Investigating Relationship between Finance and Energy Consumption in Iran (With Emphasis on Industrialization and Urbanization)

Introduction :

Understanding the role of financial development is very important because it allows the policymakers of a country to increase the economic efficiency of the country’s financial system by promoting banking and stock market and attracting foreign direct investment, since with this correct policy, they can affect economic activities and energy demand [1]. Different views consider financial development as the result of economic growth [2-4]. Countries are always trying to expand their necessary institutions, especially their financial institutions, to increase their economic growth. On the other hand, the expansion of financial institutions causes energy demand growth. Recently, there has been a consensus about the vital role of financial development on economic growth[5-8]. On the other hand, the results of some studies show that economic growth has increased energy demand in the United States during the years 1974-1947 [9]. According to studies [10-13], the increase in energy demand in emerging countries is due to the increase in their income. Emerging countries need more production to meet the growing needs of their people, which leads to more energy consumption. So it can be acknowledged that the results of the studies in line with the relationship between energy consumption and financial development with economic growth show the existence of a meaningful relationship between financial development and energy consumption. In economic literature, several control variables are applied to describe the relationship between energy consumption and economic growth. Population growth, urbanization, and industrialization are important factors affecting energy consumption. Rapid population growth leads to urbanization, which may cause more energy use. Industrialization can directly and indirectly affect energy consumption [14]. Urbanization means moving from rural areas to urban areas, which can affect energy consumption in various ways. With increasing urbanization and changing people’s consumption patterns, increasing production in line with increasing demand for goods and services, and increasing public transportation, energy consumption increases [15]. On the other hand, with increasing urbanization, it is impossible to avoid its economic and social consequences, like changing the consumption pattern, intensifying the process of reducing non-renewable resources, and increasing the emission of pollutants. [16]. Due to the discussion of resource limitations and the exhaustion of energy reserves, energy consumption management is very important, and economic policymakers around the world are looking for a way to manage urban growth to reduce the effects of urbanization processes on energy consumption.
According to the above-mentioned materials, this study examines whether the empirical evidence of Iran’s economy also indicates the existence of a relationship between energy consumption and the components of financial development, urbanization, andindustrialization. Also, if there was a relationship between these variables, from 1991 to 2021, how has been their effect? Therefore, the hypotheses of this research are presented as follows:1- Financial development has a positive and significant effect on energy consumption. 2- Industrialization has a positive and significant effect on energy consumption. 3- Urbanization has a positive and significant effect on energy consumption. In many domestic and foreign studies, the impact of financial development, as the main variable, on energy consumption has been investigated, and in some of them, the urbanization or industrialization variable has also been included as a control variable in the estimation of the model. Besides, in some studies, the effect of urbanization or industrialization on energy consumption has been investigated independently. In the upcoming article, the joint effect of financial development, industrialization, and urbanization variables on energy consumption is investigated. According to the surveys conducted by the Statistics Center, Iran has been facing an increasing increase in urbanization in recent years. Currently, 74% of Iran’s population is urban. Therefore, the findings of this research can be effective to help economic policymakers in applying appropriate financial development policies and managing industrialization and urbanization to control energy consumption. In the rest of this article, the theoretical foundations and background of the research will be reviewed, then the data and methodology of the research will be described. Finally, the results will be analyzed.

In this research, using EViews software and autoregression with distributed lag (ARDL) method, the influence of financial development, economic growth, industrialization, and urbanization on energy consumption in Iran during the period of 1991-2021 has been investigated.

The model estimation results show that in the short and long term, the effect of industrial value-added variables and urban population on energy consumption is positive and significant, while the variables of financial development and economic growth have a negative effect on energy consumption. Therefore, in the period studied in this research, the effect of financial development on energy consumption in Iran is negative, but industrialization and urbanization have a positive relationship with energy consumption.

The empirical evidence of this research shows that industrialization and urbanization in Iran increase energy consumption in the long term. Financial development and economic growth also reduce energy consumption in Iran in the long term. Therefore, in line with policies to reduce energy consumption in the country, the creation of a healthy and developed financial system that can attract investors, boost the stock market, and improve the efficiency of economic activities should be encouraged. On the other hand, sustainable economic growth creates more demand for financial services and leads to the development of the financial sector. Therefore, appropriate measures to achieve this sustainable economic growth will help to reduce energy consumption in the country. Although industrialization and urbanization cause an increase in energy consumption in Iran, attention and efforts for their prosperity are very important, as they are important components of economic development, and should never be left out of the development process, the government can control the rapid growth of urbanization by granting energy facilities in rural areas and prevent the increase in energy consumption in the country. Otherwise, to respond to the increasing demand for energy, one must seek to discover new sources and increase the supply, which will result in much higher costs.