Accepted Manuscript

Renewable energy consumption, economic growth and human development index

Zhaohua Wang, Danish, Bin Zhang, Bo Wang

PII: S0959-6526(18)30592-4
DOI: 10.1016/[Link].2018.02.260
Reference: JCLP 12207

To appear in: Journal of Cleaner Production

Received Date: 29 May 2017

Please cite this article as: Wang Z, Danish , Zhang B, Wang B, Renewable energy consumption,
economic growth and human development index in Pakistan: Evidence form simultaneous equation
model, Journal of Cleaner Production (2018), doi: 10.1016/[Link].2018.02.260.

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 Renewable Energy Consumption, Economic Growth and Human Development Index in
Pakistan: Evidence form Simultaneous Equation Model

Zhaohua Wang a,b,c,d, Danisha,b, Bin Zhang a,b,c,d, Bo Wang a b*

Abstract

The major consumption of energy around the globe is related to human activities. However, it may

be essential to quantify how renewable energy consumption influence process of human

development. This particular area of research still needs to be explored. Thus, this paper explores

the relationship between renewable energy consumption, economic growth and human

development index for 1990-2014 in Pakistan by using Two-Stage Least Square (2SLS) method.

Empirical results reveal that renewable energy consumption does not improve the situation of the

human development process in Pakistan. More, interestingly higher the income of the country the

lower is level of human development. In addition, the CO2 emission is helpful to improve human

development index. Furthermore, trade openness discourages human development process in

Pakistan. Furthermore, causality analysis confirms feedback hypothesis between environmental

factor and human development process in the long run path. These novel findings would help

policymaker and government officials to better understand the role of renewable energy and

economic growth in the human development process in Pakistan.

Keywords: Renewable Energy; Economic growth; Human Development Index (HDI); 2SLS;
Pakistan

*
Corresponding author at: School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China.
Tel.:+ 861068918213; fax: +86 10 68912483 E-mail address: 51022080@[Link] (Bo Wang)
1. Introduction

Energy is considered as backbone of economic development and social well-being, whereas

renewable form of energy is an essential to secure future of climate change. The role of energy has

always been considered as a traditional factor of production. Not only production depends on

energy, but it is also imperative for sustainable economic growth which can only be possible with

a sufficient and sustained supply of energy. Modern forms of energy are an essential input for

attaining Millennium Development Goals (MDGs). Energy plays a key role in creating jobs,

agriculture, transport, commerce and economic development. Energy is also a major device for

eliminating poverty and sustaining human development and all forms of energy contribute to

economic growth (Karekezi et al., 2012). Over the past century increasing energy consumption

has considered the key element in the process of industrialization and economic development

(Warr and Ayres, 2010). There remains the strong relationship between energy consumption and

economic growth. Energy plays a significant role to boost the economy of any country. The

developed nations switch from conventional energy consumption, (e.g., burning of coal, gas, and

Oil) to renewable energy sources to tackle the future consequences of energy. The nexus between

energy consumption and economic growth have widely been investigated (Alper and Oguz, 2016;

Dogan 2016; Inglesi-Lotz 2015; Kahia et al. 2016; Kocak and Sarkgunesi 2017; Rafindadi and

Ozturk 2016).

However, beyond the effect of energy on economic growth, it also affects human wellbeing.

For instance, there is a direct relationship between the existence of energy services and availability

of modern health facilities, education, and communication. The lack of energy services are
indications of poor health facilities, few opportunities for education and development, and little

potential of the population against poverty (Ouedraogo, 2013).

Energy consumption is an important indicator that reflects the level of social development.

For the process of modernization, it is essential to generate an adequate amount of energy to

advance sustainable development (Niu et al., 2013). Renewable energy improves the local

economies, and it is a driver for human development in rural areas (OECD 2012). Also, low human

developed countries can achieve higher development through breaking the vicious cycle of

underdevelopment. For instance, renewable energy production can trigger the economic

development and make these countries able to reach higher human development levels (Kazar and

Kazar 2014). Highly humanly developed countries are consuming much of their resources to

produce renewable energy instead of devoting resources to non-renewable sources for a long

period. Also, economic growth is a crucial factor to reduce poverty and create more resources

which is essential for human development (Morley and Abdullah, 2104). Knowing the importance

of renewable energy consumption for human development process motivate us to examine the

linkage between renewable energy consumption, economic growth and human development to

quantify how renewable energy consumption influence process of human development in Pakistan.

Therefore the innovative contribution of this study is to investigate the relationship between

renewable energy consumption, economic growth and human development index incorporating

trade ration, urbanization, and CO2 emission in the context of Pakistan.

