levels.
Imported goods can affect the demand for energy in two ways.
First, imports are trade ows into a country and this require a
 P. Sadorsky / Energy Economics 34 (2012) 476488 479

well function transportation network to move goods around. Trans-
portation requires energy and increases in trade ows are expected
to increase energy consumption. Second, the composition of im-
ports can affect energy consumption especially if the imports are
energy intensive products like automobiles, dishwashers, air condi-
tioners, etc. It is also possible that energy consumption can affect
the ow of imported goods especially if the imported goods are
machinery or equipment that requires energy to operate. Energy
conservation policies or lack of accessible energy may reduce the
usefulness and efciency of energy dependent imported goods
making it less likely that such good will be imported. There is also
the possibility of a feedback relationship between imports and
energy or the possibility of no statistically signicant relationship
between the two variables.
4. Empirical models
Following Lean and Smyth (2010b), the relationship between en-
ergy consumption, trade and output is modeled using a production
function. Whereas the model in Lean and Smyth (2010b) only in-
cludes exports, the model in this present paper allows for exports or
imports. 4,5 Output, Y can be written as a function of capital, K, labor,
L, energy, E, trade openness, O, and a country specic variable, V.
Y it f K it ; Lit ; Eit Oit ; V i
Eq. (1) can be parameterized as follows.
Y it K it1i Lit2i Eit3i Oit4i V i
Taking natural logarithms of Eq. (2), denoting lower case letters as
the natural log of upper case letters and adding a random error term
produces the following equation.
yit 1i kit 2i lit 3i eit 4i oit i it 3 equilibrium in the cointegration relationship and changes in the
In Eq. (3), countries are denoted by the subscript i (i = 1,,N) and
the subscript t denotes the time period (t = 1,,T). Eq. (3) is a fairly
general specication which allows for individual xed country effects
() and a stochastic error term ().
This paper uses panel cointegration techniques to investigate the
2007; Sadorsky, 2009a, 2009b, 2011). Panel cointegration approaches
have drawbacks including which approach (within-dimension or
between- dimension) to use in estimating the long-run cointegration
relationship and how much heterogeneity to include in the panel
VECM. 6
Estimation of Eq. (3) will provide estimates of long run elasticities
but in the context of panel estimation the ordinary least squares
(OLS) estimator of Eq. (3) is asymptotically biased and its distribution
depends upon nuisance parameters. The nuisance parameters are
regressors that are not part of the true data generating process but
could introduce unwanted endogeneity and serial correlation
(Pedroni, 2000, 2001). There are several possible approaches to
addressing the bias, including fully modied OLS (FMOLS) and dy-
namic OLS (DOLS). FMOLS uses a non-parametric approach to correct
for endogeneity and serial correlation. DOLS uses a parametric ap-
proach (adding leads and lags of the differences of the right hand
side variables) to correct for endogeneity and serial correlation. In
small samples, the DOLS approach can use up a lot of degrees of
freedom. 7
In addition, there is also a choice to be made regarding how the
data is pooled (Harris and Sollis, 2003). Pooling can be either along
the within-dimension or between-dimension (sometimes called the
group mean estimator). Within-dimension estimators assume a
common regression coefcient vector across all cross sections.
Between-dimension (or group means) estimators assume the regres-
1 sion coefcients vary across cross sections and this allows for greater
heterogeneity. Eq. (3) is written allowing for country specic regres-
sion coefcients and this is consistent with between-dimension
pooling.
If evidence of cointegration is found, then the approach of Engle
2 and Granger (1987) can be used to estimate an error correction
model (ECM). The nding of cointegration between a set of variables
implies that there exists causality, in the Granger (1969) sense, in at
least one direction. In this approach, the nding of cointegration be-
tween a group of variables is very important because it ensures that
there exists an error correction mechanism by which changes in the
dependent variable are modeled as a function of the level of the dis-
other explanatory variables. The VECM for Eq. (3) can be written as
follows.
X
q X
q X
q
yit c1i 11ij yitj 12ij kitj 13ij litj
j1 j1 j1
X
q X
q

relationship between energy consumption and trade in a sample of 14ij eitj 15ij oitj 16i it1 1it 4a
j1 j1
South American economies. Panel estimation techniques are attrac-
tive because models estimated from cross-sections of time series
have more degrees of freedom and efciency than models estimated X
q X
q X
q
from individual time series. This is particularly useful if the time se- kit c2i 21ij yitj 22ij kitj 23ij litj
ries dimension of each cross-section is short. Panel cointegration j1 j1 j1
X
q X
q
techniques have recently been used by a number of authors to inves- 24ij eitj 25ij oitj 26i it1 2it 4b
tigate the relationship between energy consumption and output (e.g. j1 j1
Apergis and Payne, 2009, 2010; Chen et al., 2007; Lee, 2005; Lee and
Chang, 2008; Lee et al., 2008; Mahadevan and Asafu-Adjaye, 2007; 6
The main drawbacks to panel cointegration are with respect to the choices that the
Mehrara, 2007; Narayan and Smyth, 2008, 2009; Narayan et al., researcher needs to make. The long-run cointegration relationship can be estimated
assuming either a common regression coefcient vector across all cross sections or
allowing the regression coefcients to vary across cross sections and this allows for
greater heterogeneity. Similarly, the VECM can be estimated with a common regres-
sion coefcient vector across all cross sections or allowing the regression coefcients
4
Incorporating trade variables like exports and imports into the production function to vary across cross sections. There are four possible ways to combine the long-run
has a long history of usage (see for example the early papers by Balassa (1978) and cointegration vector with the VECM.
7
Sheehey (1992)). This paper reports estimates from group-means OLS and FMOLS. Asymptotically,
5
In this model, exports or imports are included in the production function and two DOLS and FMOLS should produce similar parameter estimates although in small sam-
separate empirical specications estimated (one with exports, one with imports). In- ples it is not clear which approach works better. In practice, many researchers prefer
cluding exports or imports separately reduces the multicollinearity from including to use the FMOLS approach because it is easier to t on data sets with short time pe-
both variables together. It is also possible to include a trade openness variable like riods and does not reduce the degrees of freedom the way parametric approaches like
net exports divided by GDP but this was not tried. DOLS do.
480 P. Sadorsky / Energy Economics 34 (2012) 476488

