Economic policy uncertainty and energy vulnerability in Africa: How crucial is governance quality?

Working paper 944

Abstract

This study examines the effect of economic policy uncertainty (EPU) on energy vulnerability and the moderating role of governance quality. To address concerns of endogeneity, cross-sectional dependence and non-linearity, the study applies the Lewbel Two-Stage Least Squares, Driscoll-Kraay Standard error, and a machine-learning based Kernel Regularized Least Squares techniques for a sample of 26 African countries from 2000 to 2019. We find evidence that EPU deepens energy vulnerability. Assessing the role of governance (government effectiveness, rule of law, voice and accountability, control for corruption, regulatory quality and political stability) in the nexus between EPU and energy vulnerability, we find that although governance indicators do not completely offset the detrimental effect of EPU on energy vulnerability, they reduce the magnitude of the effect. We further document that EPU increases energy vulnerability at medium (50^th) to high (75^th) levels of energy vulnerability. The findings emphasize that improving governance quality is essential for building energy resilience in Africa, particularly under conditions of heightened global economic uncertainty.