Energy Consumption and Economic Growth in the Middle East and North Africa: A Multivariate Causality Test

Using a panel data Vector Error Correction model (VECM), this paper investigates the relationship between output and its main determinants including energy consumption in the Middle East and North Africa (MENA) over the period 1987-2008 within a multivariate framework. More specifically, the model allows us to examine the short- and long-run causal relationship between energy consumption and output growth when we control for the presence of capital and labor inputs. The result confirms the existence of a long-run equilibrium relationship among real GDP, energy consumption, fixed capital formation, and employment. The panel Granger causality tests reveal that there is bidirectional causal relationship between real GDP and energy consumption. Our finding hence supports the feedback hypothesis. The result suggests that an energy-conservation policy might adversely affect output growth in MENA. This finding may have important policy implications for policymakers and international organizations. Furthermore, the Generalized Method of Moments (GMM) is used to estimate the long-run elasticities. The estimation results show that the elasticity of real GDP with respect to energy consumption is 0.38. Moreover, a 1% increase in real GDP raises energy consumption by 0.60% in this region. We might conclude that an energy policy that results in the improvements of energy efficiency not only helps to conserve energy consumption but also boosts the economic output in these countries.