X
q X
q X
q
Data on energy consumption, output, capital, labor and merchan-
lit c3i 31ij yitj 32ij kitj 33ij litj dise exports and imports are obtained from the World Bank (2010)
j1 j1 j1
X
q X
q World Development Indicators online data base. Data on consumer
34ij eitj 35ij oitj 36i it1 3it 4c prices are obtained from the Penn World Tables version 6.3 (Heston
j1 j1 et al., 2009). 9
Fig. 1 shows time series plots of log energy consumption for each
X
q X
q X
q
of the countries. For most countries energy consumption has been
eit c4i 41ij yitj 42ij kitj 43ij litj
j1 j1 j1 trending upwards across time although the strength of the trend var-
X
q X
q ies by country. Brazil is by far the biggest energy consumer with Ar-
44ij eitj 45ij oitj 46i it1 4it 4d gentina a distant second. Uruguay consumes the least energy.
j1 j1
Fig. 2 shows time series plots of log real GDP for each of the coun-
tries. Overall, GDP has been increasing across time for each of the
X
q X
q X
q
countries. The economic performance of Chile is particularly impres-
oit c5i 51ij yitj 52ij kitj 53ij litj
j1 j1 j1
sive because real GDP has been increasing along a fairly tight linear
X
q X
q trend (no large downturns). Brazil is the largest economy while Par-
54ij eitj 55ij oitj 56i it1 5it 4e aguay is the smallest.
j1 j1 Fig. 3 shows time series plots of log real merchandise exports for
each of the countries. For each country exports have been increasing
where is the rst difference operator, q is the lag length, y is the nat- across time and most dramatically since 2000. Brazil is the largest ex-
ural log of real output, k is the natural log of real capital formation, l is porter while Paraguay and Uruguay are the smallest exporters.
the natural log of the labor force, e is the natural log of energy con- Fig. 4 shows time series plots of log real merchandise imports for
sumption, o is the natural log of trade openness (measured using ei- each of the countries. For each country, exports and imports show
ther real exports, x, or real imports, m), is the error correction similar patterns suggesting that imports and exports tend to move to-
term which are the residuals from Eq. (3), and is a random error gether across time. This is supported by correlation analysis for the
term. Notice that for each of Eq. (4a) through (4e) there are as panel as a whole as the natural log of exports and the natural log of
many equations as there are countries. For example, Eq. (4a) repre- imports are highly correlated with a correlation coefcient of 0.96.
sents a system of seven equations (i = 1,,7). The VECM is estimated Brazil is the largest importer while Paraguay and Uruguay are the
using SUR techniques that allow for cross-sectional specic coef- smallest importers.
cient vectors and cross-sectional correlation in the residuals. This es- Average annual growth rates of energy consumption vary be-
timation approach allows for considerable cross-sectional variation. tween countries and range from a low of 0.67% (Uruguay) to a high
The error correction model embodies both long run equilibrium of 4.36% (Chile) (Table 1). 10 For ve of these countries the values
(through the cointegration term) and short run dynamics (through are greater than 2% per year. Except for Peru and Uruguay, average
changes in the explanatory variables). The cointegration term is re- annual growth rates in energy consumption are similar to their re-
ferred to as the error correction term (ect) because deviations from spective average annual growth rates in real GDP which means that
long run equilibrium are gradually corrected through a series of for most of these countries, energy consumption is growing at about
short run adjustments. The coefcient on the lagged error correction the same rate as economic growth. One country in particular, Chile,
term is a short term adjustment coefcient and represents the pro- stands out for having high economic growth. For each country, ex-
portion of the long term disequilibrium in the dependent variable ports or imports are growing on average, much faster than output
which is being corrected in each short term period. The signicance or energy consumption. Argentina and Chile are two countries that
of the error correction terms in each set of equations can be tested have positive double digit average annual growth rates in exports
using F tests. Short run dynamics can be tested using Granger causal- while Argentina and Peru recorded double digit average annual
ity F tests. These tests jointly test if the estimated coefcients on the growth rates in imports.
lagged changes in the explanatory variables are equal to zero. 8 Table 2 shows the correlations between the panel data variables for
the variables measured in growth rates. The growth rate in energy con-
5. Data sumption variable shows the highest correlation with the growth rate
in output variable and the lowest correlation with the growth rate in
The data set is a balanced panel of 7 South American countries fol- labor. The growth rate in energy consumption correlates more highly
lowed over the years 19802007 and includes annual data on energy with the growth rate in imports than with the growth rate in exports.
consumption, output, capital formation, the labor force, merchandise Notice that the grow rate in output variable correlates highest with
exports and merchandise imports. The dimensions of the panel data the growth rate in capital. Most of the correlations are positive but out-
set are chosen to include as many countries as possible each with a rea- put growth correlates negatively with labor growth and exports
sonable time length of observations. The South American economies in- growth. Capital growth correlates negatively with labor growth and ex-
cluded in the sample are: Argentina (ARG), Brazil (BRA), Chile (CHL), ports growth. Export growth correlates positively with import growth.
Ecuador (ECU), Paraguay (PRY), Peru (PER), and Uruguay (URY). In this paper, four types of panel unit root tests are computed that
Energy consumption (energy) is measured by energy use in kt of assume cross-sectional independence (Levin et al., 2002; Im et al.,
oil equivalent. Output (output) is measured by real GDP (constant 2003; and Fisher type tests using augmented Dickey and Fuller
2000 US dollars). Following other researchers like Apergis and (ADF) (1979) and Phillips and Perron (PP) (1988) tests; Choi, 2001
Payne (2009, 2010) and Sari and Soytas (2007) the capital stock (cap- and Maddala and Wu, 1999). The tests proposed by Levin et al.
ital) is measured using gross xed capital formation (constant 2000 (2002) assume that there is a common unit root process across the
US$). Labor is measured using the number of people in the total cross-sections. For these tests, the null hypothesis is that there is a
labor force. Exports (imports) are measured using merchandise ex- unit root while the alternative hypothesis is that there is no unit
ports (imports) measured in current US$. These values are converted root. The other tests assume individual unit root processes across
to real values by dividing by the consumer price index.

