The Role of Electricity Prices in Structural Transformation: Evidence from the Philippines

The Philippines provides an extreme example of Rodrik’s observation that late developing countries experience deindustrialization at lower levels of per capita income than more advanced economies. Previous studies point to the role of protectionist policies, financial crises, and currency overvaluation as explanations for the shrinking share of the industry sector. We complement this literature by examining the role of electricity prices in the trajectory of industry share. We make use of data at the country level for 33 countries over the period 1980-2014 and at the Philippine regional level for 16 regions over the period 1990-2014. We find that higher electricity prices tend to amplify deindustrialization, causing industry share to turn downward at a lower peak and a lower per capita income, and to decline more steeply than otherwise. In a two-country comparison, we find that power-intensive manufacturing subsectors have expanded more rapidly in Indonesia, where electricity prices have been low, whereas Philippine manufacturing has shifted toward less power intensive and more labor-intensive subsectors in the face of high electricity prices.