Structural Breaks, Hydroelectricity and Economic Growth: New Findings from Malaysia

Abstract

The aim of this study is to examine the relationship between hydroelectricity and real output in Malaysia by utilizing a neoclassical model from 1982 to 2015. Long-term behavior between hydroelectricity and real output was identified based on the result of the autoregressive distributed lag (ARDL) approach to cointegration. Meanwhile, the presence of causality between hydroelectricity and economic growth was established according to the results of the Granger causality via the vector error correction model (VECM). The results of the ARDL approach to cointegration indicate that a relationship exists between fossil fuels and hydroelectricity generation on economic growth. However, it is found that the hydroelectric sector has a higher impact on real output both in the short term and the long term. Next, the results of the Granger causality via VECM finds a negative unidirectional relationship from non-renewable to real output, implying that energy dependence on the conventional energy sector does not benefit the economic expansion of the country. Accordingly, it is important for policymakers to prioritize investments in alternative resources, especially in the hydroelectric sector, to ensure sustainable development in Malaysia. Likewise, ensuring availability of adequate labor is also essential for driving hydroelectric projects in the country.