Causality between Disagregated Energy Consumption and Manufacturing Growth in Kenya: an Empirical Approach

Abstract

Besides labour and capital, energy is a critical factor of economic production worldwide. In the circumstances, the role that it plays in policy regimes designed for fast and efficient economic growth cannot be overemphasized. However causality between energy consumption and manufacturing growth is not known in Kenya. Therefore, the study provides analyses of causality between disaggregated energy consumption (electricity and petroleum) and manufacturing growth using data from Kenya between 1970-2010. An integration and cointegration test shows that the variables are  and cointegrated. As a result, the granger causality error correction test was conducted and it indicated that there is granger causality from electricity and petroleum consumption to manufacturing in short and long run periods, and bidirectional causality between manufacturing and electricity consumption in both runs. Thus, the manufacturing sector requires electricity for economical operation. On the other hand, the lack of causality from manufacturing to petroleum consumption is attributed to the fact that very few manufacturing industries in Kenya significantly depends on petroleum because of its cost and price volatilities. Fossil energy cost impacts adversely on prices of manufactured products, consequently making Kenya's manufacture to be less competitive in the regional markets. Poor competition is one major reason for the widespread migration of the manufacturing firms to hydro-energy based technologies in Kenya. Therefore, change in manufacturing technology may significantly change petroleum consumption patterns in Kenya. However, given that there are good indications of petroleum potential within the country, the trend may reverse.

Key Words: Energy consumption; Manufacturing growth; Cointegration; Granger causality; Kenya