This paper examines the causality between residential electricity consumption and GDP in Ethiopia by using time series data for the period 1970–2011. Examining the link between economic growth and energy consumption can help policy makers design appropriate policy instruments.
The empirical analysis shows the presence of a feedback system between residential electricity consumption growth and real GDP growth, supporting the hypothesis that the causality between the two variables runs in both directions. In this case, decreases in electricity consumption affect economic growth, which in turn affects energy demand. Any investment in the electricity sector is likely to speed up economic growth in the country. In the long run, while a 10% increase in real GDP per capita brings about a 2.9% increase in residential electricity consumption per capita, an increase in urbanization by 1% leads to nearly a 0.4% decrease in residential electricity consumption per capita.
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