9
The Penn World Tables data code for the consumer price index is pc.
8 10
All estimation is done using WinRats 7.0, Eviews 6.0 and Stata 11. Growth rates are calculated using continuously compounded returns.
 P. Sadorsky / Energy Economics 34 (2012) 476488 481

LENERGYARG LENERGYBRA LENERGYCHL

11.3 12.4 10.4

11.2
12.2
10.0
11.1

11.0 12.0
9.6
10.9 11.8
10.8 9.2
11.6
10.7

10.6 11.4 8.8

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LENERGYECU LENERGYPER LENERGYPRY

9.4 9.6 8.4

9.2 9.5
8.2

9.0 9.4
8.0
8.8 9.3

7.8
8.6 9.2

8.4 9.1 7.6

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LENERGYURY
8.1

8.0

7.9

7.8

7.7

7.6

7.5
1980 1985 1990 1995 2000 2005

Fig. 1. Natural log of energy consumption.

the cross-sections. For these tests, the null hypothesis is that there is a
unit root while the alternative hypothesis is that some cross sections
do not have a unit root. The unit root tests that assume individual unit
root processes across the cross-sections are fairly similar in showing
that for each series in levels the null hypothesis of a unit root cannot
be rejected at the 5% level while for each series in rst differences, the
null hypothesis of a unit root can be rejected (Table 3).
Unit root tests that assume cross-sectional independence can have
low power if estimated on data that have cross-sectional dependence.
Pesaran's (2004) CD test was used to check for cross-sectional depen-
dence. At the 5% level of signicance, all of the variables, except labor,
showed evidence of cross-sectional dependence. As a result, Pesaran's
(2007) CADF test for unit roots was calculated. This is a unit root test
that allows for cross-sectional dependence. According to this test
each variable contains a unit root in levels but no unit root in
differences.
Panel cointegration is checked using the tests of Pedroni (1999,
2004). The Pedroni approach to testing for panel cointegration is to
test the residuals from Eq. (3) for a unit root (assuming no trend or
drift in the estimating equation).
^ it i ^it1 it
In total, Pedroni (1999, 2004) provides seven statistics for tests of
the null hypothesis of no cointegration in heterogeneous panels.
These tests can be classied as either within-dimension (panel
tests) or between-dimension (group tests). These tests are all based
on the residuals from Eq. (3) and are variants on the ADF and PP
tests. For the within-dimension approach, the null of no cointegration
(i = 1 for all i) is tested against the alternative of i = b 1 for all i.
The group-means approach is less restrictive since it does not require
a common value of under the alternative. For the group-means ap-
proach, the alternative hypothesis is i b 1 for all i. The between-
dimension tests are less restrictive in that they allow for heterogene-
ity of the parameters across countries. The results from performing
these tests for the data set with exports are somewhat mixed with
two of the within-dimension (weighted) statistics indicating cointe-
gration at the 10% level and one of the between-dimension statistics
indicating cointegration at the 10% level (Table 4). The results from
performing these tests for the data set that includes imports are
also mixed with one weighted within-dimension test and two be-
tween dimension tests providing evidence of cointegration at the
10% level (Table 5).
It is also a good idea to check for structural stability of the cointe-
gration relationship because structural instability can affect the
power of the panel cointegration tests. To test for cointegration in
panels with structural breaks, the method of Gutierrez (2010) was
used. Gutierrez (2010) uses the Maddala and Wu (1999) approach
of combining the p-values across cross-sections from Gregory and
Hansen (1996) cointegration tests which account for a one-time
structural break of unknown timing. Table 6 shows the results of
5 using the Gutierrez (2010) Z statistic to combine the Gregory and
Hansen (1996) tests which allow for a level shift and a time trend.
The Z statistic is distributed as standard normal and with a value of
14.45 (for the model with exports) or 13.32 (for the model
with exports) provides evidence at the 1% level of panel cointegration
in the presence of structural breaks.
For Argentina, the model with exports and the model with im-
ports both choose 1986 (in the rst half of the 1980s Argentina was
plagued with debt depression and the Falklands War) as the break
482 P. Sadorsky / Energy Economics 34 (2012) 476488

LOUTPUTARG LOUTPUTBRA LOUTPUTCHL

26.8 27.6 25.6

26.6 27.4 25.2

26.4 27.2 24.8

26.2 27.0 24.4

26.0 26.8 24.0

25.8 26.6 23.6

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LOUTPUTECU LOUTPUTPER LOUTPUTPRY

24.0 25.2 23.0

23.8 25.0
22.8

23.6 24.8
22.6
23.4 24.6

22.4
23.2 24.4

23.0 24.2 22.2

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LOUTPUTURY
24.2

24.0

23.8

23.6

23.4

23.2
1980 1985 1990 1995 2000 2005

Fig. 2. Natural log of real output.

date in the cointegration relationship. For Brazil, the model with ex-
ports selects the break data as 1984 (IMF's austerity plan to reduce
debt was in effect between 1979 and 1984) while the model with im-
ports selects 2000 (devaluation of the Real in 1999). For Chile, the
break dates are 1984 (Latin American debt crisis) and 2002. 11 For Ec-
uador, both models select 1999 (major banking crisis) as the break
point. For Peru, the export model selects 1988 as the break point
while the import model selects 1985 (a new President was elected
and, in response to hyperination, the currency was replaced) as
the break point. For Paraguay, the export model selects 1999 (politi-
cal instability with the murder of a Vice President and impeachment
of the President) as the break point while the import model selects
2000. For Uruguay, both models select 1984 (Latin American debt cri-
sis, mass protests against the dictatorship) as the break point.
6. Empirical results and discussion
This section on the empirical results consists of a sub-section on
the short-run dynamics and a sub-section on the long-run output
elasticities. Results are presented rst for the short-run dynamics
after which results are presented for the long-run elasticities. 12
6.1. Short-run dynamics for equations with exports
Short-run dynamics for the equations with exports are investigat-
ed using the two-step approach of Engle and Granger (1987). In the
rst step, Eq. (3) is estimated and the residuals are saved. In the sec-
ond step, Eqs. (4a)(4e) are estimated. The vector autoregression lag
length, q, was set at 2 which was the lowest lag length that ensured
the residuals are random. Granger-causality test results are shown
in Table 7. For the purposes of discussion, a 5% level of signicance
is used to interpret the results.
For the primary variables of interest in this paper (output, energy,
exports) short-run Granger causality tests show evidence of a feedback
relationship between 1) energy consumption and exports, and 2) out-
put and exports. At the 5% level, there is no evidence of short-run cau-
sality running from energy to output or output to energy. The error
correction term is statistically signicant in each equation, indicating
that long-run adjustment to equilibrium is important in explaining
short run movements in output, capital, labor, energy, and exports. 13
Notice that there is some evidence of indirect causality between
energy and output via exports. Energy Granger causes exports and
exports Granger cause output. In this case, the relationship from ener-
gy to output is not a direct relationship but an indirect relationship

