An Empirical Investigation of the Relationship Between Energy Consumption and Economic Growth in Kenya: A Disaggregated Approach

Abstract

Energy is a fundamental input for economic growth worldwide. Despite this, the existence, direction and magnitude of the relationship between energy consumption and overall economic growth remains controversial in empirical literature. At the sectoral level, the nexus is yet to be established in many countries. In Kenya, energy is postulated to drive the overall economy and its strategic sectors, namely, agriculture, manufacturing and Services. However, there is neither evidence in policy nor in empirical literature as to whether energy consumption drives Kenya's overall economy and its strategic sectors or vice versa. The purpose of the study, therefore, was to investigate the relationship between energy consumption and economic growth in Kenya using a disaggregated approach. The specific objectives were to examine the relationship between overall economic growth and energy consumption in Kenya and the nexus between the disaggregated energy (electricity & petroleum) consumption and agricultural, manufacturing and the services sector growth respectively. Based on Solow's nested growth theory and through a survey design, the study analyzed 1971-20 1a World Bank data in a vector error correction model. Augmented Dickey Fuller and Phillips-Perron tests for unit roots and Johansens tests for cointegration found the series to be integrated /(1) and cointegrated(p < 0.05), meaning longrun causation exists. Empirical results by objectives show that: one, a bidirectional causality in ( energy-growth nexus (FO.05=1.84 < Fe=6.20 for GDP & FO.05=1.84 < Fe=2.84 for energy) exists, . meaning an interdependency and, therefore, for Kenya to realize positive economic growth, more energy is required. Two, in agriculture there is bidirectional causality in long-run (Fe=12.61>Foo5=1.84). However III short-run only petroleum drives agriculture (to.o5=2.042<te=3.873). Petroleum therefore is more critical for agricultural growth in Kenya. Three, in manufacturing, both electricity and petroleum are significant in long-run (Fe =10.17> Foo5=1.84) while in short-run only electricity (too5=2.042<te=2.996) is significant. The manufacturing sector is therefore more dependent on electricity. Lastly, in the services sector, electricity is significant in both short (too5=2.042<te=2.097) and long periods. Therefore, the services sector is also more dependent on electricity than petroleum in Kenya. We therefore recommend that energy supply policies should target electricity for manufacturing and services sectors and petroleum for the agricultural sector in Kenya