Two Essays on the Long-Run Relationship among Copper Production, Economic Growth, and Energy Consumption: A Case of the Democratic Republic of Congo (DRC)

Abstract

The mining sector has been the main engine of the Democratic Republic of Congos (DRC) economy since its independence in 1960. This sector accounted for two-thirds of its exports and 25% of its GDP (World Bank, 2004). The revenues and other benefit streams generated by the sector, however, have not been used in a wise and/or sustainable way, largely due to the key problems with the sector governance. Until now, mining is the countrys principal industrial activity. This dissertation includes two essays. The first essay investigates the long-run relationships among economic growth as measured by the gross domestic product (GDP), energy consumption, copper production, and copper price in the international market for DRC. The annual time series were utilized and spanned the years 1970-2010. The results of the study revealed that there are no long-run relationships among the aforementioned variables but that short-run relationships exist among them. The cointegration approach was used in this study. The time series properties of the data were analyzed, and a vector autoregressive model with the first difference was used to evaluate the direction of causality among the variables. The key study findings are as follows: bidirectional causality between GDP and energy consumption, unidirectional causality running from GDP to copper production, unidirectional causality running from copper production to energy consumption, and bidirectional causality between copper price and copper production. From the policy perspective, the confirmation of the feedback hypothesis between economic growth and energy consumption warns against the use of policy instruments geared towards restricting energy consumption as they may lead to adverse effects on economic growth. As the electrification rate in DRC is only 11%, it may not be feasible to reduce the energy consumption. What is needed is to make the electricity sector more efficient so that it could produce a greater output per unit of electricity used. Therefore, emphasis should be placed on supply-side options and energy efficiency than on energy-limiting policies. The unidirectional causality from copper production to energy consumption is explained by the increased demand for energy from the mining sector, which is energy-intensive. This sector experienced strong and positive growth in the last decade. Given DRCs extensive dependence on oil product imports for its national needs, to enhance the security of the countrys oil supply and to cope with the increase in the demand for energy due to the countrys mineral activities, the government should come up with energy policies focusing on reducing the countrys dependence on energy imports by prioritizing the development of domestic energy sources. This means increasing power generation by rehabilitating and upgrading the existing equipment and facilities

reinforcing the network

building new hydroelectric plants

promoting wind, solar, and geothermal energy

and pushing forward its on- and off-shore exploration of oil and gas. The second essay investigated the effectiveness of the drivers for increasing the share of a countrys copper production in the international copper market via panel data analysis of a set of 21 countries that spanned 20 years, from 1991 to 2010. The fixed- and random-effects models were used. The determinants were categorized as governance, socioeconomic, and country-specific factors. Variables such as energy consumption, political stability and government effectiveness, and mineral rents are positively significant determinants of increase in market share. Hence, strong and stable political institutions are conditions for market share increase and thus, economic growth. The other variables, such as energy import, foreign direct investment (net inflow), and industry value added and strength to the investor protection index were not statistically significant. In terms of policy, governance plays a crucial role in increasing market share. Therefore, successful linkage development will rely on simultaneous multifactor promotion: skills, savings, business performance, government effectiveness, policy making, and implementation capacity. This means building backward and forward linkages, which requires creating a business environment and public-sector institutions that foster growth. The reform policies of the government should focus on strengthening regulation institutions through capacity building and by ensuring transparency and accountability.