13
The signicance of the error correction term is used by some authors for interpret-
11
The debt crisis of 1982 was the most severe debt crisis to ever affect South America ing long-run Granger causality. In particular, there is evidence of 1) long-run causality
and had profound impacts on these countries for several years (Federal Deposit Insur- from capital, labour, energy, and exports to output, 2) long-run causality from output,
ance Corporation, 1997). labour, energy, and exports to capital, 3) long-run causality from output, capital, ener-
12
Since the export variable, x, and import variable, m, correlate highly (0.96) separate gy, and exports to labour, 4) long-run causality from output, capital, labour and exports
models are estimated for exports and imports. to energy, and 5) long-run causality from output, capital, labour, and energy to exports.
 P. Sadorsky / Energy Economics 34 (2012) 476488 483

LEXPORTSARG LEXPORTSBRA LEXPORTSCHL

26 26.5 26

26.0
25 25

25.5
24 24
25.0

23 23
24.5

22 24.0 22
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LEXPORTSECU LEXPORTSPER LEXPORTSPRY

24.5 25.0 23.0

22.5
24.0 24.5
22.0
23.5 24.0
21.5
23.0 23.5
21.0
22.5 23.0
20.5

22.0 22.5 20.0

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LEXPORTSURY
23.0

22.5

22.0

21.5

21.0

20.5
1980 1985 1990 1995 2000 2005

Fig. 3. Natural log of real exports.

that operates through exports. There is also evidence of an indirect
relationship from output to energy. Output Granger causes exports
and exports Granger cause energy.
Table 8 reports Q statistics used for testing for residual autocorre-
lation in the panel VECM with exports. None of the p values are statis-
tically signicant at the 1% level indicating that the residuals from the
models used to calculate the causality tests are free of any serious au-
tocorrelation problems.
There is evidence of an indirect relationship from energy to output
that works through imports. Energy Granger causes imports and
imports Granger causes output.
As a further check on the panel VECM with imports, Table 10
reports Q statistics used for testing for residual autocorrelation.
None of the p values are statistically signicant at the 1% level indicat-
ing that the residuals from the models used to calculate the causality
tests are free of any serious autocorrelation problems.

6.2. Short-run dynamics for equations with imports

For the panel VECM with imports, the autoregression lag length, q,
was set at 2 which was the lowest lag length that ensured the resid-
uals are random. Short-run Granger causality tests show evidence of
a feedback relationship between output and imports (Table 9). At
the 5% level there is evidence of short-run causality running from en-
ergy to imports. At the 5% level, there is no evidence of short-run cau-
sality running from energy to output or output to energy. The error
correction term is statistically signicant in each equation, indicating
that long-run adjustment to equilibrium is important in explaining
short run movements in output, capital, labor, energy, and imports. 14
14
The signicance of the error correction term is used by some authors for interpret-
ing long-run Granger causality. In particular, there is evidence of 1) long-run causality
from capital, labour, energy, and imports to output, 2) long-run causality from output,
labour, energy, and imports to capital, 3) long-run causality from output, capital, ener-
gy, and imports to labour, 4) long-run causality from output, capital, labour and im-
ports to energy, and 5) long-run causality from output, capital, labour, and energy to
imports.
6.3. Long-run equilibrium
Long-run output elasticities are calculated using group means OLS
and group means fully modied OLS (FMOLS) (Pedroni, 2001). Since
all of the variables are measured in natural logarithms, the estimated
coefcients from the long-run cointegration relationship can be inter-
preted as long-run elasticities (Table 11). For each variable, the two
approaches produce very similar results in terms of sign, magnitude
and statistical signicance. For the FMOLS results, a 1% increase in
capital increases output by 0.22%. A 1% increase in labor increases
output by 0.61%. A 1% increase in energy increases output by 0.35%
while a 1% increase in exports increases output by 0.03%.
For the equations with imports, OLS and FMOLS calculate very
similar results (Table 12). Using the FMOLS results, a 1% increase in
capital increases output by 0.17%, a 1% increase in labor increases out-
put by 0.37%, a 1% increase in energy increases output by 0.40%, and a
1% increase in imports increases output by 0.06%. The estimated coef-
cients for capital, labor and energy, from either Table 11 or Table 12
are of the same sign and magnitude as the ones found by Apergis and
484 P. Sadorsky / Energy Economics 34 (2012) 476488

LIMPORTSARG LIMPORTSBRA LIMPORTSCHL

25.6 26.4 25.5
25.2 25.0
26.0
24.8
24.5
25.6
24.4
24.0
24.0 25.2
23.5
23.6
24.8
23.0
23.2
24.4 22.5
22.8
22.4 24.0 22.0
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LIMPORTSECU LIMPORTSPER LIMPORTSPRY

24.5 24.4 24.0

24.0 24.0 23.5

23.0
23.5 23.6
22.5
23.0 23.2
22.0
22.5 22.8
21.5
22.0 22.4 21.0

21.5 22.0 20.5

1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

LIMPORTSURY
23.2

22.8

22.4

22.0

21.6

21.2
1980 1985 1990 1995 2000 2005

Fig. 4. Natural log of real imports.

