Energy Consumption and Economic Growth in Small Island Economies
Mechanism of an economic regulation
Petroleum is the primary source of energy used in transportation and electricity generation for many small Pacific island economies. Noting the growing demand for transportation and infrastructure services, we investigate the long-run association between petroleum consumption and output per worker in Fiji, a small island economy in the Pacific. We use a Cobb-Douglas framework and the ARDL bounds procedure with sample periods from 1980 to 2013. The results show that a 1 % increase in petroleum
... ease in petroleum consumption results in 0.08 % increase in the long run economic growth. The granger non-causality results show that energy consumption causes economic growth, thus confirming energy-led growth hypothesis. The overall results underscore the need for efficient use of energy in general with the impetus to focusing on renewable energy as an important source of economic growth. We argue that energy in whichever form (renewable or non-renewable) is an integral input for economic growth for small island countries in the Pacific. Furthermore, the country is an importer and redistributor of petroleum to other neighbouring islands. The petroleum products comprise of motor gasoline, jet fuel, kerosene, distillate fuel oil, residual fuel oil, and liquefied petroleum gases (LPG). The operations of airlines, ferries, cruise liners and other types of transportation are linked with tourism industry and heavily rely on petroleum. Also, petroleum is used for generating electricity, and the usage increases during the hot and dry season to support the hydro power plants. Considering Fiji as a reference and petroleum as a major type of energy, the study examines the relationship between energy and economic growth, whilst accounting for capital and labour stock, and structural breaks. This study aims to provide impetus to efficient use and management of energy in the Pacific with the overarching aim to promote economic growth and fostering policies to gradually phase out non-renewable energy sources. Key words: petroleum consumption, growth, ARDL bounds approach, causality, structural break, Fiji.