How to Fuel Better? Assessing the Impact of Energy Use on Industrialization in Developing Countries

Abstract

Industrialization is the engine of economic growth. Most of the developing countries shifted from agriculture towards industrialization with the motivation of pursuing higher economic growth since the last few decades. Past studies have shown that there is clear evidence of a strong correlation between energy consumption and economic growth. Hence, this paper aims to contributes on the topic of energy consumption and how it impacts the level of economic growth through industrialization. Our findings show that the association between use of energy at manufacturing sector, which have been proxied using amount of refined energy and petroleum allocated to manufacturing sector, and the development of manufacturing sector, which have been proxied using level of GDP on manufacturing sector, is not a mere correlation.  Estimations using lagged independent variable proves that an increase on use of energy at manufacturing sector has a positive and, to some extent, significant impact on the expansion of manufacturing sector. Furthermore, this study also finds that the effect of use of energy on manufacturing sector on the expansion of manufacturing sector seems to be weaker and even becomes insignificant on the Non-ASEAN Plus countries. One factor that might explain such phenomena is the difference on the commitment from each country to allocate energy for the development of their manufacturing sector. The energy allocation refers to the share of energy which flows to the manufacturing sector instead to other non-manufacturing sector, such as agriculture, services, or even consumption. Higher share of energy which flows to the manufacturing sector indicates a commitment by the government and/or the society to mobilize resource and energy to better leverage the development of the manufacturing sector which ultimately lead to the economic growth. Another factor that might contribute to higher share of energy use is wage as lower wage in ASEAN Plus countries enables the firm and industry to hire more labor; hence expanding their scale of production. The bigger production scale implies they might have a higher economies-of-scale which translated into a more efficient energy use.

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