Graphical Causality Test Approach to the Relationship Between Economic Growth, Energy Consumption, Foreign Trade Balance and Financial DevelopmentAbdullah Göv, Veli Yılancı
The aim of this study is to examine the relationships among economic growth, energy consumption, financial development, and foreign trade for 30 developing countries by employing the least absolute shrinkage and selection operator (LASSO) and truncating LASSO (KLASSO) graphical Granger causality (GGN) approaches. The results of the KLASSO GGN test show a unidirectional causality relationship to exist from economic growth to the trade balance, while the findings of the LASSO GGN test indicate a bidirectional causality to exist between these two series. The study has also determined a unidirectional causality to exist from financial development and energy consumption to economic growth. Overall, the empirical findings support the growth hypothesis and the demand-following hypothesis. Evidence has also been obtained showing economic growth to be an important factor affecting the change in the foreign trade balance among the examined country group and period (1990-2019).
Ekonomik Büyüme, Enerji Tüketimi, Dış Ticaret Dengesi ve Finansal Gelişme İlişkisine Grafiksel Nedensellik Testi YaklaşımıAbdullah Göv, Veli Yılancı
Bu çalışmanın amacı, gelişmekte olan 30 ülke özelinde ekonomik büyüme ile enerji tüketimi, finansal gelişme ve dış ticareti dengesi arasındaki ilişkiyi incelemektir. Analizde LASSO ile Kesik LASSO(KLASSO) Grafiksel Granger Nedensellik(GGN) yaklaşımlarından yararlanılmıştır. Elde edilen sonuçlarda, KLASSO GGN testi ekonomik büyümeden dış ticaret dengesine doğru tek yönlü, LASSO GGN testi ise bu iki değişken arasında çift yönlü bir nedensellik ilişkisinin olduğu sonucunu vermiştir. Bununla birlikte iki testin bulgularında, nedensellik ilişkisinin finansal gelişme ile enerji tüketiminden ekonomik büyümeye doğru tek yönlü olduğu tespit edilmiştir. Ampirik bulgular enerji tüketimi-ekonomik büyüme ilişkisinde büyüme hipotezini, finansal gelişme-ekonomik büyüme ilişkisinde ise talep takipli hipotezi desteklemektedir. Buna ilaveten incelenen ülke grubu ve dönemde (1990-2019) ekonomik büyümenin dış ticaret dengesinin değişimi üzerinde etkisi olan önemli bir faktör olduğuna dair kanıtlar elde edilmiştir.
This study adds the energy consumption, financial development, foreign trade balance, and capital formation values from 30 developing countries to the model as important components of the Cobb–Douglas production function and examines the relationships among economic growth, energy consumption, financial development, and foreign trade balance. The study uses the least absolute shrinkage and selection operator (LASSO) Graphical Granger Causality (GGN; adaptive LASSO) and truncating LASSO GGN approaches developed by
Shojaie and Michailidis (2010a) to determine the direction of any causality relationships among the variables. The study obtained annual data regarding the examined country group for the period 1990-2014 from the World Bank Development Indicators electronic database. The examined country group involves Algeria, Argentina, Bangladesh, Bolivia, Brazil, Cameroon, Colombia, Dominican Republic, Ecuador, El Salvador, Gabon, Guatemala, Jordan, India, Iran, Kenya, Malaysia, Mexico, Egypt, Nicaragua, Nigeria, Pakistan, Panama, Paraguay,
Peru, Philippines, Senegal, Sri Lanka, Thailand, and Türkiye. The study uses the logarithmic form of the analyzed variables.
The logarithmic values for the variables of economic growth, energy consumption, financial development, capital formation, and foreign trade balance are shown respectively as EG, EC, FD, CF, and FTB. The study also uses the series of real GDP per capita (constant 2010 USD), energy use (Kg oil equivalent per capita), domestic credits to the real private sector (percent of GDP), gross capital formation (fixed 2010 USD), and foreign trade balance (percentage of GDP) as the respective indicators of indicators of EG, EC, FD, CF, and FTB.
The LASSO GGN and KLASSO GGN methods test the causality relationships by considering the vector autoregression (VAR) models. When examining the findings from the LASSO GGN and KLASSO GGN tests, a unidirectional causality relationship was determined to exist between the variables of EG and FTB in the KLASSO GGN test going from EG to FTB, while the LASSO GGN test resulted in the presence of a bidirectional causality relationship. The findings show the causality relationship to be unidirectional from EC to EG and to be bidirectional between EG and FD. The presence of a causal relationship from EC to EG supports the growth hypothesis, with many studies being found to have detected this finding (see Stern, 2000; Fatai, Oxley & Scrimgeour, 2004; Khan & Qayyum, 2007; Francis, Moseley & Iyare, 2007; Narayan & Smyth, 2008; Tsani, 2010; Kaushal & Pathak, 2015). The causality relationship between EG and FD going from EG to FD supports the demand-following hypothesis Patrick (1966) had proposed. Accordingly, economic growth is a fundamental factor that determines financial development. The direction of causality was found to go from EG to FD by Xu (2000), Eser and Genç (2010), Ozturk, Darıcı & Kesikoğlu (2011), Ozcan and Ari (2011), Shahbaz, Khan & Tahir (2013), and Kar, Nazlıoğlu & Ağır (2014) and also supports the findings from Boutabba (2014) and Kaushal and Pathak (2015). The findings the study obtained also provide evidence for the existence of a relationship between foreign trade and economic growth. Many studies have also found a one-way causality relationship from EG to FTB as obtained from the KLASSO GGN (see Eser & Genç, 2010; Bajwa & Siddiqi, 2011; Shahbaz, 2012; Boutabba, 2014; Kaushal & Pathak, 2015; Shahzad, Kumar, Zakaria & Hurr, 2017), which confirm the present study’s findings. The two-way causality finding between EG and FTB as obtained by the LASSO GGN also supports the findings from the studies of Bajwa and Siddiqi (2011), Asghar and Hussain (2014), and Kar et al. (2014).
When evaluating the findings from the applied tests in terms of economics, the increases in real GDP per capita can be said to be based on production. In this context, energy use in developing countries has great importance in ensuring economic growth, production, and investment. Energy imports for production can create pressure on the foreign trade balance by producing a negative effect. On the other hand, the export of goods and services produced after the use of energy can reduce the pressures by creating positive effects regarding the foreign trade balance. For economies where production activities are not dependent on energy imports in particular, exports may have a greater positive effect on foreign trade balance.
When evaluating the study’s analytical results, energy consumption and economic growth are seen to have a close relationship. In this sense, priority production areas based on energy consumption should be determined and these resources should be transferred to high value-added production areas in terms of the economy; this structure should positively affect the foreign trade balance by providing high value-added product production and exports. In addition, optimizing income increases within a country must be taken seriously within the scope of alternative and priority policies by creating an economic structure based on domestic inputs. The investment-savings gap should be reduced, and the production structure strengthened by making the capital formation process functional alongside the increased income levels.
Considering that the income increase created in a country will be insufficient for capital formation, that country should make legal, structural, and institutional arrangements for eliminating the problems experienced in the financializationprocess. In order to create healthy financial and financial markets in this context, importance should be given to public and private cooperation, and a structure should be established that will ensure effective coordination. Efficiently distributing resources and making financial markets more efficient in such a
structure that will make capital flow and formation healthier will have positive effects on economic growth, energy markets, foreign trade balance, and financial development.