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RENEWABLE ENERGY, FOSSIL FUELS, AND
ECONOMIC DEVELOPMENT: EVIDENCE
FROM MIDDLE EASTERN AND NORTH
AFRICAN COUNTRIES
C limate change, global warming, nuclear risks, and limited natural resources
have raised our awareness that sustainable economic development is needed.
The countries of the Middle East and North Africa (MENA) increasingly are
Economic Growth: Figure 1 shows the gross domestic product (GDP) evo-
lution in the selected MENA countries. The nations experienced a moderate but
unstable GDP increase during the period 1980–1990. For the most part, economic
performance in terms of increasing GDP in the MENA region has been rapid
during the last decade (2000–2010). But the magnitude of the increase varies
between countries. Although economic growth decreased in 2009 as a result of the
global economic and financial crisis in many countries, the MENA region was
recording GDP increases in that year. Egypt and Tunisia experienced a GDP
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 211
Figure 1
EVOLUTION OF GROSS DOMESTIC PRODUCT (GDP) BY COUNTRY, 1980–2011
(in logarithmic form)
212 THE JOURNAL OF ENERGY AND DEVELOPMENT
Figure 1 (continued)
EVOLUTION OF GROSS DOMESTIC PRODUCT (GDP) BY COUNTRY, 1980–2011
(in logarithmic form)
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 213
Figure 1 (continued)
EVOLUTION OF GROSS DOMESTIC PRODUCT (GDP) BY COUNTRY, 1980–2011
(in logarithmic form)
214 THE JOURNAL OF ENERGY AND DEVELOPMENT
Figure 1 (continued)
EVOLUTION OF GROSS DOMESTIC PRODUCT (GDP) BY COUNTRY, 1980–2011
(in logarithmic form)
Source: Compiled by authors from the World Bank’s World Development Indicators.
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 215
decrease during 2011 given the substantial levels of political and social un-
certainty. The political and economic outlook for much of the Middle East and
North Africa region remains uncertain.
Carbon Dioxide Emissions: Although the MENA region is not one of the
leading carbon dioxide (CO2) emitters, the northern Mediterranean countries are
currently responsible for the greatest share of CO2 emissions. However, this sit-
uation is expected to change, with the northern and southern regions emitting
equivalent shares of CO2, according to the projected emissions of the Mediter-
ranean countries for the period 2005–2030 (table 1). The important CO2 emissions
increase is expected to take place in the MENA nations. Turkey is the largest
contributor to CO2 emissions in the region, with its level expected to triple by
2030, thus accounting for 43 percent of all MENA countries’ emissions.
This region is most vulnerable to climate change due to water scarcity, a sig-
nificant dependence on climate-sensitive agriculture, and the concentration of
population and economic activity in flood-prone urban coastal zones. Thus, huge
efforts are needed in the region to reduce the pollutant emissions because of
significant fossil fuels consumption. Implementation of climate change legislation
should be pressing for MENA states. According to the projections for the year
2030, transportation and industry will continue to be the main consuming sectors
in the region and industry will account for the largest increase in total final
Table 1
PROJECTED EVOLUTION OF CARBON DIOXIDE (CO2) EMISSIONS FOR SELECTED
COUNTRIES IN THE MEDITERRANEAN, MIDDLE EAST, AND NORTH AFRICA, 2005–2030
Methodology
Cross-Section Dependence Test: There are several potential causes for cross-
section dependence in a panel, which can be either commonly observed or un-
observed factors. Cross-section dependence can arise due to various reasons, such as
omitted observed and unobserved common factors or general residual interdependence
that could remain even when all the observed and unobserved common effects are
taken into account. Therefore, M. Pesaran proposed a test for cross-section dependence
in a panel to find whether the dependence is present in the data.2 The test statistic of
cross-section dependence is defined as:
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 XN 1 XN pffiffiffiffiffiffi
CD ¼ T ij r^ij ð1Þ
N ðN 1Þ i¼1 j¼iþ1
where pij are the pairwise correlation coefficients from the residuals of the aug-
mented Dickey-Fuller (ADF) regressions. The correlations are computed over the
common set of observations Tij for i and j, i 6¼ j. The cross-section dependence
(CD) statistic is asymptotically normally distributed.
