The energy-GDP nexus: Evidence from a panel of Pacific Island countries

The Pacific Island countries are small island economies that are increasingly dependent on energy for growth and development, yet highly susceptible to climate change. Thus, the relationship between energy consumption and GDP is crucial for realizing their future development and growth objectives. This article tests for Granger causality and provides long-run structural estimates for the relationship between energy consumption, GDP and urbanization for a panel of Pacific Island countries. For the panel as a whole in the long-run there is bidirectional Granger causality between energy consumption and GDP and these variables exert a positive impact on each other. A 1% increase in energy consumption increases GDP by 0.11%, while a 1% increase in GDP increases energy consumption by 0.23%. The findings suggest that for the panel as a whole these countries should increase investment in energy infrastructure and regulatory reform of energy infrastructure to improve delivery efficiency, continue to promote alternative energy sources and put in place energy conservation policies to reduce unnecessary wastage. These strategies seek to realize the dual objectives of reducing the adverse effects of energy use on the environment, while avoiding the negative effect on economic growth of reducing energy consumption.