Payne (2010) in their model which related output to capital, labor South American countries studied in this paper. Short-run and long-
and energy. run Granger causality test results support a feedback relationship be-
tween energy consumption and exports. This means that changes in
7. Policy analysis exports affects energy consumption and changes in energy consump-
tion affect exports. For these countries, energy or environmental pol-
The empirical results reported in the previous section can be used icies that reduce energy consumption will reduce exports. 15 This
for energy policy and environmental policy analysis for the panel of could have very undesirable effects on economic growth in South
American countries as a reduction in exports will lead to a reduction
Table 1 in wealth creation. Exports from South American countries tend to
Average annual growth rates over 19802007 (percent).
consist of agricultural (beef in Argentina and Brazil, fruits, wine and
Country Energy Real Real capital Labor Real Real vegetables in Chile, wheat in Argentina) or raw materials (copper in
consumption GDP formation exports imports Chile, oil in Brazil) which are very much in demand in other countries
Argentina 2.07 2.06 1.66 1.85 12.24 10.41 around the world. Reducing exports from South America not only re-
Brazil 2.70 2.35 0.93 2.77 7.78 6.10 duces economic activity in South America but also deprives people in
Chile 4.36 4.76 6.44 2.43 11.69 9.58 other countries from enjoying the benets of these agricultural prod-
Ecuador 3.16 2.62 1.07 2.86 6.92 7.16
Peru 0.83 2.50 3.37 2.87 5.40 10.11
ucts and raw materials. It is also the case that increasing trade open-
Paraguay 2.60 2.53 0.51 3.20 9.12 5.79 ness measured using export expansion programs are going to
Uruguay 0.67 1.70 0.73 0.91 7.07 6.18 increase energy demand and this could affect future estimates of
Total 2.34 2.65 1.89 2.41 8.60 7.91 energy demand for these countries. Energy demand forecasts that
do not take into account exports may underestimate future energy
Table 2 consumption.
Correlations for the panel data set (variables in growth rates). In the short run there is evidence of a Granger causal relationship
running from energy consumption to imports. This means that, in the
e y k l x m
short run, energy conservation policies will slow imports.
e 1.00
y 0.60 1.00
k 0.53 0.85 1.00
l 0.05 0.15 0.12 1.00 15
Strictly speaking, the Granger causality tests are designed to test whether lagged
x 0.06 0.14 0.24 0.04 1.00
changes in one variable affect contemporaneous changes in another variable. The di-
m 0.36 0.48 0.54 0.07 0.30 1.00
rection of the causal results can be inferred from Figs. 14 which report a positive as-
obs = 189. sociation between energy, output, exports and imports.
 P. Sadorsky / Energy Economics 34 (2012) 476488 485

Table 3
Panel unit root tests.

Method y y k k l l

Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a

Null: Unit root (assumes common unit root process)

Levin, Lin & Chu t* 2.799 0.997 7.153 0.000 0.924 0.822 7.400 0.000 3.640 0.000 4.380 0.000

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat 5.521 1.000 6.517 0.000 0.697 0.757 6.558 0.000 0.874 0.809 4.501 0.000
ADFFisher Chi-square 0.435 1.000 66.121 0.000 13.514 0.487 66.147 0.000 13.988 0.451 46.280 0.000
PPFisher Chi-square 0.489 1.000 66.433 0.000 7.220 0.926 63.584 0.000 15.467 0.347 41.452 0.000
Pesaran's CADF test 1.217 0.888 4.109 0.000 0.467 0.680 5.046 0.000 0.318 0.625 2.903 0.002

Method e e x x m m

Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a Statistic Prob.a

Null: Unit root (assumes common unit root process)

Levin, Lin & Chu t* 2.543 0.995 7.617 0.000 3.168 0.999 11.503 0.000 2.894 0.998 11.919 0.000

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat 4.435 1.000 8.261 0.000 5.586 1.000 10.578 0.000 5.776 1.000 12.026 0.000
ADFFisher Chi-square 2.178 1.000 85.924 0.000 1.622 1.000 111.928 0.000 0.392 1.000 128.480 0.000
PPFisher Chi-square 2.011 1.000 75.585 0.000 1.827 1.000 117.733 0.000 0.334 1.000 127.554 0.000
Pesaran's CADF test 0.146 0.558 4.269 0.000 1.202 0.100 5.276 0.000 1.132 0.129 5.950 0.000

All unit root test regressions were run with constant. Pesaran's CADF test is estimated with 1 lag.
a
Probabilities for Fisher tests are computed using an asymptotic Chi-square distribution. All other tests assume asymptotic normality.

For the long-run there is evidence of a causal relationship between energy. In the short-run this supports the neutrality hypothesis. 16
1) energy consumption and exports and 2) energy consumption and This relationship does not, however, carry over to the long-run. In
imports. This means that in the long-run, environmental policies the long-run there is evidence of a feedback relationship between
that reduce energy consumption will reduce exports and imports put- output and energy indicating that in the long-run, energy reduction
ting energy conservation policy aimed at reducing greenhouse gas policies will reduce economic growth.
emissions at odds with trade expansion policy. An energy policy While there is no evidence of a statistically signicant direct rela-
designed to dramatically increase the share of renewable energy in tionship between output and energy in the short-run, there is some
total energy consumption and lower the share of fossil fuel based en- evidence of an indirect effect that works through the trade variable.
ergy would be one way of allowing energy consumption to increase There is evidence of an indirect relationship between energy and out-
across time while reducing greenhouse gas emissions. Policies put that works through exports. There is evidence of an indirect rela-
designed to increase energy intensity (energy use per unit of GDP) tionship from energy to output that works through imports. These
may have limited effects because Latin American countries tend to results are important in establishing that energy reduction policies
be among the least energy intensive regions of the world. Using will indirectly reduce economic growth in the short-run through ei-
2007 data from the World Bank on energy intensity (in kg of oil ther the impact that energy reduction has on exports or the impact
equivalent per 1,000 GDP at constant 2005 PPP) shows energy inten- that energy reduction has on imports.
sity in Latin America at 134.7 compared to Middle East and North Af- Short-run and long-run Granger causality test results support a
rica (222.8), OECD (148.9) and the World (184.8). feedback relationship between output and exports. This feedback re-
Short-run Granger causality test results from either the model lationship supports both the ELG and GLE hypotheses. These results,
with exports or the model with imports nd no evidence of a statisti- although not the central focus of this paper, are important in showing
cally signicant relationship at the 5% level between output and that, for these countries, export restrictions can slow economic
growth and that poor economic performance can hinder trade.
Short-run and long-run Granger causality test results support a feed-
back relationship between output and imports which provides fur-
Table 4
Panel cointegration tests for model with exports. ther support for a feedback relationship between output and trade.
The feedback relationship between output and trade (where trade is
Alternative hypothesis: common AR coefs. (within-dimension)
measured using either exports or imports) supports the view that
Statistic Prob. Weighted statistic Prob. trade promotion increases economic growth and increases in eco-
Panel v-statistic 0.621 0.164 0.991 0.122 nomic growth increases trade. Protectionist trade policies designed
Panel rho-statistic 0.333 0.189 0.247 0.193 to slow either exports or imports will hinder economic growth.
Panel PP-statistic 0.973 0.124 2.326 0.013
Panel ADF-statistic 0.472 0.178 1.348 0.080
8. Conclusions
Alternative hypothesis: individual AR coefs. (between-dimension)
There is an extensive literature looking at the relationship be-
Statistic Prob.
tween energy consumption and economic output and a separate
Group rho-statistic 1.406 0.074
even more extensive literature looking at the relationship between
Group PP-statistic 0.595 0.167
Group ADF-statistic 0.570 0.170
16
Null hypothesis: No cointegration. These results are different from Apergis and Payne (2010) who nd evidence of
Trend assumptions: No deterministic trend. short-run causality running from energy to output. The sample range of data is similar
Lag selection: Automatic SIC with a maximum lag of 5. in the two studies so the difference in results could be due to differences in countries
NeweyWest bandwidth selection with Bartlett kernel. sampled, estimation techniques, or the inclusion of the trade variable.
486 P. Sadorsky / Energy Economics 34 (2012) 476488

