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Energy efficiency-economic growth nexus: What is the role of income inequality?

Peer Reviewed
1 May 2021

The Sustainable Development Goal (SDG) 7 stresses the importance for economies around the world to double
their efforts in improving energy efficiency. Energy efficiency improvements have been found to trigger economic
growth, albeit empirical evidence to support this claim remains mixed. In a world of widening inequality,
how income inequality dynamics affect the growth and energy efficiency nexus is critical, yet empirical research
investigating the role of income inequality is lacking. This study addresses this concern by examining the
moderating role of income inequality in the economic growth – energy efficiency nexus. The study is based on an
unbalanced yearly panel dataset for 51 African countries from 1991 to 2017. We measure energy efficiency using
the stochastic frontier analysis technique and apply the two-step generalized method of moments (GMM)
technique to examine the direct and indirect effects (moderating through income inequality) of energy efficiency
on economic growth. We conduct several robustness checks to ensure consistent estimates of the parameters. We
find that, directly, improving upon energy efficiency triggers economic growth, but this is compromised in
economies with high-income inequality. The estimated conditional total effect of energy efficiency on economic
growth is lower for countries with higher income inequality compared to countries with lower income inequality.
By implication, reducing income inequality could be one effective channel through which energy efficiency can
trigger economic growth.

Publication | 22 March 2022