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The effect of urbanization and industrialization on energy use.

ABSTRACT

This study investigated the effect of urbanization and industrialization on energy use. The cases of some selected countries in Africa with high population and low population intensity. The study used a panel of emerging economies. The results indicate that income increases energy consumption in both the long run and the short run. In the long run, urbanization decreases energy consumption, while industrialization increases it. Long-run dynamics are important as evidenced by the estimated coefficient on the error correction term. These results have implications for sustainable development. Economic growth policies designed to increase income and industrialization will increase energy consumption. Since most energy needs in emerging economies are currently met by the burning of fossil fuels, economic growth and industrialization policies will be at odds with sustainable development

CHAPTER ONE

INTRODUCTION

1.1     Background of the study

Economic growth and development remain key goals desired by underdeveloped and developing nations. It is the process of transformations in national attitudes, structure and system of production and the distribution of output that leads to improvement in standard of living. According to Wilson (2002), industrialization dates back to the 18th and 19th centuries when the industrial revolution took place. This period was marked by the invention of machines and the setting up of factories and other industrial changes of that period.

Industrialization is the bed rock of economic development to the extent that the process of economic development usually begin with industrialization and impossible without it. The pursuit of industrialization by developing economies is hinged on the theoretical and empirical evidences that development nations themselves are highly industrialized.

Industrialization and economic growth are tied together as it provides a large scope for technological progress, on-the-job training and increases in productivity that give rise to wage increases. In addition, it leads to greater backward and forward linkages, more stable and easily controllable production process than agricultural and the most favorable condition for growth occurs when a proper balance is achieved between industry and agriculture. Industrialization is the process of transforming raw material into consumer goods, producer goods, and services with the help of capital and as well as human resources (Amechi and Azubuike 2004). Today, nations are partitioned into two distinct categories as industrialized and unindustrialized. Developed nation are usually the industrialized nations with very high output figures. Industrialization has a trickle down effect on every other activity sector of the economy and the aggregate economy.

As urbanization and industrialization continue to increase in emerging economies, there are questions as to how these two attributes of modernization will impact energy use. This is of particular concern in emerging economies where urbanization and industrialization are growing rapidly. Between 1980 and 2008, for example, urbanization in Ghana rose from 67.4 percent to 85.6 percent while urbanization in South Africa more than doubled from 19.6 percent to 43.1 percent. If urbanization and industrialization have a significant impact on energy demand, this will have implications for sustainable development. For example, if urbanization and industrialization increase energy usage, then forecasting models that exclude these socioeconomic variables may seriously underestimate future energy needs with the result that sustainable development goals will be more difficult to achieve. The connection between energy consumption and sustainable development is particularly evident if one considers the impact that energy consumption has on greenhouse gas (GHG) emissions. Since 61.4 percent of global GHG emissions come from the production, distribution, and use of energy (Baumert et al. 2005), any serious attempt to control greenhouse gas emissions will have to focus on reducing fossil fuel consumption and increasing renewable energy consumption.

 

1.2     Statement of the Problem

There are underling views that all sectors are not equally important for economic growth. The view that economic growth depends on the expansion of a key sector was formalized in the eighteenth century physiocratic analysis of the production and distribution of agricultural output and has persisted in various forms ever since. The role assigned to industrialization has been a central element of numerous analytical studies.

The thought above may have been what engineered or spurred the efforts made so far by successive governments in Nigeria to promote industrial activities as they contribute immensely to the growth of the economy through employment generation, increases in foreign exchange earnings, acquisition of both semiand highly specialized skills, minimization of the risk of complete foreign dependence and utilization of resources.

The effort towards industrialization began in the pre-colonial period. During the post-independence period of 1960s government policy of import substitution gained prominence and after the civil war of 1970s huge foreign exchange flowed in from the export of crude oil which provided avenue for direct government investments in manufacturing activities. The import substitution policy was followed by the indigenization policy programme aimed at making Nigerians assume full control of many firms operating in the country. Other strategies and incentives have been adopted by government such as export promotion, tax holidays, duty reliefs, provision of loans etc.These efforts saw industry including crude petroleum and natural gas accounting for large percentage of foreign exchangeearning and federally collected revenue.

But the recent downturn in the world oil market calls for a test of the contribution of the industrial sector to economic growth in Nigeria. In 1981 the share of industry in GDP was 51.89% (derived from CBN testified bulletin 2014). A decade later (1991) it rose to 54.89 %. In the successive decades it maintained a steady decrease from 44.15% in 2001 to 42.86% in 2011. It decreased further to 39.03% in 2012 and 34.54% in 2013. These could be attributed to the decline in the output of crude petroleum and natural gas component of industrial activities. The implication of this is that other sub sectors of the industrial sector have been relatively dormant.

Manufacturing activities are classified by the CBN into three components namely: oil refining, cement, and other manufacturing, the share of non-oil industrial activities to the economy has remained insignificant. In 1981, it was 33.34% and decreased 17.88% in 1991. It went further down to 7.52% in 2011with an all time low of 1.61% in 2012.these results are not commensurate with the various government efforts and drive towards industrialization. Could it be that government efforts have been wrongly applied or that the efforts have been too insignificant to yield the desired results;and has the industrial sector contributed significantly to the economic growth of Nigeria?

 

1.3     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.

 

1.4     Justification of the study

This study makes several important contributions to the literature. First, while the relationship between urbanization and energy use has been studied by a number of authors (e.g., Jones 1989, 1991; Parikh and Shukla 1995; York 2007; Poumanyvong and Kaneko 2010), there is no consensus on how urbanization and industrialization affect energy use in emerging countries. This leaves policymakers without a clear basis for action.

Second, while panel data techniques are becoming more common, most existing models linking urbanization, industrialization, and energy consumption use a static model applied to a panel data set. A panel data set offers advantages over a cross-section data set by including a time dimension. This increases the number of observations and allows for variation in both the cross-section and time dimension. This study uses a dynamic framework to model the impact of income, urbanization, and industrialization on energy use. Dynamic models are advantageous because both long-run and short-run impacts are modeled.

Third, previous studies have assumed that the impact of urbanization and industrialization on energy use is homogeneous across countries. This is a very strong assumption to make and one that is unlikely to hold across moderate or large groupings of countries. In this study, panel regression models are estimated using recently developed pooled mean group estimators that allow for heterogeneity in the estimation of the short-run slope coefficients (Pesaran et al. 1999). If panel data exhibit cross-section dependence, estimating models with homogeneous slope coefficients (as in the case of pooled OLS, fixed effects, or GMM) may yield misleading results.

 

1.5     Scope of the study

This study was carried out on the effect of urbanization and industrialization on energy use. The study selected 18 countries in Africa with high population and low population intensity.

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