What makes Pakistan as our case study is interesting. The situation of the human development

process in Pakistan is vulnerable, and it is ranked as 146th among 186 countries and territories of

the world in term of human development index (HDI). Furthermore, 49.4 percent of Pakistan’s

population is suffering from multiple deprivations and 11.0% at the vulnerable situation. Second,
the indicators of Gender inequality index (GII) are also not satisfactory. The value of gender

inequality of Pakistan is 0.567 which places Pakistan at a 123rd position out of 146 countries in

the world (Term et al. 2013). The value of HDI for Pakistan has been observed stagnant over last

five years. The main contributors to slow growth in human development are educational inequality

and rising or stagnating income at the global level. The HDI figure of Pakistan was 0.537 in 2013

which were among lowest indexed category, and that placed the country at 146th position out of

187 countries and territories of the world. Third, Pakistan’s economy is also facing many

challenges in the form of terrorism, extremism and energy crises. A massive cost is incurring to

deal with all these challenges which not only harm the poor, children, elders and women but it also

effects crisis-affected population, disables, refugees and temporarily relocated persons. The

pressures of damaging habitat, the trauma of displacement, loss of livelihoods, and disillusionment

enhance these pressures manifold. Pakistan ranked among top 10 vulnerable countries of the world

to the impact of climate change, and cost of adaptation is estimated at $10.7 billion per year for

next 40-50 years (UNDP 2014). The current situation of energy in Pakistan is at vulnerable and

energy crisis in the country is affecting every sector of the economy and human life.

This study contributes to the existing body of knowledge in several ways. First, this paper is as

a first innovative contribution to existing literature, which quantifies the relationship between

renewable energy consumption, economic growth and human development process, as it is evident

that energy consumption, economic growth, and human development are interrelated. The large

amount studies have examined the impact of renewable and nonrenewable energy on growth but

not addressed efficiently. The major consumption of energy around the globe is related to human

activities. This particular area of research still needs to be explored. However, it may be essential

to quantify the relationship between energy consumption and HDI. It is evident that to examine
the link of HDI with renewable energy consumption and economic growth is originality and

novelty of this research study in the field of energy.

Second, this study is the first attempt to investigate the relationship between renewable energy

consumption, economic growth and human development index in Pakistan specific scenario in

explaining the human development process. The current situation of energy and human

development process in Pakistan is at vulnerable and energy crisis in the country is affecting every

sector of the economy and human life. Pakistan is abundant in natural resource, and there are

opportunities for investors to utilize renewable energy resources. It needs not to be emphasized

that Pakistan is not poor but poor management of its natural resources has made it so. Thus it is

need of time to control the worst situation of both energy and human development process in

Pakistan. About 38% populations have no access to electricity. The poor condition of electricity

suffers education, health, and income of the people. This study is an attempt to contribute to the

existing literature and helps policymaker to better understand the role of renewable energy in the

human development process of Pakistan. To analyze the time series data for Pakistan two stages

least square (2SLS) method is used. Before 2SLS we have checked the stationary level of the data.

After the regression estimate, we have detected the causal relationship among variable of

consideration.

The rest of the study designed as section 2 gives an overview of human development index and

energy situation in Pakistan. Section 3 explains literature review and section 4 describes the

methodology and data source. Section 5 explains results analysis and discussion, and lastly, section

6 concludes the study.

The development efforts by Government of Pakistan consolidate on millennium development

goals (MDGs). Specifically, the MDGs contain two important macroeconomics frameworks, i.e.,

new growth framework and poverty strategy paper (PRSP). The new growth framework is a

framework for inclusive growth and increasing total factor productivity whereas, poverty reduction

strategy paper (PRSP) focuses on social and economic policies. HDI measures the level of human

development of any country and allows cross-country comparison, divide countries into three

levels of development, i.e., developed, under developing, or underdeveloped (Hou et al., 2014).

United Nations Development program is regularly issuing an annual review on HDI for more than

two decades. These problems depict the quality of life for people around the world. The value of

HDI for Pakistan has been observed stagnant over last five years (UNDP, 2014).

The electricity mix of Pakistan heavily depends on thermal power that contains 35.2% of total

electricity share. Renewable energy is a quick way to handle current energy crises and pledges

energy security. About 70% of the population in the country is living in a rural area which contains

7 million households. It is estimated that 54% of rural population is living without electricity. This

deprivation has forced them to lead a sub-standard life of poverty and social inequity. As a result,

a lot of resources and workforce cannot be utilized for economic development due to

disengagement from the mainstream (Raheem et al. 2016).

