In the short run, energy efficiency concerns and trade protection hurt each other and growth, but in the long run, not necessarily so: 1980-2010 Latin American Evidence

The paper studies the 3-way causal relationships between energy consumption, output and trade for a sample of 15 Latin American countries over the period 1980 to 2010. The results of our panel cointegration and error-correction model based on GMM estimators highlight a unidirectional relationship running from energy use to real GDP (in the short and long run) and from energy use to exports (in the short run). This confirms earlier results for a smaller sample of countries in the region and shows that energy consumption cuts can have significant economic costs. In contrast to earlier results, we find that these conclusions are more robust in the short than in the long run, suggesting that if technological change (in particular energy efficiency improvements) is accounted for, the growth and trade costs of energy consumption cuts should be lower than often feared. Energy efficiency improvements appear to be happening. The case for energy efficiency improvements further increases with the finding that under current technologies, cutting energy consumption would hurt growth more than an import substitution policy.