Electricity Consumption and Economic Growth in Botswana: A Vector Error Correction Approach

Abstract:

Emerging economies are still faced with need to improve economic growth. One

of the main drivers of growth in literature has been found to be electricity

consumption. However literature fails to explain the relationship between

economic growth and electricity consumption. It is against this background that

the study examines the presence of the long run relationship between economic

growth and electricity consumption in Botswana. The study use annual time series

data for the period 1980 – 2014. Using the Vector Error Correction Model, the

study shows that there is a positive long run relationship between the two

variables. Electricity consumption drives long term growth and it is an important

input in the country’s production function. Human capital and inflation are

important control variables in explaining this long run relationship. Inflationary

pressures on the economy should be kept low and human capital development

should be industry relevant for the country to advance its growth efforts.

Policymakers should continue with and rather develop instruments that encourage

more electricity consumption. In this case electricity subsidies should be given to

firms in areas that are critical for country’s growth prospects, like mining and

agriculture. Policy makers need to make a cost benefit analysis as they design the

subsidies to benefit all the targeted economic agents

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