Essay on Energy Consumption and Economic Growth in Brazil: A Decade of Increase

Introduction

Energy is a crucial part of any economy and holds a central position in enhancing social development in the world. Energy consumption and the economy in Brazil have both increased in the past decade. A 4.18% increase in energy usage was recorded between 2003 and 2008. In the same five years, a 4.81% increase in income in the country was recorded. The rate of growth of Brazil's Gross Domestic Product and energy use is 2.81% and 3.43% (Pao and Fu, 2013). Comparison of figures in the past few years is given an excellent insight into the trends in the economy and energy use (Magazzino, 2016).

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In this paper, time series statistics from 1980 to 2008 will be used to analyze this relationship and review the factors that affect both energy use and the economy. Furthermore, this paper will review how energy use in the country affects economic growth using causality models. This is established through testing for stationarity; testing co-integration and Granger causality is estimated using error-correction models. F tests will be used to investigate the level of significance that the causality has on the developed model. All the data used are in natural logarithms, and hence, the time series can be investigated using growth related terms using the first difference method.

Overview of the Association between Economic Growth and Energy Use in Brazil

The choice of energy policies in Brazil is comparable to global energy standards. The country has made improvements in the electricity usage policies that have motivated universal access to electricity in new regions in the country. An estimated 45% of energy needs in Brazil is supplied by renewable sources (Pao and Fu, 2013). Since 1990, the total prime energy requirements in Brazil have doubled. There has been an increasing new for electricity of industries, businesses, and households in the country that has motivated economic growth (Clottey, Sun, Amissah and Mkumbo, 2018). Demand for transport fuels has also improved the way that the economy grows in that newer methods of connecting regions in the country have been developed. With this, as demand for fuel increased and is still increasing, more income and capital are driven into the economy.

Brazil has a significant amount of operational flexibility that is linked to the presence of large hydropower plants that account for over 75% of the total domestic electricity generation (Magazzino, 2016). There has been an increasing expansion of hydroelectric power in the country, but its potential is limited by the remoteness and sensitivity in the environment in the remaining resource. At the moment, there is a 20GW hydropower industry that is built to increase the production of energy and meet the needs of the new industries that are being established in the country (Pao and Fu, 2013). Elasticity in the source of power in the country is also increasing. For instance, the use of natural gas and wind have also been developed in rural regions (Dinh and Shih-Mo, 2014). Such power plants have increased the growth of rural areas and provided jobs for most of the people in the affiliated regions. Diversification in the production lines and transmission capacity has been improved by the influx of international investors that have provided a basis for which energy production and usage in the country can be improved.

The discovery of large offshore oil and gas rigs, Brazil has been recognized as one of the world's advanced oil and gas regions. Petrobras, a national oil company in Brazil, has been granted a central role in the country in regards to strategic regulation of petroleum consumption (Pao and Fu, 2013). With new developments in deep water mining of oil, Brazil is preparing to secure its position as a net oil exporter. Forecasted estimates show that the country could export up to 1 million barrels per day of oil by the end of 2022. This will be a great push in revenue generation that would later increase the GPD with time.

Literature Review

There exist many studies that examine the econometric link between energy use and economic development. The results differ by country and also the methodologies used to develop the inferences. In sum, literature dealing with this topic indicate different results such as bidirectional causality, no causality or unidirectional causality between the two variables.

Depending on policy in a country, causality will differ. A unidirectional causality shows that any energy policies do not affect the economy. Chen, Kuo, and Chen (2007) found this kind of causality in Malaysia, India, and Singapore. A bidirectional causality indicates a two-way system whereby both the economy and energy usage depended on the other. This kind of causality was identified by Morinto and Hope (2004) to exist in Sri Lanka. These results are consistent with those found by Pao and Fu (2013), who found a bidirectional model between energy usage and real GDP growth in Brazil. No causality shows no association exists the two variables. This kind of causality was found by Chen, Kuo, and Chen (2007) to exist in Thailand and China.

Model

From the above literature, it is possible to form a model that relates real GDP and energy usage in Brazil. Using natural logs, the model used in this paper is:

NECi= v0 + v 1NGDPi +ui where NEC and NGDP represent the energy usage and real GDP respectively. U represents the error in the above model, and it is assumed to be independent of the predictor variable, which is energy consumption. Furthermore, the sum of the error terms is assumed to be zero and has constant variance. Income elasticity, in the long run, using the above model is given by the v 1 and is supposed to be higher than zero since the growth in the economy should increase the rate of energy consumption.

