Key Economic Sector Nexus and their Granger Causality with Electricity in Tanzania

Abstract: This thesis uses annual data from 1970 - 2014 to investigate Granger causality between electricity production and key growth contributors in Tanzania. The multivariate analysis is done using Autoregressive Distributed Lag (ARDL) to check for co-integration; the Vector Error Correction (VEC) and Vector Autoregressive (VAR) models are employed for co-integrated and non-co-integrated variables respectively. The sectors investigated are agricultural and manufacturing value addition while also including labour and capital stock as inputs beside electricity. The results show that electricity production does not significantly Granger Cause manufacturing value addition in both short and the long run. It is observed however to significantly Granger Cause agricultural value addition and capital formation in the long run. There is also significant two-way sectoral causality between agricultural and manufacturing value added in the short run. The results of this study suggest unidirectional flows from electricity to one of the growth supporting sectors and capital formation, this indicates energy dependency of this economy’s traditional sector and its stock of accumulated input. Therefore, in Tanzania the agricultural sector seems to be the main driver of this energy led growth hypothesis.