The Relationship Between Trade Freedom, Energy Consumption and Economic Growth in Developing Countries

Extended Abstract
Introduction
Economic growth in developing countries has been increasingly examined in relation to energy consumption and trade openness, as these factors critically shape production capacity, technological diffusion, and environmental outcomes. Trade openness enhances access to international markets, foreign capital, and advanced technologies, thereby stimulating economic expansion. However, it may simultaneously elevate energy demand and environmental pressures, particularly in developing economies characterized by energy-intensive production structures. Consequently, the nexus among trade openness, energy consumption, and economic growth remains theoretically ambiguous and empirically contested. Elucidating the causal linkages among these variables is essential for formulating evidence-based sustainable development policies in the developing world. Accordingly, this study investigates the dynamic interactions and causal relationships among trade openness, energy consumption, and economic growth within a panel of selected developing countries.
Method
This study employs an unbalanced panel dataset comprising 20 developing countries over the period 2000–2024, with all variables sourced from the World Development Indicators (WDI) database. Economic growth is measured by the annual growth rate of real gross domestic product (GDP). Trade openness is operationalized as the ratio of the sum of exports and imports to GDP. Energy consumption is quantified as per capita energy use (kilograms of oil equivalent). Energy prices are incorporated as a control variable to account for cost-induced variations in consumption patterns.
Prior to estimation, panel unit root tests specifically the Augmented Dickey–Fuller (ADF) and Levin–Lin–Chu (LLC) tests are conducted to assess the stationarity properties of the variables. Long-run cointegrating relationships among the variables are subsequently estimated using the dynamic ordinary least squares (DOLS) estimator, which addresses endogeneity and serial correlation in cointegrated panels. To examine short-run causal dynamics, the study applies both the panel Granger causality test and the Toda–Yamamoto causality procedure. The latter approach ensures robustness against potential misspecification arising from non-stationarity and cointegration by augmenting the VAR order beyond the true integration order of the variables.
Results
The dynamic ordinary least squares (DOLS) estimation results reveal that trade openness exerts a positive and statistically significant influence on both economic growth and energy consumption in developing countries. Enhanced trade integration stimulates production expansion and consequently elevates energy demand. In contrast, energy consumption demonstrates a negative and statistically significant effect on economic growth, reflecting systemic inefficiencies in energy utilization and the predominance of energy-intensive production structures that constrain productivity gains per unit of energy input.
Causality analysis identifies bidirectional Granger causality between trade openness and economic growth, indicating a mutually reinforcing feedback relationship wherein trade expansion drives growth while growing economies further liberalize trade. Furthermore, a unidirectional causal relationship running from energy consumption to economic growth is detected, suggesting that energy availability functions as a prerequisite input for economic activity. Bidirectional Granger causality is also observed between trade openness and energy consumption, implying that trade liberalization increases energy demand while heightened energy consumption facilitates greater participation in international trade.
Conclusion
The findings indicate that while trade openness exerts a positive effect on economic growth in developing economies, it concurrently elevates energy consumption. Inefficient energy utilization may partially offset the growth dividends generated by trade liberalization, thereby undermining the net welfare gains from integration into global markets. Consequently, policymakers should integrate trade openness strategies with complementary measures including energy efficiency improvements, rationalization of energy pricing mechanisms, and targeted investments in clean energy technologies. Integrated trade–energy policy frameworks are essential for reconciling economic expansion with environmental sustainability, thereby curbing energy intensity and alleviating environmental pressures in developing countries.