Assessing the impact of rural electrification on economic growth: a comprehensive analysis considering informal economy and income inequality in Bangladesh

Abstract

Rural electrification, serving as a proxy for energy access, is pivotal for economic growth in Bangladesh. This paper investigates the long-run and short-run effects of rural electrification (RELEC) on economic growth, while also considering the influence of the informal economy, and income inequality. Using an autoregressive distributed lag (ARDL) approach and analyzing data of Bangladesh economy over the period 1976–2020, the study finds that RELEC has a significant positive impact on economic growth in the long run. However, in the short run, RELEC exhibits negative effects on economic growth. FMOLS method is utilized to check the sensitivity that confirms the long run favorable impact of rural electrification on economic growth. The Informal Economy negatively affects growth, while the Gini coefficient has a positive impact in both short and long terms. Vector error correction methodology (VECM) shows bidirectional causality between growth and electrification. This unique study considers diverse determinants amid Bangladesh’s evolving economic landscape. Policymakers are urged to diversify the energy mix to meet rural electrification demand, involving private investment, boosting capacity, and fostering competition. Moreover, there is a necessity to promote various channels such as sustainable agriculture, rural industrialization, poverty reduction through which electricity access may enhance growth. The error correction term (ECT) coefficients show a rather quick adjustment process, demonstrating that the model’s adjustment mechanism is agile.