Electricity consumption, Education Expenditure and Economic Growth in Chinese Cities

We examine the city-level cointegrating and Granger causal relationships between economic growth, electricity consumption and human capital during a period of 2003-2012 in China. Applying the Continuously-updated fully modified OLS panel estimation, we find that for China as a whole physical and human capital have similar positive impacts on local economic growth, which are slightly larger than the effect of electricity consumption. A 1% rise in either physical or human capital investment boosts economic growth by 0.07% and the output elasticity of electricity consumption is 0.06. Comparatively, electricity consumption plays a dominant role to boost economic growth in the Center, human capital contributes most to growth in the East, and growth in the West benefits most from physical capital investments. Using a Granger causality test that is suitable for heterogeneous panels, we find a uni-directional causal relationship running from economic growth to electricity consumption in central and western China and a feedback effect in eastern China. In terms of the causal relationship between electricity consumption and education expenditure, electricity Granger causes education expenditure in some eastern Chinese cities and a reverse relationship is observed for cities in Middle China, while for western cities a bi-directional causal link is found. Local policies should therefore vary and be coordinated across government agencies.