The Relationship between Urbanization, Economic Growth and Energy Consumption in China: An Econometric Perspective Analysis

Abstract

As the largest developing country in the world, with rapid economic growth, China has witnessed fast-paced urbanization development over the past three decades. In fact, urbanization has been shown to promote economic growth and improve the livelihood of people, but it can also increase energy consumption and further generate energy crisis. Therefore, a better understanding of the relationship between urbanization, economic growth and energy consumption is important for China’s future sustainable development. This paper empirically investigates the long-term equilibrium relationships, temporal dynamic relationships and causal relationships between urbanization, economic growth and energy consumption in China. Econometric models are utilized taking the period 1980–2012 into consideration. Cointegration tests indicate that the variables are found to be of I(1) and cointegrated. Further, vector error-correction model (VECM) indicates that when the short-term fluctuations deviate from the long-term equilibrium, the current changes of energy consumption could eliminate 9.74% non-equilibrium error of the last period, putting back the situation to the equilibrium state through a reverse adjustment. Impulse response analysis intuitively portrays the destabilized changes of the variables in response to some external shocks. However, the impact of energy consumption shock on urbanization and the impact of urbanization on economic growth seem to be rather marginal. Moreover, Granger causality results reveal that there is a bi-directional Granger causal relationship between energy consumption and economic growth, and unidirectional causality running from urbanization to energy consumption and economic growth to urbanization. The findings have important implications for Chinese policymakers that on the path towards a sustainable society, the effects of urbanization and economic growth on energy consumption must be taken into consideration.