Unit Root Test: The autoregressive specification is given by equation (2):
Yit ¼ ri Yit1 þ di Xit þ eit ð2Þ
where i = 1,…,N for each country in the panel; t = 1,…,T refers to the time period;
Xit represents the exogenous variables in the model including fixed effects
or individual time trend; ri are the autoregressive coefficients; and eit are the
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 217
Figure 2
EVOLUTION OF RENEWABLE ENERGY AND FOSSIL FUEL CONSUMPTION BY
COUNTRY, 1980–2011
(in logarithmic form)
218 THE JOURNAL OF ENERGY AND DEVELOPMENT
Figure 2 (continued)
EVOLUTION OF RENEWABLE ENERGY AND FOSSIL FUEL CONSUMPTION BY
COUNTRY, 1980–2011
(in logarithmic form)
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 219
Figure 2 (continued)
EVOLUTION OF RENEWABLE ENERGY AND FOSSIL FUEL CONSUMPTION BY
COUNTRY, 1980–2011
(in logarithmic form)
220 THE JOURNAL OF ENERGY AND DEVELOPMENT
Figure 2 (continued)
EVOLUTION OF RENEWABLE ENERGY AND FOSSIL FUEL CONSUMPTION BY
COUNTRY, 1980–2011
(in logarithmic form)
Source: Compiled by authors from the World Bank’s World Development Indicators.
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 221
stationary error terms. If ri < 1, yit is considered weakly trend stationary and if ri =
1, then yit contains a unit root. The panel unit root tests of J. Breitung and A. Levin
et al. assume a homogeneous autoregressive unit root under the alternative hy-
pothesis whereas K. S. Im et al. allow for a heterogeneous autoregressive unit root
under the alternative hypothesis.3 G. S. Maddala and S. Wu and I. Choi suggest
comparable unit root tests to be performed using the non-parametric Fisher statistic.4
K. Fiore examined the null hypothesis of stationarity for heterogeneous panels.5
Five types of panel unit root tests are computed: the Im, Pesaran, and Shin
(IPS); the Breitug (BRT); the Levin, Lin, and Chu (LLC); and two Fisher-type
tests using the augmented Dickey-Fuller and Phillips-Perron (PP). The tests pro-
posed by A. Levin et al., J. Breitung, and K. S. Im et al. assume that there is
a common unit root process across the cross sections.6 For these tests, the null
hypothesis is that there is a unit root while the alternative hypothesis is that there is
no unit root. The other tests assume individual unit root processes across the cross
sections. For these tests, the null hypothesis is that there is a unit root while the
alternative hypothesis is that some cross sections do not have a unit root. However,
if the panel features cross-section dependence, classical panel unit root tests suffer
from serious size distortions. Moreover, the cross-section dependence problem has
attracted considerable research attention in recent years. In order to address this
problem, M. Pesaran suggests the use of a robust test in the presence of cross-section
dependence in a panel, based on these individual cross-sectional augmented ADF
statistics, denoted as the CADF test.7
Cointegration Test: The use of panel cointegration techniques to test for the
presence of long-run relationships among integrated variables with both a time-
series dimension, T, and a cross-sectional dimension, N, has received much at-
tention recently, especially in the empirical literature. One of the most important
reasons is the increased power that may be gained by accounting not only for the
time-series dimension but also for the cross-sectional dimension. In spite of this,
many studies fail to reject the no-cointegration null, even in cases where cointe-
gration is strongly suggested by theory. A. Banerjee et al. and J. Kremers et al.
refer to this as a common-factor restriction and show that its failure can cause
a significant loss of power for residual-based cointegration tests.8 As a response to
this, J. Westerlund developed four new panel cointegration tests that are based on
structural rather than residual dynamics and, therefore, do not impose any common-
factor restriction.9
P. Pedroni suggests two types of residual-based tests for the test of the null of
no cointegration in heterogeneous panels.10 For the first type, four tests are based
on pooling the residuals of the regression along the within-dimension of the panel
(panel tests include the panel v-statistic, panel r-statistic, panel PP-statistic, and
panel ADF-statistic); for the second type, three tests are based on pooling the
residuals of the regression along the between-dimension of the panel (group tests
222 THE JOURNAL OF ENERGY AND DEVELOPMENT
include the group r-statistic, group PP-statistic, and group ADF-statistic). In both
cases, the hypothesized cointegration relationship is estimated separately for each
panel member and the resulting residuals are then pooled in order to conduct the
panel tests.
