Energy diversification and economic growth: Following the neglected role of productivity growth in an analysis of 131 countries

Energy diversification is closely linked to energy efficiency, ecological and environmental issues and therefore highly important for sustainable outcomes. Besides, energy diversification can directly affect economic growth, since energy is a fundamental production input. Furthermore, it can also indirectly affect economic growth through changes in productivity increase. Based on this theoretical foundation, this study investigates the direct and productivity interactive effects of energy diversification on economic growth for 131 countries and their subgroups classified according to the levels of socioeconomic development, energy diversification, fossil energy abundance and income. For this purpose, the study calculates a diversification indicator according to energy sources consumed by using the normalized Herfindahl-Hirschman index and estimates growth equations for both GDP growth and per capita GDP growth. The findings show that the direct effect of energy diversification is negative. However, by including the interaction term in the models, it was revealed that energy diversification also has a significant positive effect on growth through increased productivity. These findings indicate that different directional mechanisms operate in the nexus of energy diversification and economic growth. Furthermore, the findings for country groups show that OECD, high energy diversified, high- and upper-middle-income countries have the capability to eliminate the negative effects of energy diversification and experience only its positive interactive effect. Besides, the results for groups according to income level also provide insight into the technological difficulties of energy diversification and imply that further diversification is possible in some countries, per se , due to market incentives, and in some others, it requires government support.