The Aggregate Effects of Electrification in the Developing World

Transcription

1 The Aggregate Effects of Electrification in the Developing World Stephie Fried a and David Lagakos b a Arizona State University, b UCSD and NBER Society of Economic Dynamics June 28-30, 2018

2 Electric Generation Capacity Per Capita in Megawatts/(million people) ETH GHA KEN TZA SSA Country Aggregate Effects of Electrification June 2018, Fried and Lagakos 2

3 Electric Generation Capacity Per Capita in Megawatts/(million people) ETH GHA KEN TZA SSA USA Country Aggregate Effects of Electrification June 2018, Fried and Lagakos 3

4 Increase in Generation Capacity Per Capita Since ETH GHA KEN TZA SSA Year Aggregate Effects of Electrification June 2018, Fried and Lagakos 4

5 What Are the Aggregate Effects of Electrification? 1 Intensive margin Firms with grid connections get more electricity Fewer power outages 2 Extensive margin (entry) More firms produce with electricity 3 Capital accumulation Electricity increases MP k HHs accumulate more capital More capital higher labor productivity Aggregate Effects of Electrification June 2018, Fried and Lagakos 5

6 Micro Studies of the Effects of Electrification Allcott, Collard-Wexler, O Connell (2016) Effects of power outages on manufacturing firms in India Eliminating outages increases revenue 5-10 percent Intensive margin only Aggregate Effects of Electrification June 2018, Fried and Lagakos 6

7 Micro Studies of the Effects of Electrification Allcott, Collard-Wexler, O Connell (2016) Effects of power outages on manufacturing firms in India Eliminating outages increases revenue 5-10 percent Intensive margin only Kassem (2018) Effects of grid expansions in Indonesia on firm entry and exit Electrification doubles the number of manufacturing firms Extensive margin only Aggregate Effects of Electrification June 2018, Fried and Lagakos 6

8 Micro Studies of the Effects of Electrification Allcott, Collard-Wexler, O Connell (2016) Effects of power outages on manufacturing firms in India Eliminating outages increases revenue 5-10 percent Intensive margin only Kassem (2018) Effects of grid expansions in Indonesia on firm entry and exit Electrification doubles the number of manufacturing firms Extensive margin only Lipscomb, Mobarak, Barham (2013) County-level effects of increase in hyrdopower dams in Brazil Large effects on housing prices and HDI Migration can t infer aggregate effects Aggregate Effects of Electrification June 2018, Fried and Lagakos 6

9 What We Do: Aggregate Effects of Electrification Quantitative structural macro model Calibrate to match African economies in 2000 Simulate the observed increases in electricity from Impact of electricity on output per worker and welfare Aggregate rate of return to electricity investment Aggregate Effects of Electrification June 2018, Fried and Lagakos 7

10 Model: Three Key Features 1 Structural change Traditional sector: produce output with labor Modern sector: produce output with capital, labor, electricity 2 Grid energy is rationed Prices do not adjust to clear markets Demand > supply power outage 3 Firms can generate their own electricity More expensive Perfect substitute (a kwh is a kwh, regardless of the source) Aggregate Effects of Electrification June 2018, Fried and Lagakos 8

11 Entrepreneur Productivity and Entry Pay entry cost to operate: wω Entry cost scales with wage (Bollard, Klenow, and Li 2016) Aggregate Effects of Electrification June 2018, Fried and Lagakos 9

12 Entrepreneur Productivity and Entry Pay entry cost to operate: wω Entry cost scales with wage (Bollard, Klenow, and Li 2016) After entry, draw productivity z from G(z) G(z) = 1 ( ) 1 λ z Aggregate Effects of Electrification June 2018, Fried and Lagakos 9

13 Entrepreneur Productivity and Entry Pay entry cost to operate: wω Entry cost scales with wage (Bollard, Klenow, and Li 2016) After entry, draw productivity z from G(z) G(z) = 1 ( ) 1 λ z Modern sector entry Pay entry cost again to operate in the modern sector Otherwise, operate in the traditional sector Aggregate Effects of Electrification June 2018, Fried and Lagakos 9

14 Production Technologies Traditional sector Y t i = Az 1 η i L η i Modern sector: Y m i = Az 1 η i [ (1 γ)x ε 1 ε i ] ηε + γe ε 1 ε 1 ε i X i = K α i L 1 α i Hassler, Krusell, and Olvovsson (2012): ε 0 Aggregate Effects of Electrification June 2018, Fried and Lagakos 10

15 Two Ways a Firm Can Get Energy 1 Firms can purchase energy from the grid, E g i Limited and un-predictable Purchase energy from grid fraction v of the period Aggregate Effects of Electrification June 2018, Fried and Lagakos 11