Table 5 Table 8
Panel cointegration tests for model with imports. Residual diagnostic tests for VECM equations with exports.

Alternative hypothesis: common AR coefs. (within-dimension) ARG BRA CHL ECU PER PRY URY

Statistic Prob. Weighted statistic Prob. y

Q(10) 4.608 7.572 21.741 12.862 4.786 4.943 9.720
Panel v-statistic 0.869 0.137 0.335 0.189
p value 0.916 0.671 0.016 0.231 0.905 0.895 0.465
Panel rho-statistic 0.335 0.189 0.360 0.187
Panel PP-statistic 0.951 0.127 1.204 0.097
k
Panel ADF-statistic 0.473 0.178 0.364 0.187
Q(10) 4.674 4.229 14.174 8.390 6.021 12.998 3.802
Alternative hypothesis: individual AR coefs. (between-dimension) p value 0.912 0.936 0.165 0.591 0.813 0.224 0.956

Statistic Prob. l
Q(10) 2.568 10.030 4.339 11.805 10.785 8.440 8.607
Group rho-statistic 1.570 0.058
p value 0.990 0.438 0.931 0.298 0.374 0.586 0.570
Group PP-statistic 0.325 0.189
Group ADF-statistic 1.337 0.082
e
Null hypothesis: No cointegration. Q(10) 5.172 6.629 5.755 12.243 7.601 4.615 6.200
Trend assumptions: No deterministic trend. p value 0.879 0.760 0.835 0.269 0.668 0.915 0.798
Lag selection: Automatic SIC with a maximum lag of 5.
NeweyWest bandwidth selection with Bartlett kernel. x
Q(10) 5.174 11.761 11.088 6.747 4.433 3.931 8.406
p value 0.879 0.301 0.351 0.749 0.926 0.950 0.589

economic output and exports. There is, however, very little published
literature that brings these two separate streams of economic litera-
ture together to investigate the relationship between energy con-
Table 9
sumption and trade. The purpose of this paper is to investigate the
Granger-causality results for VECM with imports.
dynamic relationship between energy consumption, output and
trade for a panel of South American countries. From To
Short-run and long-run causality results show a feedback relation- y k l e m
ship between exports and energy consumption and this has impor-
y 6.26 1.25 1.30 3.10
tant implications for energy and environmental policy. One (b0.01) (0.25) (0.22) (b 0.01)
implication is that trade expansion policies like export promotion k 3.25 5.59 0.89 3.28
policies designed to increase exports will also increase energy (b 0.01) (b0.01) (0.57) (b 0.01)
l 2.98 5.70 1.72 3.21
(0.01) (b0.01) (0.07) (b 0.01)
Table 6 e 1.26 4.39 1.03 3.46
Cointegration break point tests. (0.25) (b0.01) (0.04) (b 0.01)
m 1.98 1.52 4.49 0.63
Model with exports Model with imports (0.03) (0.12) (b0.01) (0.83)
t1 5.88 6.02 3.24 3.57 3.53
Country Break date Break date
(b 0.01) (b0.01) (b0.01) (b 0.01) (b 0.01)
Argentina 1986 1986
Brazil 1984 2000 The table reports F statistics with p values in parentheses.
Chile 1984 2002 The F tests for short-run Granger causality have 14 and 77 degrees of freedom.
Ecuador 1999 1999 The F tests for the error correction terms have 7 and 77 degrees of freedom.
Peru 1988 1985 In the table, denotes the error correction term.
Paraguay 1999 2000 The system of equations is estimated using OLS with panel corrected standard errors
Uruguay 1984 1984 (PCSE).
Z test 14.45 13.32

Table 7
Table 10
Granger-causality results for VECM with exports.
Residual diagnostic tests for VECM equations with imports.
From To
ARG BRA CHL ECU PER PRY URY
y k l e x
y
y 6.50 2.58 1.59 4.85 Q(10) 3.761 4.996 11.670 20.946 11.410 6.660 14.499
(b.01) (b.01) (0.10) (b.01) p value 0.957 0.891 0.308 0.021 0.326 0.757 0.151
k 2.59 4.04 1.20 2.25
(b.01) (b.01) (0.29) (0.01) k
l 2.91 5.97 2.87 5.26 Q(10) 4.591 5.425 8.851 4.658 17.776 12.604 4.825
(b.01) (b.01) (b.01) (b.01) pvalue 0.917 0.861 0.546 0.913 0.059 0.247 0.903
e 1.50 4.90 1.53 2.45
(0.13) (b.01) (0.12) (b.01) l
x 2.11 2.04 4.19 2.81 Q(10) 1.844 1.926 8.003 7.408 9.731 9.239 9.823
(0.02) (0.03) (b.01) (b.01) p value 0.997 0.997 0.629 0.686 0.464 0.510 0.456
t 1 5.06 5.12 7.27 3.07 8.09
(b.01) (b.01) (b.01) (b.01) (b.01) e
Q(10) 6.876 4.096 5.173 13.876 6.654 8.196 8.447
The table reports F statistics with p values in parentheses.
p value 0.737 0.943 0.879 0.179 0.758 0.610 0.585
The F tests for short-run Granger causality have 14 and 77 degrees of freedom.
The F tests for the error correction terms have 7 and 77 degrees of freedom.
m
In the table, denotes the error correction term.
Q(10) 5.965 15.653 11.109 6.013 6.978 8.848 6.463
The system of equations is estimated using OLS with panel corrected standard errors
p value 0.818 0.110 0.349 0.814 0.728 0.547 0.775
(PCSE).
 P. Sadorsky / Energy Economics 34 (2012) 476488 487