The seven Pedroni tests are based on the estimated residuals from the following
long-run model given in equation (3):
Xm
Yit ¼ ait þ b X þ eit
j¼1 ij i jt
ð3Þ
where eit = riei(t–1) + uit are the estimated residuals from the panel regression. The
panel statistics and group statistics depend on the null hypothesis, H0: r ̂i = 1 for all i,
against the alternative hypotheses Ha: rî =r ̂ < 1 and Ha: rî < 1 for all i, respectively,
and where rî is the estimated autoregressive coefficient of the residuals in the ith
unit. For the panel v-statistics, large positive values indicate the presence of coin-
tegration, whereas large negative values for the remaining test statistics indicate
rejection of no cointegration.
Panel Causality Test: The long-run equilibrium coefficients can be estimated
by using single equation estimators such as the fully modified ordinary least
squares (FMOLS) procedures developed by P. Pedroni, the dynamic ordinary least
squares (DOLS) estimator from P. Saikkonen, or the pooled mean group estimator
(PMG) proposed in M. Pesaran et al., or by using system estimators such as the
panel vector autoregressions (VARs) estimated with generalized method of mo-
ments (GMM), the quasi maximum likelihood (QML), or the Swamy random
coefficient model (RCM) estimator.11
The data consist of a panel of eight MENA countries (Algeria, Egypt, Iran,
Israel, Jordan, Morocco, Tunisia, and Turkey), covering the period 1980 to 2011;
the annual data from 1980 to 2011 are obtained from the World Bank’s World
Development Indicators 2014 and the Energy Information Administration’s An-
nual Energy Outlook 2014.12 The data are compiled within a panel data framework
in light of the relatively short-time sample. For modeling, all variables are
expressed in natural logarithms.
Thus, the following model may be employed to explore the causal relationships
between variables:
GDP ¼ b0 þ b1 L þ b2 K þ b3 RE þ b4 FF ð4Þ
Empirical Results
This section presents the results of the unit root, cross-section dependence and
cointegration tests, and the panel causality estimation.
Cross-Section Dependence: As a first step, this study applies the cross-section
dependence (CD) test developed by M. Pesaran to verify the consideration of
cross-section dependence.13 M. Pesaran demonstrates the strong performance of
the CD test for small samples. Table 2 shows the cross-section dependence test
results. By rejecting the null hypothesis of cross-section independence at the
1-percent level, the result clearly indicates the presence of cross-sectional de-
pendence for all variables within the MENA region.
Unit Root Test: We utilized two different panel unit root tests to check
whether the variables were stationary or non-stationary. The panel unit root tests
employed are the IPS and CADF tests, which take into account both heterogeneity
and dependency among countries. The IPS test shows that all variables at level are
non-stationary (table 3), while the null hypothesis of non-stationary is strongly
rejected at the 1-percent significance level at the first difference of all variables.
The CADF test results are reported in table 4. The null hypothesis CADF unit
root tests were not rejected by all variables with the exception of the fossil fuels
variable. On the contrary, the differenced series are stationary leading us to
conclude that a panel unit root is present in the level series.
Panel Cointegration Test: Table 5 presents the panel cointegration test re-
sults. These tests examine the null hypothesis of no cointegration at the 5-percent
significance level against the alternative of cointegration. The results of the panel
cointegration tests are different. The small sample size properties for the seven
statistics have been re-investigated by P. Pedroni via Monte Carlo simulations.14 In
terms of power, for smaller samples the group ADF statistic is the most powerful,
followed by the panel ADF statistic. In our case N = 8 (smaller than 20). The group
Table 2
a
CROSS-SECTION DEPENDENCE (CD) TEST RESULTS
a
GDP = gross domestic product; K = gross fixed capital formation; L = labor force; RE =
renewable energy consumption; and FF = fossil fuel consumption.
224 THE JOURNAL OF ENERGY AND DEVELOPMENT
Table 3
a
THE IM, PESARAN, AND SHIN (IPS) TEST RESULTS
a
*, **, and *** indicate significance at the 10-percent, 5-percent, and 1-percent levels,
respectively; GDP = gross domestic product; RE = renewable energy consumption; FF = fossil fuel
consumption; L = labor force; and K = gross fixed capital formation.
ADF and the panel ADF statistics affirm the absence of cointegration at the
5-percent significance level.
However, this result is based on conventional asymptotic critical values that
assume cross-sectional independence. Thus, J. Westerlund and D. Edgerton em-
ploy a bootstrap technique to deal with dependence among individuals and to
determine the bootstrap p-value (robust p-value).15 In this case, three test statistics
(Ga, Pa, Pt) are significant and reject the null hypothesis of no cointegration among
all variables at the 5-percent level. We conclude that there is a long-run cointe-
gration relationship among all variables (table 6).
