The development of the different theories of economic growth has generally focused on the primary land, labour and capital inputs, and has generally neglected the role that energy plays in the growth process. The non-reproducible nature of energy, climate change threats, and potential environmental impacts associated with energy production and consumption, and the lack of a direct substitute for hydrocarbons. The irreversible decrease in fuel reserves, coupled to the likely general future increase in energy prices would exacerbate the pressure on the demand for energy. This has re-centered the importance of energy in the economic growth debate. Given this reality, the nexus between energy consumption and economic growth has consequently been and still is widely analyzed and studied.
Stern (2004) reviewed the background theory of production and growth from different perspectives; firstly, from the viewpoint of economists and then natural scientists. He argued that it was crucial to understand of the role of energy in production, the increasing scale of production involved in economic growth, and the institutional ecosystem within which the energy consumption and economic growth nexus operates. From this standpoint, energy is an input to production. The quantum of that impact, in conjunction with other determining variables is of policy relevance as it would indicate how changes in energy consumption would likely impact on GDP in the short- and long-run. This nexus is also likely to result in a derived demand for energy, thus the level of output is one of the factors that can prospectively determine energy demand. Given this situation, there is therefore, the likelihood of a bi-directional causality between the two variables.
Despite supporting the above-mentioned thesis, Stern (2018) mentioned that empirical research on whether energy causes economic growth or vice versa is inconclusive. Kouton (2019) accounted for energy use in production and investigated the relationship between the two variables, but concluded that it depended on the phases of economic cycle in the different African countries. The literature is thus not prescriptive on the above-mentioned relationship; the energy-growth hypothesis can neither be imputed nor generalized for a particular country. Several explanations can be evoked, and they include: countries at various levels of development, methodologies used in such studies, time horizons covered by different studies and the varying the methodologies adopted. The nexus between energy and output therefore needs to be assessed on a specific country basis, considering intrinsic realities and context.
Mauritius is a middle-income small island development state with no oil, natural gas or coal reserves, and is therefore heavily reliant on imported petroleum products to meet most of its energy requirement. In Mauritius, research on establishing the role of energy consumption as a determinant of economic growth is scant. Given its reliance on imported sources of energy; any increase in energy prices or disruption in supply can potentially negatively impact economic growth in Mauritius. In this context, computing the economic output elasticity of energy is of direct policy relevance. Secondly it is also important to ascertain the direction of causality between energy and economic growth, so as to be better able to guide energy policy formulation. Mauritius is facing a dilemma, it wants to increasingly move towards a low carbon economy through energy-saving modes, but at the same time does not want to endanger its economic growth towards a high-income country. The determination of the direction of causality between economic growth and energy consumption is a key input in guiding the formulation of appropriate policies. The contribution of our paper is three-fold. Firstly, we posit that energy consumption plays an important role in economic development tin Mauritius, and aim at quantifying it. Our finding would supplement the existing literature given the specificities of, and realities faced by Mauritius as a net energy-importing small island state, with an aspiration to transit into a high-income economy bracket. Secondly, we make use of cointegration techniques, as key variables are likely to be non-stationary and stochastically trending; to determine the elasticity of energy on economic output in the short-run and long-run. Thirdly, we also investigate any causal relationship between energy consumption and economic growth in Mauritius, while conducting the analysis within a multivariate framework, thus controlling for theoretically-prescribed explanatory variables.
The remainder of this paper is structured as follows: Sect. 2.0 reviews the relevant extant literature, Sect. 3.0 delves into energy consumption and economic growth in Mauritius, Sect. 4.0 describes the methodological approach and the data, Sect. 5.0 presents and discusses the results and Sect. 7.0 finally concludes.