Table 11 Chen, S., Kuo, H., Chen, C., 2007. The relationship between GDP and electricity con-
Panel group mean cointegration results for the equations with exports. sumption in 10 Asian countries. Energy Policy 35, 26112621.
Cheng, B.S., 1997. Energy consumption and economic growth in Brazil, Mexico, and
k t stat l t stat e t stat x t stat Venezuela: a time series analysis. Appl. Econ. Lett. 4, 671674.
Choi, I., 2001. Unit root tests for panel data. J. Int. Money Finance 20, 249272.
OLS 0.22 15.31 0.61 16.71 0.36 6.29 0.03 2.16 Chontanawat, J., Hunt, L.C., Pierse, R., 2008. Does energy consumption cause economic
FMOLS 0.22 16.43 0.61 15.64 0.35 7.06 0.03 2.88 growth? Evidence from a systematic study of over 100 countries. J. Policy Model.
p b 0.01. 30, 209220.
Dickey, D.A., Fuller, W.A., 1979. Distribution of the estimators for autoregressive time
p b 0.05.
series with a unit root. J. Am. Stat. Assoc. 74, 427431.
Edwards, S., 1998. Openness, productivity and growth: what do we really know? Econ.
J. 108, 383398.
Engle, R.F., Granger, C.W.J., 1987. Cointegration and error correction: representation,
Table 12 estimation, and testing. Econometrica 55, 251276.
Panel group mean cointegration results for the equations with imports. Federal Deposit Insurance Corporation, 1997. An Examination of the Banking Crises of
the early 1980s and Early 1990s, Volume 1. available online at http://www.fdic.
k t stat l t stat e t stat m t stat gov/bank/historical/history/vol1.html.
Giles, J.A., Williams, C.L., 2000a. Export-led growth: a survey of the empirical literature
OLS 0.18 13.65 0.41 12.44 0.39 9.73 0.05 2.59 and some non-causality results: part 1. J. Int. Trade Econ. Dev. 9, 261337.
FMOLS 0.17 10.9 0.37 9.36 0.40 8.93 0.06 2.98 Giles, J.A., Williams, C.L., 2000b. Export-led growth: a survey of the empirical literature
and some non-causality results: part 2. J. Int. Trade Econ. Dev. 9, 445470.
p b 0.01.
Granger, C.W.J., 1969. Investigating causal relations by econometric models and cross-
p b 0.05.
spectra methods. Econometrica 37, 424438.
Gregory, A.W., Hansen, B.E., 1996. Residual based tests for cointegration in models with
regime shifts. J. Econ. 70, 99126.
consumption. This means that predictions of future energy consump- Grossman, G., Helpman, E., 1991. Innovation and Growth in the Global Economy. MIT
Press, Cambridge, MA.
tion that do not take into account the effect of exports will likely un- Gutierrez, L., 2010. Simple tests for cointegration in panels with structural breaks. Appl.
derestimate the demand for energy. This could lead to demand Econ. Lett. 17, 197200.
shortages and supply interruptions if forward looking energy supply Harris, R., Sollis, R., 2003. Applied Time Series Modeling and Forecasting. John Wiley &
Sons Ltd., West Sussex, England.
decisions are made assuming lower than actual energy consumption. Heston, A., Summers, R., Aten, B. 2009. Penn World Table Version 6.2. Center for Inter-
Another implication is that environmental policies that reduce energy national Comparisons of Production, Income and Prices at the University of
consumption will affect the growth in exports. This puts environmen- Pennsylvania.
Huang, B.N., Hwang, M.J., Yang, C.W., 2008. Causal relationship between energy con-
tal policy aimed at reducing energy consumption at odds with trade
sumption and GDP growth revisited: a dynamic panel data approach. Ecol. Econ.
policy. A better environmental approach is to facilitate a rise in ener- 67, 4154.
gy consumption by increasing the share of renewable energy relative Im, K.S., Pesaran, M.H., Shin, Y., 2003. Testing for unit roots in heterogeneous panels.
to non-renewable energy. J. Econ. 115, 5374.
International Energy Agency, 2009. World Energy Outlook. IEA, Paris.
Short-run Granger causality test results show no statistically sig- Lean, H.H., Smyth, R., 2010a. Multivariate Granger causality between electricity gener-
nicant relationship at the 5% level between output and energy con- ation, exports and GDP in Malaysia. Energy 35, 36403648.
sumption. This result supports the neutrality hypothesis. These Lean, H.H., Smyth, R., 2010b. On the dynamics of aggregate output, electricity con-
sumption and exports in Malaysia: evidence from multivariate Granger causality
short-run results do not, however, carry over to the long-run. In the tests. Appl. Energy 87, 19631971.
long-run there is evidence of a feedback relationship between output Lee, C.C., 2005. Energy consumption and GDP in developing countries: a cointegrated
and energy implying that reductions in energy consumption will re- panel analysis. Energy Econ. 27, 415427.
Lee, C.C., Chang, C.P., 2008. Energy consumption and economic growth in Asian economies:
duce economic growth. a more comprehensive analysis using panel data. Resour. Energy Econ. 30, 5065.
Evidence is found for a short-run and long-run feedback relation- Lee, C.C., Chang, C.P., Chen, P.F., 2008. Energy-income causality in OECD countries revis-
ship between output and trade (measured using either exports or im- ited: the key role of capital stock. Energy Econ. 30, 23592373.
Levin, A., Lin, C.F., Chu, C., 2002. Unit root tests in panel data: asymptotic and nite
ports). This supports the joint hypothesis of export-led growth and sample properties. J. Econ. 108, 124.
growth driven exports. Export promotion policies that increase ex- Lewer, J.J., Van den Berg, H., 2003. How large is international trade's effect on economic
ports will also increase economic growth. Poorly designed domestic growth? J. Econ. Surv. 17, 363396.