Econometric Methodology

The error correction model is used to capture the Granger connection concerning the two variables in the above regression equation. This process is done in three main steps. First, the integration order for both variables in the equation is checked. This information is crucial in co-integration tests since they only apply to variables with the same order. To check the quality and the stationarity of variables, the Phillips-Perron tests are used. After confirming the presence of identical integration order, the Johansen ML technique is employed to assess the co-integration association between the variables in the regression model developed above. The presence of co-integration between variable then creates a way for the use of the Ordinary least squares method and ensures this method does not establish a false regression estimation. The Ordinary least squares method used for the regression method estimates parameters in the equation that are super consistent. Additionally, long-run equilibrium links are confirmed by the presence of co-integration between both variables in the equation. With this information, it can be established that Granger causality is present in economic development and energy usage in at least one direction.

The final step is using the error correction equation to correct any disequilibrium in the two variables. This model is also used to check for causality in the variables that are co-integrated. The model below shows the error correction method used in this paper:

NECt =gh10+ gh11i NECt+i gh12i NGDPt+i d1ECTt+1 1t

j=1j=1

n2k2

NGDPt =gh+20 gh21i NGDPt+i gh22i NECt+i d2ECTt+1 2t

j=1j=1

Where

ECTt1 is given by NECt1 b0 b1NGDPt1

This equation is derived from the association of co-integration between real output and energy usage in the regression equation. NECt has a maximum lag of n. On the other hand, the means are uncorrelated error terms that are serial. d2 represents the rapidness of change in the adjustment coefficient that shows the rate at which the energy consumption variable affects the equilibrium relationship regarding economic growth (Dinh and Shih-Mo, 2014). The model above can measure the short run, and long-run causality relationship between the two variables since both of these variables are presented together with their lags. The econometric association between these two variables is present when H0: gh12i = d1 = 0 is denied.

Findings

The data used for this analysis have two variables, energy usage and real output of Brazil between 1980 and 2008. This data was acquired from the Energy Information Administration. The real output is presented in US dollars. British thermal unit is used to measure energy consumption in Brazil. The mean energy usage for Brazil between 1980 and 2008 was 6823.80 with a standard deviation of 2063.77. The average real GDP for the country between 1980 and 2008 was 577.411, with a standard deviation of 124.920. The average growth rate for energy consumption for the country in 1980 and 2009 was 5.15. On the other hand, the average growth in the real GDP between the same years was 3.25. In comparison to figures from the world, average energy consumption was 2.41 while that for real GDP was 3.11.

From the regression results, a 1.454% increase in energy usage is seen when the real GDP of Brazil grows by 1%. This is an indication that in the long run, the variables in this study have a positive association. Co-integration tests show the presence of a connection association between growth in the real output and energy usage in Brazil. In the short run, a unidirectional connection is present the two variables. This means that through a feedback system, change either variable affects the outcomes in the economy or energy sector in Brazil. However, in the long run, a two-way connection exists amid the two variables regarding dynamics in Brazil. Additionally, a strong Granger relationship exists between the consumption of energy and the economy in Brazil.

From the above results, the econometric relationship between real output and energy usage in Brazil is easier since the causality relationship can be reviewed in several factors that may affect the way both variables. Various constraints in the economy would have different effects on the way that the country's energy usage would be. Such outcomes will be analyzed in the discussion section using these results.

Discussion

From the results, several policy implications can be linked to the association between energy use and the economy in Brazil. Brazil is a developing country that has the potential for growth in many sectors in the economy. Specifically, the energy sector in the company has realized steady growth from 1980 to 2008 (Tarkoma, Siekkinen, Largerspetz, and Xiao, 2014). Within this period, the country has had numerous changes to energy policies, some of which address the way that energy is consumed in the country. Therefore, to comprehend the association between energy consumption and GDP in Brazil, it is critical to review policy changes that have influenced the kind of causality that exists between these two variables.

A two-way connection exists between carbon emissions and real GDP. Additionally, there is a direct association between growth in the economy and energy consumption. Energy is, therefore, one of the most crucial growth engines in an economy. The long terms and short term relationship between the two variables in this study has significant implications in the outcomes regarding economic decisions in a country (Pao and Tsai, 2011). For efficient growth, relevant laws and policies are needed to regulate the nature of the causality relationship between the two variables. It is needed that each of the variables depends on each other, and any shock in the system provided positive growth in the economy (Ma, 2007). However, dependence on high energy use has several negative implications in a country. For instanc...