Panel Causality Test: In the next part of the analysis we apply three panel
causality estimators to obtain the different elasticity of GDP to L, K, RE, and FF.
The results of the panel estimators are reported in table 7. They indicate that all
variables, with the exception of the L variable, are statistically significant at the
1-percent level. The renewable energy variable has a small positive impact on
Table 4
a
THE CROSS-SECTIONAL AUGMENTED DICKEY-FULLER (CADF) TEST RESULTS
a
*, **, and *** indicate significance at the 10-percent, 5-percent, and 1-percent levels,
respectively; GDP = gross domestic product; RE = renewable energy consumption; FF = fossil fuel
consumption; L = labor force; and K = gross fixed capital formation.
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 225
Table 5
a
PEDRONI COINTEGRATION TEST RESULTS
a
*, **, and *** indicate significance at the 10-percent, 5-percent, and 1-percent levels,
respectively.
GDP with an impact of about 0.07 (GMM) and 0.10 (DOLS), which implies that
a 1-percent increase in renewable energy use increases the GDP by 0.07 percent
(GMM). The fossil fuels variable has the greatest positive impact on GDP, which
is about 0.60 (GMM), 0.33 (RCM), and 0.48 (DOLS).
The first objective of this study is to evaluate the energy-sector situation in the
MENA countries and to explore the causal relationship among economic growth,
renewable energy use, fossil fuels consumption, labor force, and gross fixed
capital formation during the period 1980–2011 in eight MENA nations. The panel
causality results indicate that all variables employed (with the exception of L)
Table 6
a
WESTERLUND TEST RESULTS
a
Number of bootstraps to obtain robust p-values set to 100; optimal lag/lead length =1; modeled
with constant and trend.
226 THE JOURNAL OF ENERGY AND DEVELOPMENT
Table 7
a
PANEL CAUSALITY TEST RESULTS
Variable
K 0.27 *** 0.53 *** 0.20***
L 0.004 0.02 -0.19
RE 0.07*** 0.23** 0.10*
FF 0.60 *** 0.33 *** 0.48***
a
GMM = generalized method of moments estimator; RCM = Swamy random coefficient model
estimator; DOLS = dynamic ordinary least squares estimator; K = gross fixed capital formation; L =
labor force; RE = renewable energy consumption; FF = fossil fuel consumption; and *, **, and ***
indicate significance at the 10-percent, 5-percent, and 1-percent levels, respectively.
have a significant impact on GDP. The physical capital factor plays an important
role in MENA countries to improve the economic growth. Furthermore, renewable
energy consumption has a small positive impact on GDP. The small positive
impact implies that renewable energy use is not yet fully exploited in this region
and not efficiently utilized. While fossil fuels consumption has the greatest pos-
itive impact on GDP, implying that the MENA countries are heavily dependent on
fossil fuels, particularly in such fossil-fuel-producing countries such as Algeria,
Iran, and Egypt.
The consumption of renewable energy offers greater energy security to con-
sumers while promoting sustainable development and reducing dependence on
energy-exporting countries. Renewable energy in the MENA region is still under
utilized and not fully explored. The current energy infrastructure is simply in-
sufficient to promote sustainable development. A strong national political will
along with the necessary policies is indispensable to overcoming these obstacles.
Regional and international cooperation has a significant role to play, especially by
acting as a mechanism to facilitate the transfer of technology and know-how among
MENA countries where efficiency potentials can be attained and the northern
Mediterranean nations, where technologies are available for renewable energy.
To overcome these significant constraints in the deployment of renewable
energy in the MENA region, more research and development is needed in the
renewable energy domain. Adoption of a strong strategy based on strengthened
regional cooperation for the Mediterranean and MENA could be beneficial. This
strategy should include increasing public-sector investment in renewable energy,
implementing positive policies and enacting supportive legislation, and working
to incentivize private-sector investment in renewable energy sources. The basic
question we have approached is what are the perspectives of renewable energy
investment in the MENA region and does it promote economic growth?
MENA: RENEWABLES, FOSSIL FUELS, & DEVELOPMENT 227
NOTES:
1
V. Faraco and Y. Hadar, “The Potential of Lignocellulosic Ethanol Production in the Medi-
terranean Basin,” Renewable and Sustainable Energy Reviews, vol. 15, no. 1 (2011), pp. 252–66.
