Questing the three key growth determinants: Energy consumption, foreign direct investment and financial development in South Asia
The relationship between energy led growth, foreign direct investment (FDI) led growth and financial development led growth hypothesis has been widely debated inside the academic circles. There is a general consensus that these factors are a major cause of growth and vice versa. The objective of this study is to analyze the causal relationship among energy consumption, economic growth, relative price, ﬁnancial development (FD) and foreign direct investment (FDI) in South Asia using a bivariate and multivariate framework. This study covers a sample from 1975 to 2011. The results of cointegration suggests that variables are cointegrated at their first order i.e, I(1) variables and there has been long-run relationship exist between them. The study finds that both energy consumption and economic growth Granger causes each other in the short and long run. The study supported five growth hypotheses in the context of South Asia and these hypotheses have important policy implications in the South Asian region i.e., a) energy led growth hypothesis, b) energy led financial development, c) FDI led growth hypothesis, d) finance led growth hypothesis and e) FDI led relative prices are supported by the findings from this study. The finding of bidirectional Granger causality between energy consumption and economic growth implies that South Asia is an energy dependent country. Energy is a prominent resource for ﬁnancial sector development in South Asia, further developed financial sector need more energy resources, and this result indicates that energy consumption Granger cause FD and FD Granger cause energy consumption in South Asian region. Moreover, there is a bidirectional link between FDI & economic growth; and between FDI & relative prices of energy in South Asia which explains that FDI increases energy prices in the host countries, whereas brighter growth prospects in the host countries attract an increased flow of FDI in this region. Finally, existing energy infrastructure fails to comply with speedy FDI and thus put strain on the energy channels which leads to higher energy prices. This quest supports the FDI led relative price hypothesis in South Asian region.
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