Urban and Regional Planning Project Topics

The Effect of Urbanization and Industrialization on Energy Use

The Effect of Urbanization and Industrialization on Energy Use

The Effect of Urbanization and Industrialization on Energy Use

Chapter One

Purpose of the study

The purpose of this study is to investigate the relationship between energy use, income, urbanization, and industrialization for a panel of 18 emerging economies. The model is tested using heterogeneous panel regression techniques.



Theories of growth and industrialization

The concept of industrialization has found its way into numerous literatures. It is a system whereby an economy creates or grows wealth through industries and machines. Theories exist on the role of industrialization in economic growth and development.

Structural Change Theory

The structural change models of economic growth analyses the relationship between industrialization and economic growth. The theory formulates the hypothesis that underdevelopment is due to underutilization of resources arising from structural and institutional factors that have their origin in both domestic and international dualism. It theory advocates structural transformations as described in Todaro and Smith (2011) as “the process of transforming an economy in such a way that the contribution to national income by the manufacturing sector eventually surpasses the contribution by the Agricultural sector.

The description given by Jhingan (2011) is that “industrialization plays a major role in the economic development of LDCs. It is a pre-requisite for economic development as the history of advanced countries show. For development to occur the share of the industrial sector should rise and that of the agricultural sector decline”. He went ahead to state that “this is only possible through a policy of deliberate industrialization”.

The critical appraisal of the role of industrialization in economic growth and development presented by Jhingan suggests that “the policy of industrialization followed by LDCs in the early phase of their development has not brought the expected economic and social benefits. The reasons he adduce are that it has failed to reduce inequalities of income and wealth, unemployment and regional imbalances and the pace of development has been uneven with the neglect of the growth of other sectors. In addition, he notes that “ industrialization has created such serious problems as rural stagnation,, the mushrooming growth of the urban class, organizational power failures in government bureaucracies and the excessive high rate of the growth of population and the labour force, among others.

 The Minimum Effort Thesis

This theory developed by Harvey Leibenstein quoted in Jhingan (2011) holds that critical “minimum effort” is the way out of the impasse of underdevelopment by the underdeveloped countries that are characterized by the vicious circles of poverty that keeps them around a low per capita income equilibrium sate. The minimum effort as envisaged by Leibenstein would raise the per capita income to a level at which sustained development could be maintained

The theory supposes that every economy undergo “shocks” and “stimulants”. While a shock has the capacity of reducing per capita income, a stimulant possesses the capacity of increasing it, and it is the stimulation of income-raising factors such as industrialization beyond income-depressing factors that secures the critical minimum and sets the economy on the path of development.

 Stages of Growth Theory

Rowstow in his “Stages of economic growth” theory discussed the various phases undergone by countries as they transit from one level of economic development to another and how industrialization can spur growth and he described this in the take-off stage. Jinghan (2011) describes this stage as “when growth becomes its normal condition”. As prescribed by Rostow, one of the conditions for the take-off is the development of leading sectors in the economy such as industrial sectors and regards this as the analytical bone structure of the stages of economic growth.

Unbalanced Growth Theory

According to the theory of unbalanced growth put up by Hirschman, He posits that a deliberate unbalancing of the economy according to a pre-designed strategy is the best way to achieve economic growth in an underdeveloped nation (Jhingan 2011). This deliberate unbalancing of the economy means heavy investment into a strategic sector of the economy and not all the sectors taken simultaneously. The assumption is that this strategic sector when fully developed catalyses the growth of other sectors and the aggregate national output. For him, investment in strategically selected industries or sectors of the economy will lead to new investment opportunities and so pave way for further economic development, and probably in concurrence with this Jinghan (2011) states thus “growth is being communicated from leading sectors of the economy to the followers, from industry to another, from one firm to another”. Rostows favors unbalanced growth and explains it in terms of leading sectors in an economy.




Econometric Model

The relationship between energy use (e), income (y), urbanization (u), and industrialization (d) can be specified as a dynamic panel data model: eit ieit −1 +β1i yit +β2i yit −1 +β3iuit +β4iuit −1 +β5idit +β6idit −1 + +ν εi it(1)

In Equation (1), countries are denoted by the subscript i (i = 1, . . . , N) and the subscript t (t = 1, . . . , T) denotes the time period. Countryspecific effects are included through νi, and εit represents the random error term. All variables are expressed in natural logarithms and therefore the estimated coefficients can be interpreted as elasticities.

