Abstract
In this paper we present a discussion on current energy and power situation of the country, and examine the causal relationship between FDI in the energy and power sector, and economic growth in Bangladesh for the period 1972–2010. Related trend reveals a considerable gap between energy production and energy use during this period. Moreover, inflow trend of FDI was also fluctuating over the studied period. We also find that there are robust positive and unidirectional short-run causal relationships running from FDI to energy use and from energy use to GDP growth. Empirical results also confirm a causal relationship for the energy use equation in the long run. Considering the resource and technology gap and requirements for the development of the energy and power sector, FDI should be encouraged to this sector that would be imperative to the targeted GDP growth
Introduction
The integration of developing and least developed countries with the global economy increased sharply in the 1990s with change in their economic policies and lowering of barriers to trade and investment. Foreign direct investment (FDI) is expected to benefit least developed countries like Bangladesh in a number of ways. First, it supplements domestic investment which is low due to lack of resources in these countries. Second, FDI is expected to generate employment, increase domestic competition and bring other positive externalities such as transfer of technological know-how, good practices. Bangladesh offers attractive investment opportunities to foreign investors and has adopted policies to attract FDI into the country. In fact Bangladesh seems to offer one of the most liberal FDI regimes in South Asia.
Energy and power sector is one of those sectors in Bangladesh for which FDI has been encouraged through various policy supports as large investment is required to meet the energy demands of the country. Ref. [20] estimated that the average electricity generation has to increase by 12.5 to 14.5 percent per year to achieve a growth of 8 percent as targeted for FY (Fiscal Year) 2014–15 in the Sixth Five Year Plan (SFYP) ([27]). The Government of Bangladesh (GoB) has to allocate its limited resources among several competing priorities including the social sectors. Thus the major source of investment for energy and power sector1 is the private sector, both domestic and foreign. The extraction of natural gas and local coal and the installation of power plants in the country require large-scale investments. Given the capital intensive nature of the energy and power sector and the technological requirements for the sector, the inflow of FDI has been encouraged by the government through various supportive policies. However, FDI inflow to Bangladesh has not been satisfactory. Lack of good governance, corruption, political instability and turbulence, bureaucratic inertia, and poor law and order situation have been identified as major reasons for the less attractive investment climate in the country.
How far government policies have been useful to bring in adequate FDI in the energy and power sector, and to what extent such investments have contributed to the economic growth of the country are issues to be investigated in order to take an objective view on FDI in the sector. In the context of Bangladesh, very few empirical studies are available which delve into the relationship between FDI in the energy and power sector and economic growth. Most studies looked into the relationship between the overall FDI and economic growth of the country. This paper analyses the trend of FDI flow towards the energy and power sector in Bangladesh, and examines the responsiveness of economic growth to FDI in this sector by estimating an econometric analysis based on long-term data gathered from various official sources. It also discusses issues on governance in the energy and power sector which may influence the flow of FDI in this sector, and suggests policy recommendations for its development through higher investment.
The paper is organized in the following manner. Following the introduction, Section 2 presents the outlook of the energy and power sector. This section describes the capacity and reserves of the energy and power sector in Bangladesh. Various plans and policies on the sector and resource flow towards the development of the sector and resources allocated for the sector through both government channel and FDI are also discussed in this section. Review of literature on the relationship between energy FDI and economic growth in South Asia is presented in Section 3. The contribution of FDI in the energy and power sector towards economic growth in Bangladesh is examined in Section 4. Data and methodology for causality analysis and empirical results of econometric analyses are also presented in this section. Finally, the paper concludes in Section 5 by presenting a few policy recommendations for the development of the sector based on the findings of the study.
Overview of the energy and power sector, and FDI Scenarios
Total energy use in Bangladesh has been doubled between 1994 (14,611.2 kilo-tons of oil equivalent) and 2010 (29,599.33 kilo-tons of oil equivalent) [56]. Increased energy use has led to higher imports of energy as domestic sources could not meet the demand. During 1971–2009, the average growth rate of energy import was 17.35 percent. In 2008, total import of refined petroleum products amounted to 69.97 thousand barrels per day, that was twice the quantity of imports in 1998 (36.47 thousand
FDI and economic growth
In economic literature, discussions on FDI are centered around two major theories; these are modernization and dependency theories. In the modernization theory FDI is considered to promote economic growth on the assumption that growth requires capital investment [2] In recent times, the importance of FDI has been tagged with a number of other necessary conditions. Hence, the new growth theories emphasized the role of technology transfer through FDI since poor countries suffer from lack of
Conceptual framework
Possible sources and directions of any causal relationship, if exists, between economic growth, FDI and energy consumption in Bangladesh can be found by examining the Granger causality. This study employs Augmented Dickey–Fuller (ADF) and Philips–Perron (PP) unit root tests to identify the order of integration of explanatory variables. The Johansen cointegration test is then employed to examine the existence of a long-run equilibrium relationship between the series of the model. The sources and
Summary and concluding remarks
In this paper, we examined the trends and causal relations between FDI, energy use and economic growth for Bangladesh using time series data for the period 1972–2010. It also conveys some short-run and long-run policy implications for energy demand, FDI requirement in the energy sector, and consequent economic growth. Empirical findings lead to important policy implications for the energy and power sector of Bangladesh. First, the evidence of a positive and unidirectional causality running from
Acknowledgement
The authors would like to thank three anonymous referees, Debapriya Bhattacharya, Willem van der Geest, Christopher Gustafson, Brian Mills, and participants at the Centre for Policy Dialogue (CPD)-Chr. Michelsen Institute (CMI) Research Colloquium, on May 2013, in Dhaka for their insightful discussions, comments and suggestions. Excellent research assistance was provided by Nepolean Dewan. This research was funded by the Norwegian Ministry of Foreign Affairs (MFA) under the CPD-CMI Research
References
- P. AgrawalEconomic impact of foreign direct investment in South AsiaJ.A. Adjaye
- The relationship between energy consumption, energy prices and economic growth: time series evidence from Asian developing countries.
- E.S.H. Yu et al.The relationship between energy and GNP: further resultsEnergy Econ(1984)