Maddala, G.S., Wu, S., 1999. A comparative study of unit root tests with panel data and
economic policies that slow or hinder economic growth will also
a new simple test. Oxf. Bull. Econ. Stat. 61, 631652.
slow trade. Mahadevan, R., Asafu-Adjaye, J., 2007. Energy consumption, economic growth and
In the long run there is evidence of a causal relationship between prices: a reassessment using panel VECM for developed and developing countries.
1) energy consumption and exports and 2) energy consumption and Energy Policy 35, 24812490.
Mehrara, M., 2007. Energy consumption and economic growth: the case of oil export-
imports. This means that in the long-run, energy or environmental ing countries. Energy Policy 35, 29392945.
policies that reduce energy consumption will reduce exports and im- Murray, D.A., Nan, G.D., 1996. A denition of the gross domestic productelectrication
ports putting energy conservation policy aimed at reducing green- interrelationship. J. Energy Dev. 19, 275283.
Nachane, D.M., Nadkarni, R.M., Karnik, A.V., 1988. Cointegration and causality testing of
house gas emissions at odds with trade expansion policy. the energy-GDP relationship: a cross-country study. Appl. Econ. 20, 15111531.
Narayan, P.K., Smyth, R., 2008. Energy consumption and real GDP in G7 countries: new
evidence from panel cointegration with structural breaks. Energy Econ. 30,
Acknowledgements 23312341.
Narayan, P.K., Smyth, R., 2009. Multivariate Granger causality between electricity con-
I thank three anonymous reviewers for their helpful comments. sumption, exports and GDP: evidence from a panel of Middle Eastern countries.
Energy Policy 37, 229236.
Narayan, P.K., Smyth, R., Prasad, A., 2007. Electricity consumption in G7 countries: a
References panel cointegrating analysis of residential demand elasticities. Energy Policy 35,
44854494.
Apergis, N., Payne, J.E., 2009. Energy consumption and economic growth in Central Ozturk, I., 2010. A literature survey on energy-growth nexus. Energy Policy 38, 340349.
America: evidence from a panel cointegration and error correction model. Energy Payne, J.E., 2010. Survey of the international evidence on the causal relationship be-
Econ. 31, 211216. tween energy consumption and growth. J. Econ. Stud. 37, 5395.
Apergis, N., Payne, J.E., 2010. Energy consumption and growth in South America: evi- Pedroni, P., 1999. Critical values for cointegration tests in heterogeneous panels with
dence from a panel error correction model. Energy Econ. 32, 14211426. multiple regressors. Oxf. Bull. Econ. Stat. 61, 653670.
Awokuse, T.O., 2008. Trade openness and economic growth: is growth export-led or Pedroni, P., 2000. Fully modied OLS for heterogeneous cointegrated panels. In:
import-led? Appl. Econ. 40, 161173. Baltagi, B.H., Fomby, T.B., Hill, R.C. (Eds.), Adv. Econometrics, Vol 15. Nonsta-
Bahmani-Oskooee, M., Mohtadi, H., Shabsigh, G., 1991. Exports, growth and causality in tionary Panels, Panel Cointegration and Dynamic Panels, JAI Press, Elsevier
LDCs: a re-examination. J. Dev. Econ. 36, 405415. Sciences, Amsterdam.
Balassa, B., 1978. Exports and economic growth: further evidence. J. Dev. Econ. 5, Pedroni, P., 2001. Purchasing power parity tests in cointegrated panels. Rev. Econ. Stat.
181189. 83 (4), 727731.
488 P. Sadorsky / Energy Economics 34 (2012) 476488
Pedroni, P., 2004. Panel cointegration: asymptotic and nite sample properties of pooled
time series tests with an application to PPP hypothesis: new results. Econometric
Theory 20 (3), 597627.
Pesaran, M.H. 2004. General diagnostic tests for cross section dependence in panels,
Working Paper no. 0435. University of Cambridge, Cambridge.
Pesaran, M.H., 2007. A simple panel unit root test in the presence of cross section
dependence. J. Appl. Econ. 22, 265312.
Phillips, P.C.B., Perron, P., 1988. Testing for a unit root in time series regression. Biometrika
75, 335346.
Riezman, R.G., Summers, P.M., Whiteman, C.H., 1996. The engine of growth or its hand-
maiden? A time series assessment of export-led growth. Empir. Econ. 21, 77113.
Sadorsky, P., 2009a. Renewable energy consumption, CO2 emissions and oil prices in
the G7 countries. Energy Econ. 31, 456462.
Sadorsky, P., 2009b. Renewable energy consumption and income in emerging economies.
Energy Policy 37, 40214028.
Sadorsky, P., 2011. Trade and energy consumption in the Middle East. Energy Econ. 33,
739749.
Sari, R., Soytas, U., 2007. The growth of income and energy consumption in six devel-
oping countries. Energy Policy 35, 889898.
Sheehey, E.J., 1992. Exports and growth: additional evidence. J. Dev. Stud. 28, 730734.
Soytas, U., Sari, R., 2003. Energy consumption and GDP: causality relationship in G-7
and emerging markets. Energy Econ. 25, 3337.
Squalli, J., 2007. Electricity consumption and economic growth: bounds and causality
analyses of OPEC countries. Energy Econ. 29, 11921205.
Van den Berg, H., Schmidt, J.R., 1994. Foreign trade and economic growth: time series
evidence from Latin America. J. Int. Trade Econ. Dev. 3, 121130.
Weil, D.N., 2008. Economic Growth, Second edition. Addison Wesley.
World Bank, 2010. World Development IndicatorsAccessed at: http://www.worldbank.
org/data/onlinedatabases/onlinedatabases.html.
World Trade Organization, 2009. International Trade Statistics 2009, Geneva. Switzerland.
http://www.wto.org/english/res_e/statis_e/statis_e.htm.
Xu, Z., 1996. On the causality between export growth and GDP growth: an empirical
reinvestigation. Rev. Int. Econ. 4, 172184.