Electricity supply, industrialization and economic growth: evidence from Nigeria

Purpose - Most studies on electricity-economic growth nexus in the literature are preoccupied with causality, with little attention paid to the transmission mechanisms. The orientation of most of these studies is obviously predicated on their assumption that electricity enters the production function in a Hicks-neutral fashion. Based on the assumption that productivity of capital is affected by electricity supply, this study estimates a production function in which electricity enters the model in capital-augmenting style. The study aims to examine the transmission channels in the electricity-economic growth nexus. Design/methodology/approach - Using monthly data on Nigeria from 1980 to 2013, the study uses the three-stage least square regression technique, which not only controls for possible endogeneity in the model but also allows for tracing the transmission linkages to estimate the relationship between electricity and economic growth in Nigeria. Findings - This study establishes that electricity positively affected economic growth in Nigeria however through its positive effects on industrial output. The direct effect of electricity on economic growth was insignificant. This study thus concluded that the transmission mechanism in electricity-economic growth nexus is the electricity-induced industrial growth. Practical implications - Nigeria should increase her electricity supply (for increased electricity consumption) because this would significantly stimulate her industrialization and economic growth. Originality/value - This study differs from earlier studies in that it did not primarily focus on causality; it examined the transmission channels in the electricity-economic growth nexus. Moreover, it differs from them on the implicit assumptions made by earlier studies that electricity enters the production function in a Hicks-neutral fashion. It rather estimated a model in which electricity enters the production function in capital-augmenting fashion because the study assumed that productivity of capital is affected by electricity supply.