Sectoral Value Added — Electricity Elasticities across Countries

Many developing countries face severe electricity constraints, which are reflected in lowelectrification rates, frequent and prolonged outages, and high electricity tariffs, all of which result in lowelectricity consumption that impedes economic development. This study estimates the impact of electricity consumptionon value added through reduced form equations for three sectors: agriculture, manufacturing, and services. It usespanel data on 126 countries for 1996–2014 from the International Energy Agency and World Development Indicatorsdatabases. To control for endogeneity and reverse causality bias in the ordinary least squares estimators, the studyapplies two-step difference and system panel generalized method of moments estimation techniques, which improve theordinary least squares estimates by applying lags of the explanatory variables as instruments that are not correlatedwith the error term and account for countries’ fixed effects generating bias in the coefficients. The estimation resultsindicate that electricity consumption has a significant and positive impact on the manufacturing sector’s value added innon-high-income countries (with an elasticity of 0.022). By contrast, the electricity consumption elasticities areinsignificant in agriculture and services in non-high-income countries, as the production technologies of theseindustries vary substantially across income groups compared with those in manufacturing. Finally, using all thecountries in the sample produce positive and significant results for all sectors, with the highest elasticity of0.036 in manufacturing.