THEORETICAL ANALYSIS OF ENERGY CONSUMPTION IMPACTING ON THE

ECONOMIC GROWTH

This section discusses how this paper incorporates energy use in a classical framework, taking
into account key elements such as the economics schools thought of a classical economy and
then what is the role of energy use in the economy and then how important is energy use for the
development of economics. By answering these concerns, we will be able to build our model
used in the next chapters of this research.

For a very long time, the discipline of economics has occupied an important place in society
because of its controversies and, for example, the problem of economic growth has been at the
center of its attention. We will be focusing on this specific matter in this section to understand
the mechanisms used by the pioneers of the economies. Analysis of the process of economic
growth was one of the central concerns of classical economists from UK, represented mainly by
Adam Smith, Thomas Malthus and David Ricardo. For the first listed with his book titled “The
Wealth of the Nations” , Adam Smith (1776) is generally regarded as the forerunner of the
classical economist thought and the basic message in Smith's influential book was that the wealth
of the nations was not based on mineral resources but on trade. Further he created a link between
the growth of the wealth of living people and the performance of production by taking into
account factors of production such as land, labor and capital(Ronald H.Coase,1992;
Waterman,2012; Ayhan Ucak,2015; Ramesh Chandra, 2004; Keith Pavitt,1998; Michel
Zouboulakis,2015; Andrea Mario Lavezzi, 2001; Mary Clevaland, 2003 ). While For Thomas
Malthus (1766-1834), all his work is directed towards the thought of economic growth, he
describes the growth of the population and the increase in production which have proved
pessimistic. Malthus' concern is that population growth is a real problem and for that it gives a
new orientation to economic questions even within the school of classical economics the
positions diverge (Robert Kunzig, 2011; Bilal Savas; 2008; Fumitaka Furuoka, 2009; Henrik
Urdal, 2005; Fumitaka Furuoka, 2010; Peter Dunn, 1998; Robert Dofman, 1989; Bo and Thomas,
2002; Gary and Edward, 1998). As far as David Ricardo is concerned, perhaps his most
important legacy is his theory of comparative advantage which suggests that a nation should
concentrate its resources only in the industries where it is most internationally competitive and
make trade with other countries to obtain products that are no longer produced domestically.(Roy
Ruffin, 2002; Satya Dev Gutpa, 2014; Bongani and Macleans, 2013; Gary Cook. 1998; David et
al. 1999; Gene Mumy, 1986; Gilbert Faccarello, 2015; Donald Davis, 1997;Tri Widodo,2009 )
This last thought is well practiced by many emerging economies across the world, they are
specialized in the export of raw materials used in developing countries. These countries through
this policy have increased growth for the past decades.
Classical thinking allows classical school economists to believe that the market regulates itself
when they are free from all constraints (Edward Kittrell, 1966; Mark Pennington,2011; Reinert
Erik, 2012; Joshua Muldavin, 2008; David Levy, 2003; Mason Gaffney, ;Susan Engel, 2010).
Thus, the analysis of the process of economic growth has been a central element of the work of
classical economists under the free market. The interest of classical economists in economic
growth also stemmed from a philosophical concern for the possibilities of "progress", one of the
essential conditions of which was the development of the material base of society. Thus Classical
economists have been able to account for the general forces that influence economic growth and
the mechanisms underlying the growth process. Therefore, in examining the work of classical
economists, we also find that the problems of economic growth have been analyzed through the
application of general economic principles, considering the economic system as a whole, rather
than in terms of a separate theory of economic growth as such. Again, we find in classical
economic analysis a necessary interconnection between the analysis of the distribution of value
and growth.

However, population issues related to the whole economy do occur. Much attention has therefore
been paid to population growth, the increase in the share of workers in the field of material
production, investments and geographic discoveries, which have contributed to extensive growth.
They believed that the economy could grow rapidly because of the technological progress,
including part of the division of labor. According to theory, the increase in capital leads to an
increase in the demand for labor, as the stable population causes an increase in real wages, which
stimulates population growth in the long run. Finally, they argued that the accumulation of
capital is faster than the increase in labor; these two processes can, in principle, last forever.

From the above literature on the classical thinking of economic growth, it is clear that it does not
focus on the role of energy resources which may have a significant role for the rapid economic
growth and production.
Energy use plays a complex and crucial role in the economy, and here this study tries to capture
some important aspects of it. Obviously energy use has a direct role in the economics activities
in agricultural, services and industries sectors. So it an essential input into the production of the
final good.

It Increase the efficiency of production technology through the process of innovation, and they
also help in the process of economic growth. The role of energy use allows a rapid and
sustainable economic growth. Although Energy use as one of the driving force that drive all
economic activities, classical economists did not consider it as a key production factor due to the
fact that they have focused all their concerns on the agricultural sector through the use of land.
They believed that agricultural and industry sectors are the main contributors of the economy.
Following this approach, it is clear that manufacturing sector heavily depends on the energy use
even in some part agricultural production too.

