The linkage between energy consumption and income in six emerging economies of Asia

Purpose – The purpose of this paper is to examine the short‐ and long‐run causal relationship between energy consumption and gross domestic product (GDP) of six emerging economies of Asia. The importance of identifying the direction of causality emanates from its relevance in national policy‐making issues regarding energy conservation. Design/methodology/approach – This paper employs co‐integration and vector error correction modeling along with generalized impulse response functions and varience decomposition tests to check the robustness of the findings. Findings – The empirical results show that there exists unidirectional short‐ and long‐run causality running from energy consumption to GDP for China, uni‐directional short‐run causality from output to energy consumption for India, whilst bi‐directional short‐run causality for Thailand. Neutrality between energy consumption and income is found for Indonesia, Malaysia, and Philippines. Both the generalized variance decompositions and impulse response functions confirm the direction of causality. Research limitations/implications – These findings have important policy implications for the countries concerned. The results suggest that while India may directly initiate energy conservation measures, China and Thailand may opt for a balanced combination of alternative polices. Originality/value – Many economists and social scientists are claiming that the increased demand for energy from developing countries like China and India is one of the major reasons for the energy price hikes in recent times. In this backdrop, it is justified to search causal relationship between energy consumption and national output (GDP) of some developing countries from Asia. Since the traditional bivariate approach suffers from omitted variable problems, this paper employs a trivariate demand side approach consisting of energy consumption, income and prices.