Equation (1) is an example of an autoregressive distributed lag (ARDL) model of order one for each variable. This model is a dynamic version of the static model originally proposed by Jones (1991). Dynamic models are advantageous over static models because dynamic models easily facilitate the calculation of both short-run and long-run effects. ARDL models can be estimated assuming homogeneous slope coefficients or heterogeneous slope coefficients.

The unrestricted ARDL model in Equation (1) can be written as a restricted error correction model.



The empirical analysis is conducted by estimating a series of regression models under different assumptions about the inclusion of quadratic terms. Turning first to the estimated coefficients representing the long-run effects, the estimated coefficient on the income variable is positive, statistically significant, and slightly larger than one in each specification (Table 3). The estimated coefficient on the longrun urban variable is negative and statistically significant. The estimated coefficient on the industry variable is positive and statistically.



Emerging economies are going through a remarkable transformation in economic development that is affected by socioeconomic factors. This study explores the impact that two socioeconomic variables, urbanization and industrialization, have on energy consumption in emerging economies. It is expected that urbanization and industrialization will continue rising in emerging countries and understanding how urbanization and industrialization affect energy consumption is an important and timely topic to study. A better understanding of how urbanization and industrialization affect energy consumption in emerging economies is necessary for a serious discussion about sustainable development in emerging economics.

This study reports results from estimating dynamic panel data models of energy consumption for emerging economies. A dynamic model is useful because both short-run and long-run impacts of income, urbanization, and industrialization on energy consumption can be captured in one model. One of the novel features of this study is the use of recently developed econometric techniques that facilitate heterogeneous parameter estimates.

The estimated coefficient on the income variable is positive and statistically significant in both the long run and the short run. This result is important in establishing that increases in income increase energy use in both the long run and the short run. The estimated coefficient on the industrialization variable is positive and statistically significant in the long run but statistically insignificant in the short run. These results are important in establishing that increases in income and industrialization will increase long-run energy consumption in emerging economies. The estimated coefficient on the error correction term is negative, less than one in absolute value, and statistically significant, which indicates that the system is dynamically stable and converges to a long-run equilibrium. Economic policies that result in increasing income and/or industrialization are expected to increase energy consumption in emerging economies. This means that economic growth policies designed to increase income and industrialization will be in conflict with sustainable development since it is currently the case that most of the energy consumed in emerging economies comes from the burning of fossil fuels.

The long-run impact of urbanization on energy consumption is negative and statistically significant. Urbanization facilitates economies of scale in production, which lowers energy use but requires more transportation to move goods, food, and people into and out of the urban areas, which increases energy consumption. A negative and statistically significant coefficient on urbanization implies that the net effect of urbanization is to reduce energy consumption. For the emerging economies studied, urbanization offers a way to at least partially increase sustainable development. Since the long-run estimated coefficients on urbanization and industrialization are of similar magnitude but differ in sign, the joint omission of these variables from standard energy consumption forecasting models may not be a cause for concern. Environmental policy that fails to take into account the impact of urbanization on energy consumption may be more beneficial, while environmental policy that fails to take into account the impact of industrialization on energy consumption may be less beneficial.

From a sustainable development perspective, the more troubling result from this study is the slightly larger than unity long-run elasticity of income. A 1 percent increase in per capita income increases per capita energy consumption by more than 1 percent. By most estimates, emerging economies are expected to be the fastest growing economies in the near and intermediate futures and fast growing economies demand a lot of energy. For example, the U.S. Energy Information Administration (2012) predicts that energy consumption in South Africa and Tanzania will more than double between 2008 and 2035 and these two countries will account for 31 percent of total world energy demand in 2035. One way that emerging economies can develop in a more sustainable manner is for them to embark on a path of economic growth that uses energy more efficiently and more renewable energy in the fuel mix. A greater usage of renewable energy can be achieved by fuel switching from fossil fuels to renewables.


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