Finding the Optimal Way of Electricity Production in Pakistan

Present study reveals the impact of electricity production on economic growth in Pakistan. It covers the period of 1975-2010 and assumes a log-linear relationship between the variables. Both the bounds test and Johansen test for cointegration indicate a unique long-run relationship between the variables. However; higher tariff rates, associated with thermal power plants, are eroding the private business investment in short-run. Based on these facts, this study advocates the promotion of hydropower plants that are beneficial for two reasons. First, it would produce clean power in the country. Second, cost of production would also drop resulting in lower tariff rates. Finally; it finds bi-directional causal relationship between the variables in long-run, whereas no causal relationship has been found in short-run.