Does access to energy cause human development ? A Granger causality check

11 Dec 2018

Not many have looked into the causality between the percentage of a country’s population with energy access and the corresponding rise in its human development score

Access to energy
While energy access is a necessary ingredient in the human development mix, access alone may not guarantee and contribute towards human development goals in the way it is conceived in theory.

Access to clean, affordable, and reliable electricity is often seen as one of the key drivers for attaining higher levels of growth and human development (Gaye, 2007). This is further highlighted by the inclusion of and the importance assigned to the field of energy access in the Sustainable Development Goals set by the United Nations (UN) to achieve worldwide social development. The linkages between energy access and human development may range from improved health (because of the use of cleaner cooking and lighting fuel at home), higher income levels (due to increased livelihood opportunities), to better infrastructural outcomes in schools and hospitals due to access to electricity. Vaccines, for example, need refrigeration. Night schools and colleges have lighting requirements. Further, schools, educational institutes and health centres also have information and communication technology (ICT) requirements, which require access to reliable electricity. In both rural and urban India, households have lighting requirements at night for cooking, household chores, watching TV, children’s homework etc.

A simple correlation between India’s Human Development Index (HDI) score and the proportion of population with access to electricity from 1990 to 2015 shows a high positive correlation (0.98). It thus provides ample cues to examine the subject further. India’s HDI score has risen from 0.43 when it was first conceived and calculated by the UN Development Programme (UNDP) in 1990 to 0.81 in 2015. In the same period, the proportion of India’s population with access to electricity increased from 42.8% to 62.4%. While a clear change is observed between the two variables, their causality remains to be tested.

Although many studies in India and around the world (Tyner, 1978; Kui-yin-chenng and Elspeth Thomson, 2001; Shaista Alan and Mohammed Sahirmudin Butt, 2002; Zhong Xiang Zhang, 2001, et al) have established bidirectional causality between GDP growth and electricity consumption, very few have actually studied the causality between a country’s percentage of population with access to energy, specifically electricity, and the corresponding change in its HDI score. The few studies that look at the relationship between access to energy/consumption and human development include Gaye, 2007; Iyer, 2013; among others.

To understand if it is the higher levels of HDI that lead to higher coverage of population with access to electricity or if it is vice-versa, we test the two variables over a range of 26 years using the Granger causality. Granger causality, a concept of econometrics, is a statistical hypothesis test for determining whether one time series is useful in forecasting another (Granger, C. W. J. 1969). In other words, if there is any causality between two time series variables and their lagged counterparts.

Before running the Granger causality test, it is important to test if the time series variables under consideration are stationary, which is a pre-condition for the test (Gujarati, 2003). Stationarity of the two variables HDI score and proportion of population with access to electricity is checked using the Dickey–Fuller (DF) test.

The results of the DF test show that HDI score is non-stationary, while the proportion of people with access to electricity is stationary. The first difference of HDI is taken to address this, which is found to be stationary. After establishing the stationarity of the proportion of people with access to electricity and the first difference of HDI, a vector autoregression (VAR) is run with these two variables.

Access to energy
Beyond household energy access, reliable energy access for institutions that enable human development e.g. schools, anganwadis, hospitals and health centres may also be prioritised.

The results from the Granger causality test confirm that access to electricity does not necessarily lead to a HDI score. However, previous levels of human development may have led to access. The results provide us some insights behind the nature of causality between a high HDI score and energy access. This also gives us a more detailed perspective and dissects the meaning of a high but faulty correlation score between the two variables as seen through a simple correlation estimate. While energy access is a necessary ingredient in the human development mix, access alone may not guarantee and contribute towards human development goals in the way it is conceived in theory, or, for that matter, the policy thrust it has experienced in the policy space across the under developed countries, particularly in India and Africa. Further, beyond household energy access, reliable energy access for institutions that enable human development e.g. schools, anganwadis, hospitals and health centres may also be prioritised.

Previous levels of higher HDI score may cause access to electricity because this segment of population has already attained some basic levels of socio-economic improvement that gives them access to the second order basic amenities like electricity and cleaner cooking fuel.

Besides, the nature and quality of access to modern energy/electricity/cooking fuel also decides the level of the push and their effectiveness towards attaining better human development outcomes. While India has provided electricity access to 62.4% of its population till 2015 (the number has increased to 85.8% in November 2018), the corresponding HDI scores may not have changed significantly due to poor reliability, and unavailability and lack of affordability of grid electricity. More importantly, energy access or access to reliable electricity alone may not have necessarily caused the relative improvement in India’s human development score in the last 25 years. The achievements in the core human development dimensions like health and education obviously had a much larger role to play. The growth in both health and education expenditure however has largely remained constant and at times rather dismal over the last few years.

In light of this, it remains to be seen what is the extent of influence that access to clean and reliable energy alone has on India’s HDI score in the coming years.

References:

- Alam, shaista; Subihuddin Butt, Mohammad (Dec 2002)."Causality between energy and economic growth in Pakistan: An application of cointegration and error correlation modeling techniques', Pacific and Asian Journal of Energy (PAJE), Vol.12 (2), TERI, New Delhi. P.151-165.

- Amie Gaye, Access to Energy and Human Development, Human Development Report 2007/2008: Fighting climate change: Human solidarity in a divided world

- Damodar N. Gujarati. Basic Econometrics, McGraw Hill, 2003

- Granger, C. W. J. (1969). "Investigating Causal Relations by Econometric Models and Cross-spectral Methods". Econometrica. 37 (3): 424–438

- SDG goal number 7: Ensuring access to affordable, reliable, sustainable and modern energy

- Srinivasan Iyer, Energy Access for Sustainable Human Development, UNDP

- Tyner, Wallance, E (1978)."Energy resources and economic development in India." Allied publishers, Bombay.

- Yin chenng, Kui;Thomson, Elspeth (Dec 2001)."Electricity consumption and economic growth in China: A co-integration analysis." Pacific and Asian Journal of Energy (PAJE), Vol.11 (2), TERI, New Delhi. P 99-108.

- Zhang Zhong, Xiang (2003) "Why had the energy intensity fallen in China's industrial sector in the 1990s. The relative importance of structural change and intensity changes."

Themes
Tags
Economic growth
Energy access
Human development

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