Financial development and energy consumption in South Africa: An empirical investigation
The relationship between financial development and energy consumption has attracted considerable attention in recent years. Currently, there exist four views on the relationship between financial development and energy consumption. The first view argues that there is a unidirectional causal flow from financial development to energy consumption. The second view is in favour of the energy-led financial development hypothesis. This view maintains that it is energy consumption that drives financial development. In contrast to the first two views, the third view takes a middle-ground stance. This view argues in favour of a bidirectional relationship between these two variables. It argues that both financial development and energy consumption Granger-causes each other. Although the majority of the previous studies on this subject are in favour of finance-led energy consumption, energy-led financial development, or a bidirectional causal relationship between energy and financial development, there are a few studies that support a neutrality hypothesis, which posits that there is no causal relationship between financial development and energy consumption.
Unfortunately, the majority of the empirical studies that have been conducted on the relationship between financial development and energy consumption are mainly concentrated in the Asian and Latin-American countries. Very few empirical studies on this subject exist for the sub-Saharan African countries. The current study, therefore, attempts to examine the causal relationship between financial development and energy consumption in South Africa during the period 1980-2011.
In order to address the omission of variable bias, the study has included economic growth as an intermittent variable between financial development and energy consumption – thereby leading to a trivariate causality model. Unlike some previous studies, this study uses three proxies of financial development, namely: 1) Domestic credit to the private sector as a percentage of GDP as a proxy for financial institutions’ depth; ii) Bank credit to bank deposits as a proxy for financial institutions’ stability; and iii) Bank lending-deposit spread as a proxy for financial institutions’ efficiency.
Using the ARDL-bounds testing approach to co-integration and the ECM-based Granger-causality model, the study finds that there is a distinct long-run unidirectional causal flow from financial development to energy consumption in South Africa. This applies – irrespective of which proxy has been used to measure the level of financial development. Other results show that there is a long-run unidirectional causality from economic growth to both energy consumption and financial development in South Africa.