Nor Smith, David Ricardo and Malthus argued how energy use may affect the entire economic
circles, the explanation behind may come from the idea that man does all whether in agriculture
and manufacturing sector. Only John Stuart and Frederic Bastiat mentioned the importance of
energy use. One thinks that energy use can be considered as substitute factor and replaced the
labor in a more cooperative way to increase production or meet demand. In a more explicit way,
the second economist divided energy use into different forms which contributes to production
both in manufacturing and agricultural area.

The view usually adopted in neoclassical growth models with energy use is that it is incorporated
into the power of nature. In their macroeconomic framework, energy use is not considered as a
key point. They consider energy use as a raw material, intermediate good which are used in the
process of making a final good.
 Our approach is actually opposite to the neoclassical production-theoretic literature, which takes
only labor and land to be qualitatively the most influential inputs that may affect production and
contribute to increase growth. The model of this paper combines the two approaches – allowing
the energy use as explanatory and exogenous variables under the assumption that energy use
does contribute to economic development. On the other hand, some classical economists viewed
education in a more positive light such as Jean-Baptiste Say. It can argue that energy use could
play a key role in creating a more informed and discerning polity by transforming the traditional
habits of consumption and production within a given environment.

Stanley Jevons is one of the energy economists who have revived the energy debate in the
economic model. In his book published in 1865, he insisted that the use of energy was not an
obstacle to consumption but that it had some benefits in structuring the economic model. Several
economists have followed him to defend the hypothesis that energy can increase the level of
development.

This research paper considers energy use as one of the possible role of the government in
steering these transitions from the neo-classical economic perspective to more inclusive
economies. According to IMF and World Bank, most of the Sub-Saharan countries are classified
as fragile or transitions economies and at this stage factors may influence positively via policies.
Along this, the neo-classical perspective confines the definition of transition to a technological
transition where an old and less productive technology is gradually replaced by a new, more
productive technology. The fact that neoclassical thinking does not consider complementarity
between technological innovation taking into account energy and the transformation of cultures
and social activities, then it does not provide political guidance on the management of the two
factors which are closely linked. But rather consider that these are isolated factors that can be
corrected in order to revitalize the economic market. However the neoclassical point of view on
technological innovation is seen through the industrial sector which makes it possible to
transform raw materials into finished products and in order to achieve this there is a whole
dynamism between the factors influencing the process. And among so many others we have
economic, environmental and innovation variables.

Energy use is classified within the field of behavioral economics by many economics and
supported by classical thought (Adam Olivier, 2015). In a more precisely, within the neo-
classical economics school of thought one of the fields of research is welfare economics. Welfare
economics focuses on the issue of the well-being of society. The variable of environmental
quality is considered as an indicator of economic welfare due to the fact that the environment
plays a role both in consumption which is represented by the welfare and the production. These
classical economists focus on a framework under which the market mechanism can, under
specific conditions, lead to an allocation that maximizes social welfare. Knowing that
technological change is considered to increase growth so therefore the traditional model of
growth with two production factors should be revised and here in the growth model,
environmental is considered as issues as well, a third production factor is included, namely
energy, which is usually considered as a practical representation of the broader concept.

The sources of growth in the energy based economy are strictly attached to the transformation of
the entire business cycle if and only if energy usage is adopted by the economics agent.
Considering such economy, it is clear that if we assume that before the adoption of energy within
the economy business cycle the production factors which are only based on labor and capital
may have a limited capacity of production. For a given worker either unskilled or skilled worker
who is paid to directly use muscular energy to get a final product within a period of time with a
fixed outcome, and let assume that a machine is employed to get the same products obtained by
the labor. It is clear that with the machine there is an added value in speed, productivity. In
general energy is linked to household daily activities and this increase consumption and then
contributes to the economy.

Also the energy use can be viewed in the context of taxonomy economy where policymakers
consider as if a new source of income to increase national revenue. Economists are unanimous
about the taxation of consumption since tax revenues contribute to finance national development.
Following the same path, energy becomes an additional and alternative economic aggregate
different from the export taxation policy on raw materials, mining sectors and many others
taxation sectors. Through industries, household consumption a taxation policy can be
implemented to increase growth. Therefore besides the traditional policies that maximize
attention to revitalize agricultural sector, industries, nowadays, services industries depend on the
energy capacity to fuel the economies through consumption.