16 Two Ways a Firm Can Get Energy 1 Firms can purchase energy from the grid, E g i Limited and un-predictable Purchase energy from grid fraction v of the period 2 Firms can generate their own energy: E s i Produce energy from final good at constant MC E s i = A s Y s i MC of self-generated energy = 5 MC of grid energy Aggregate Effects of Electrification June 2018, Fried and Lagakos 11

17 Grid Electricity Market Grid electricity supply Government: E g = A g K g Sets p g = MC Grid electricity demand Modern firms Fraction of the period modern firms can access electricity (v) Market clearing Price is fixed, does not adjust to clear market Instead: rationing, v adjusts so that supply = demand Aggregate Effects of Electrification June 2018, Fried and Lagakos 12

18 Structural Change: Modern Sector Entry Decision traditional firms modern firms 1 z Entrepreneurs with z i > z enter the modern sector: π t (z ) = π m (z ) Aggregate Effects of Electrification June 2018, Fried and Lagakos 13

19 Calibrate Model to Match African Economies in 2000 Countries Ethiopia, Ghana, Tanzania, Kenya Key moment Electricity share of modern output: γ Grid electricity share of output: K g,2000 Fraction of households with electricity: Ω m Aggregate Effects of Electrification June 2018, Fried and Lagakos 14

20 Quantitative Exercise Begin in year 2000 steady state Shock economy each year from with observed increase in per capita increase in grid electricity Transition to new SS with 2014 levels of electricity per capita Aggregate Effects of Electrification June 2018, Fried and Lagakos 15

21 Effects of Electrification on GDP per Capita Steady state increase in output per worker (percent) Ethiopia Ghana Kenya Tanzania Large increases in output per worker in Ethiopia and Kenya Aggregate Effects of Electrification June 2018, Fried and Lagakos 16

22 Effects of Electrification on GDP per Capita Steady state increase in output per worker (percent) Ethiopia Ghana Kenya Tanzania Large increases in output per worker in Ethiopia and Kenya Aggregate Effects of Electrification June 2018, Fried and Lagakos 16

23 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline 10.3 Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

24 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline percent bigger increase in grid capital per capita 11.0 Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

25 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline percent bigger increase in grid capital per capita 11.0 More expensive self-generated energy: p s /p g = Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

26 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline percent bigger increase in grid capital per capita 11.0 More expensive self-generated energy: p s /p g = No structural change 7.3 Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

27 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline percent bigger increase in grid capital per capita 11.0 More expensive self-generated energy: p s /p g = No structural change 7.3 Larger electricity share of modern output: (p g E g + p s E s )/Y m = Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

28 Mechanisms: Ethiopia Steady State Increase in Y/L Experiment Increase in Y /L Baseline percent bigger increase in grid capital per capita 11.0 More expensive self-generated energy: p s /p g = No structural change 7.3 Larger electricity share of modern output: (p g E g + p s E s )/Y m = Larger elasticity of substitution: ε = Aggregate Effects of Electrification June 2018, Fried and Lagakos 17

29 Alcott et al. (2016) experiment: Intensive Margin Only Reduce power outages by 7.2 percentage points Partial equilibrium: hold prices and entry constant Focus on modern firms only Increase in modern firm output (percent) Ethiopia Ghana Kenya Tanzania Aloctt et. al (2016): 5-10 percent increase in firm revenue Aggregate Effects of Electrification June 2018, Fried and Lagakos 18

30 Welfare Effects of Electrification Consumption Equivalent Variation Country Transition Steady State Ethiopia Ghana Kenya Tanzania Aggregate Effects of Electrification June 2018, Fried and Lagakos 19

31 Rate of Return to Electricity Investment in 2000 Increase electricity investment by 1% of GDP in 2000 Calculate transition back to year 2000 steady state Rate of return solves (Brooks and Donovan 2017): I g,0 = t=1 β t y t (1 + r) t Rate of Return (percent) Ethiopia Ghana Kenya Tanzania Aggregate Effects of Electrification June 2018, Fried and Lagakos 20

32 The Aggregate Effects of Electrification Quantitative structural model with 3 channels 1 Intensive margin: existing firms get more electricity 2 Extensive margin: entry into modern production 3 Capital accumulation by households Effects on output per worker and welfare Largest effects in Ethiopia Effects driven by relative price of self-generated energy, structural change, and electricity share of modern output Rate of return to electricity investment Big: 7-16 percent! Bigger in countries with smaller initial levels of electricity Aggregate Effects of Electrification June 2018, Fried and Lagakos 21