ISSN 1750-9653, England, UK International Journal of Management Science and Engineering Management, 6(4): 272-277, 2011 http://www.ijmsem.org/ Testing the relationship between electricity supply, development of industrial sector and economic growth: An empirical analysis using time series data for Pakistan Nazima Ellahi * Lecturer Department of Economics, Foundation University College of Liberal Arts and Sciences, Pakistan (Received 16 August 2010, Revised 6 January 2011, Accepted 20 January 2011) Abstract. Industrial sector of a country is an engine to economic growth, a sustained and incessant supply of electricity is an important determinant of industrial sector performance, which further contributes to better growth of economic indicators. This research study analyzes the joint role of electricity supply and industrial sector development for economic growth of Pakistan, moreover it also finds the impact of electricity shortage on overall economic growth. Theoretically this study is based on endogenous growth model, and empirically it applies Auto Regressive Distributed Lag (ARDL) approach to find short run as well as longrun estimates. Major findings of the study include that labor, capital, electricity supply and industrial sector development play an important role for improving the economic growth of Pakistan and shortage of electricity results in dismal performance of industrial sector. Major recommendations include that, despite there are policies and incentives in the industrial sector, it cannot be improved or contribute to economic growth, unless the problem of electricity is fixed. Keywords: electricity crisis in Pakistan, industrialization, economic growth 1 Introduction Industrialization has been the key determinant to foster high growth indices in developing countries of the world in- cluding China, Indonesia, Korea and Taiwan. These nations have achieved high growth rates due to high industrial de- velopment, which further caused declining poverty trends and high growth statistics (Kniivila, 2008 [10]). It is defined as a process which brings changes in social as well as eco- nomic structure of a country and transforms the living stan- dard of the people by means of increasing the efficacy of fac- tors of production, and technology employed. Development of industrials sector brings substantial changes in real sec- tor of the economy and also leads to raise national income of the country manifold along with creation of employment opportunities. This sector has attained a special attention since long ago as it possesses a potential for improvements in balance of payments, production of exportable goods and import substitution (Saeed, 2002). Electricity is the cheapest form of energy available to domestic as well as industrial sector as an input, where it is directly used as a fuel and for operating the machinery. For the developing countries growth in energy use is closely and positively related to growth of industrialization (World Bank, 2005 [4]). An adequate electricity supply to indus- trial sector is a key factor to foster economic development (Odumosu, 2005 [14]). The electricity generation sector of Pakistan comprise of two major government owned players, Water and Power Development Authority (WAPDA) 1 and Karachi Electric- ity Supply Corporation (KESC) 2 which are engaged in power generation, distribution and transmission along with 15 Independent Power Producers (IPPs) 3 . Furthermore, an additional authority National Electric Power Regula- tory Authority (NEPRA) 4 is also working. With rapid urbanization, and improved living standard of societies there is a high demand of electric appliances which fur- ther raised electricity demand. Government of Pakistan es- timated that, there is a need to enhance the generation capacity by more than 50% to meet the increasing demand (Pakistan Energy Profile, 2008 [23]). This high demand pre- vailing in the market is not met by electricity generated in country, lagging behind the supply, which is responsible for high level load shedding. Industrial sector as well as the domestic sector of the country is facing the huge shortfall of electricity along with high prices which are caused by many reasons. Firstly, Poor planning, as both the sectors have not been precise in esti- * Correspondence to: E-mail address : nazimaellahi@yahoo.com. 1 Water and Power Development Authority is a public owned entity, established during February 1958. Its major resources include Mangla Dam and Tarbela Dam. (Encyclopedia of Earth, 2008) (Encyclopedia of Earth, 2008). 2 Karachi Electric Supply Company is vertically integrated company which is engaged in fulfilling the electricity requirements of Karachi city, its majority share were purchased by government of Pakistan in 1952. Its privatization took place during the fiscal year 2002-03 which resulted in 71% share transfer to private sector. 3 IPPs are independent entities which are operating on the basis of Build Own Opereate (BOO). 4 NEPRA determines electricity rates and it regulates the power generation, distribution and transmission. ©International Society of Management Science And Engineering Management® Published by World Academic Press, World Academic Union