In Pakistan, energy consumption has raised up to 80 percent similar to other developing nation

for last two decades. The TOE has increased to 61million in 2009-2010 which was 34 million in

1994-1995. Pakistan mostly depends on conventional energy to meet energy requirement in the

country. Abundant renewable energy resources are available in the country. There exists the

potential for almost all kind of renewable energy, include, i.e., the wind, solar, biodiesel
production, geothermal, biomass waste to energy production, tidal/ocean energies and micro

hydel/canal fall (Sheikh, 2010). A Rich source for production of wind energy is available in

Pakistan. It is projected that cost line zone has the potential to produce energy of 50,000MW. The

Northern area in the country designed for the production of wind energy in the country. To

operational wind energy, about 5000 villages can be electrified. Punjab has the potency to produce

energy 350MW from its Canal system. Micropower plants in the country can yield energy about

300MW. Due to an agrarian economy of Pakistan, cheap energy is required to its rural population

(Shahbaz et al., 2015). The trend of human development index, renewable energy consumption

and environmental factor can be observed in figure 1.

et al. (2015) found that renewable energy consumption enhances economic growth in Pakistan.
Furthermore, labor and capital also play an important role in economic growth. Ewing et al. (2007)

report the nominal relationship between renewable energy consumption and economic growth for

the United States. Empirical results suggest that high shocks in energy influence economic growth.

On the contrary, Tiwari (2011) examine that renewable energy added much to economic growth

in case of India and proposed that contribution of renewable energy in total energy balance must

increase over time. Also, Arifin and Syahruddin (2011) conclude that economic growth is

augmented by adopting energy conservation policies. The results also confirm growth hypothesis

for Indonesia. Ocal and Aslan (2013) conclude that renewable energy consumption contributes

negatively to economic growth in case of Turkey. Another group of researchers studied causal

relationship between renewable energy consumption and economic growth. For instance, Bowden

and Payne (2010) focus on the causal relationship between economic growth and renewable/

nonrenewable energy consumption for the US using Toda-Yamamoto long-run causality approach.

Bhattacharya et al. (2016) confirm the long run relationship between renewable energy

consumption and economic growth over the period of 1991-2012 for 38 high energy consuming

countries. Menegaki (2011) and Alper and Oguz, (2016) examine the causal relationship between

renewable energy consumption and economic growth for EU-27 and new EU member countries

respectively. The result of the study has confirmed neutrality hypothesis. Also, Menyah and

Wolde-Rufael (2010) investigate the causal relationship between CO2 emissions, economic

growth, nuclear and renewable energy consumption. In the same way, Sadorsky (2009) establish

bi-directional causality between renewable energy consumption and economic growth for 18

emerging economies. Sebri and Ben-Salha (2014) use the multivariate framework to probe the

causal relationship between renewable energy consumption and economic growth over the time

span of 1971–2010 for the BRICS countries. Results of the study confirm the long-run relationship
between renewable energy consumption and economic growth. Also, Saidi and Ben Mbarek (2016)

found that unidirectional causality is running from renewable energy consumption to real GDP per

capita in the case of developing countries. Lin and Moubarak (2014) confirm bi-directional

causality between economic growth and renewable energy consumption in China. Similarly, for

G7 countries Chang et al. (2015) prob the effect of renewable energy consumption on economic

growth. The empirical results affirmed bi-directional causality between the variables.

3.2. Economic growth and Human Development Index (HDI)

The outline of HDI gained prevalent attention, which reveals general disappointment by the

probable real per capita GDP or real wages a quantity of changes in living standards. The HDI is

addressed by way of change as it reached out past buying the force of private incomes to

incorporate measurement of prosperity and personal satisfaction. Furthermore, since per capita

GDP and additional components of HDI, life expectancy, and educational achievement have for

the most part progressed at different rates this permits a country to assess its economic

development in various formative stages (Hou et al., 2014). Through two-way linkage, it has been

studied the relationship between HDI and economic growth. The results of the study have found

that human development has an impact on economic growth, which will strengthen the range of

choices capabilities of masses of a country, economic growth will improve human development

(Ranis, 2004). In the case of India, Khodabakhshi (2011) found that growth has a low impact on

HDI although growth is rising well. Costantini and Monni (2008) analyzed the relationship

between economic growth, sustainability and human development for 179 countries and forced

that complimentary goal could be the achievement of high living standard in the developing

countries for human capital accumulation. The progress of human development plays an important

role to build a sustainable development path. Also,