In this section that explores the relevant theoretical and conceptual aspects of the relationship
between disaggregated energy consumption and economic growth using the production function
called Cobb-Douglas. Although there are a variety of production functions, the one chosen here
is closely linked to the approach taken in our research. The current understanding of economic
growth is largely based on the neoclassical growth model developed that takes technology into
account. Neoclassical economic models do not include energy as a factor of production and view
the economy as a closed system in which goods are produced by inputs of capital and labor. Over
time this thinking has been called into question and today the role of energy as an important
factor in production cycle has received increasing attention in recent decades. A commonly used
production function, which is known as an appropriate instrument for finding relationships
between production and economic factors, is the Cobb-Douglas form, written as:
𝛽
𝑌𝑡 = 𝐴𝐾𝑡𝛼 𝐿𝑡 (1)

This is the basic form of the Cobb Douglas function where 𝑌 represents an aggregate output
which is the GDP per capita, 𝐾 is the capital variable and in this research Gross fixed capital
formation is used, 𝐿 is the labor commonly represented by active population aged between 15-65,
and 𝐴 is considered as the technology parameter, and i and t are respectively countries and time
variant. 𝛼 and β measure the elasticities of output with respect to capital and labor. Recent
literature concerning economic growth indicates that capital, labor, technological progress, and
energy are the basic elements of economy growth in the developed countries. Therefore,
economic growth models are built on five variables such as output, capital, labor, energy, and
technological progress (Yuan et al. 2008). Based on the previous studies (Nourzad 2000, Wei
2007, Yuan et al. 2008, and Liao et al. 2010), this study presents a Cobb-Douglas production
function taking energy as an input along with the other traditional inputs (labor and capital) in
the following mathematical form:
𝛽
𝑌𝑖𝑡 = 𝐴𝐾𝑖𝑡𝛼 𝐾𝑖𝑡 𝐸𝑖𝑡𝛶 (2)

This equation (2) is an augmented Cobb-Douglas function including energy use variable to
expand the variables in order to adjust to the framework specified above where 𝐸𝑡 is energy and
𝛾 is the elasticity of output with respect to energy. Also equation (2) represents the Cobb
Douglas form of a panel data analysis.

According to Liao et al. (2010) and Arbex and Perobelli (2010), energy is classified into two
categories; clean energy (renewable) and non-clean energy (non-renewable) and the production
procedure uses both resources as sources of energy. However in the particularity of our model is
the fact that there is no specification in the source of energy. It is assumed that energy use
represents the electricity use per capita within the selected regions of West Africa.
𝛽 𝛾
𝑌𝑖𝑡 = 𝐴𝐾𝑖𝑡𝛼 𝐾𝑖𝑡 𝐸1𝑖𝑡
𝛶
𝐸2𝑖𝑡 (3)
𝛶
𝐸1𝑖𝑡 Energy provided through dam electricity if we assume that most of the selected countries
within this West African region electricity come from hydropower dams and are not specialized
𝛾
in the new energy sources. This second source of energy denoted 𝐸2𝑖𝑡 is the energy which comes
from renewable energy such solar panel, nuclear energy etc…

The logarithmic form of the production function provides a log-linear form and yields is
developed and can be specified as:

𝑙𝑛𝑌𝑖𝑡 = 𝑙𝑛𝐴 + 𝛼𝑙𝑛𝐾𝑖𝑡 + 𝛽𝑙𝑛𝐿𝑖𝑡 + 𝛶𝑙𝑛𝐸𝑖𝑡 (4)

In the above model, 𝑌, as the dependent variable, represents real gross domestic production, 𝐾,
𝐿,and 𝐸, as independent variables, stand for capital, labour, Energy use, respectively. The
economic explanations of 𝛼, 𝛽, 𝛶, and 𝛾2 are the elasticities of output with respect to capital,
labor, energy use which electricity consumption per capita, respectively.

It is clear to all that energy consumption does have a significant impact on environment through
Co2 emissions. Obvious this study can’t be done without the interpretation of the Kuznet curve
theory. According to this theory with evidence, Nicolas and Ilhan (2015) and James and Arik
(1998), the economic growth and environmental impact follow a U-shape. This implies that
when there is economic growth through energy consumption there is severe degradation of
environment. Therefore massive ongoing hydropower dam project in Africa and especially in the
West African countries due to the massive Chinese investments may cause heavy damage on the
environmental side. Yet there is a side effect of such initiative, but there is a need to stimulate the
economy. Along this way of thinking, electricity consumption will definitely attract more foreign
investors to expand their business in a prosperous business environment.

Although the Kuznets Curve deserves much attention in the field of energy use, our study will
not focus on the negative contribution of energy consumption and economic growth nexus.
However, energy does contribute to economic growth and will only have a minor impact on the
environment. Climate change, environment pollution is mainly caused by the three giants: India,
China and USA and so on. The size of the population density, industrialization, and Co2
emissions are so important, they are the most polluter in the world. Environmental degradation in
Africa is most concentrated in the Agricultural are and the economic growth path taken by these
nations less undermine environmental protection. The Kuznets Curve theory may not be
explained and justified in the case of these emerging nations.