2
M. H. Pesaran,“General Diagnostic Tests for Cross Section Dependence in Panels,” Cambridge
Working Papers in Economics no. 435 and CESifo Working Paper Series no. 1229, University of
Cambridge, Cambridge, United Kingdom, 2004.
3
J. Breitung, “The Local Power of Some Unit Root Tests for Panel Data,” in Advances in
Econometrics, volume 15: Nonstationary Panels, Panel Cointegration, and Dynamic Panels, ed.
B. H. Baltagi (Amsterdam: JAY Press, 2000), pp. 161–78; A. Levin, C.-F. Lin, and C.-S. Chu,
“Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties,” Journal of Econo-
metrics, vol. 108, no. 1 (2002), pp. 1–24; and K. S. Im, M. Pesaran, and Y. Shin, “Testing for Unit
Roots in Heterogeneous Panels,” Journal of Econometrics, vol. 115, no. 1 (2003), pp. 53–74.
4
G. S. Maddala and S. Wu, “A Comparative Study of Unit Root Tests with Panel Data and
a New Simple Test,” Oxford Bulletin of Economics and Statistics, vol. 61, Special Issue (1999), pp.
631–52, and I. Choi, “Unit Root Tests for Panel Data,” Journal of International Money and Fi-
nance, vol. 20, no. 2 (2001), pp. 249–72.
5
K. Fiore, “Nuclear Energy and Sustainability: Understanding ITER,” Energy Policy, vol. 34,
no. 17 (2006), pp. 3334–341.
6
A. Levin et al., op. cit.; J. Breitung, op. cit.; and K. S. Im et al., op. cit.
7
M. H. Pesaran, “A Simple Panel Unit Root Test in the Presence of Cross-Section Dependence,”
Journal of Applied Economics, vol. 22, no. 2 (2007), pp. 265–312.
8
A. Banerjee, J. Dolado, and R. Mestre, “Error-correction Mechanism Tests for Cointegration in
a Single-equation Framework,” Journal of Time Series Analysis, vol. 19, no. 3 (1998), pp. 267–83,
and J. J. M. Kremers, N. R. Ericsson, and J. J. Dolado, “The Power of Cointegration Tests,” Oxford
Bulletin of Economics and Statistics, vol. 54, no. 3 (1992), pp. 325–48.
9
J. Westerlund, “Testing for Error Correction in Panel Data,” Oxford Bulletin of Economics and
Statistics, vol. 69, no. 6 (2007), pp. 709–48.
10
P. Pedroni, “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple
Regressors,” Oxford Bulletin of Economics and Statistics, vol. 61, special edition (1999), pp.
653–70, “Fully Modified OLS for the Heterogeneous Cointegrated Panels,” Advances in Econo-
metrics, vol. 15 (2000), pp. 93–130, and “Panel Cointegration: Asymptotic and Finite Sample
Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis,” Econometric
Theory, vol. 20, no. 3 (2004), pp. 597–625.
11
P. Pedroni, “Fully Modified OLS for the Heterogeneous Cointegrated Panels,” Advances in
Econometrics, vol. 15 (2000), pp. 93–130; P. Saikkonen, “Asymptotically Efficient Estimation of
Cointegration Regressions,” Econometric Theory, vol. 7, no. 1 (1991), pp. 1–21; M. H. Pesaran,
Y. C. Shin, and R. Smith, “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels,”
Journal of the American Statistical Association, vol. 94, no. 446 (1999), pp. 621–34; and P. A. V. B.
Swamy, “Efficient Inference in a Random Coefficient Regression Model,” Econometrica, vol. 38, no.
2 (1970), pp. 311–23.
228 THE JOURNAL OF ENERGY AND DEVELOPMENT
12
World Bank, World Development Indicators 2014 (Washington, D.C.: World Bank, 2014),
and the U.S. Department of Energy, Energy Information Administration (EIA), Annual Energy
Outlook 2014 (Washington, D.C.: EIA, 2014).
13
M. H. Pesaran, “General Diagnostic Tests for Cross Section Dependence in Panels.”
14
P. Pedroni, “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple
Regressors.”
15
J. Westerlund and D. Edgerton, “A Panel Bootstrap Cointegration Test,” Economics Letters,
vol. 97, no. 3 (2007), pp. 185–90.