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