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PolicyResearchWorkingPaper10510

PowerConstraintsandFirm-LevelTotalFactorProductivityinDevelopingCountries

AblamEstelApeti

AlphaLy

DevelopmentEconomics

DevelopmentResearchGroup

June2023

ProducedbytheResearchSupportTeam

PolicyResearchWorkingPaper10510

Abstract

theseverityofself-reportedpowerconstraintsorobstaclesbyfirmsandthemagnitudeofrevenue-basedtotalfactorproductivityloss.Theresultsalsoindicatethattheeffectofpoweroutagesonfirm-levelrevenue-basedtotalfactorproductivitycouldbeinfluencedbythestageofeconomicdevelopment(low-incomecountries,lower-middle-incomecountries,upper-middle-incomecountries),andtheabil-ityoffirmstoengageinresearchanddevelopmentandpurchasebackupgenerators.Thesefindingssuggestthattoensureeconomicdevelopment,thegovernmentshouldprovideastablepowersupplythatcanmitigatethenegativeshocksfacedbymanufacturingfirmsandenhancetheirproductivityandcompetitiveness,allowingthemtodriveeconomicgrowth.

Thispaperanalyzestheeffectsofpoweroutagesandcon-

straintsonmanufacturingfirms’revenue-basedtotalfactor

productivityindevelopingcountries.Theempiricalanalysis

isbasedontheWorldBankEnterpriseSurveysdatasetfor

84countriesover2006–2019.Thepaperstartsbyshow-

ingstatisticallythatfirmsfacingpoweroutagesdifferand

operateinverydifferentenvironmentscomparedtofirms

notfacingpoweroutages,underliningapotentialnonran-

domissueofthetreatmentvariable.Thematching-based

approach(entropybalancing)isdesignedtocontainthis

typeofbias.Itshowsthatpoweroutagesnegativelyand

significantlyaffectfirm-levelrevenue-basedtotalfactorpro-

ductivity,witha9percentlowerunconditionalaverage

productivityforexposedfirmscomparedtononexposed

firms.Moreover,theestimatessuggestaconnectionbetween

ThispaperisaproductoftheDevelopmentResearchGroup,DevelopmentEconomics.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat/prwp.Theauthorsmaybecontactedataly6@oraapeti@.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

PowerConstraintsandFirm-LevelTotalFactorProductivityinDevelopingCountries*

AblamEstelApeti†andAlphaLy‡

JELClassification:L94,D24,O10

Keywords:Powerconstraints,Productivity,Developingcountries

*WethankRajaChakir(INRAE),Jean-LouisCombes(LEO-UCA),AnnaCreti(ParisDauphine),CarolynFischer(TheWorldBank-DECSI),MeganElizabethLang(TheWorldBank-DECSI),andAlexandruMinea(LEO-UCA)fortheirhelpfulcommentsandsuggestions.WearegratefultotheWBGAfricaFellowshipProgramorganizingteam.

†AblamEstelApeti:UniversityofGttingen,Gttingen,Germany,UniversitClermontAuvergne,Universitd’Orlans,LEO,TheWorldBankGroup,E-mail:ablamestel.apeti@uca.fr.

‡AlphaLy(CorrespondingAuthor):ParisDauphineUniversity,ClimateEconomicsChair,ChaireEIEA(MinesParis-PSL&UM6P),EnergyandProsperityChair,TheWorldBank-DECSI,E-mail:aly6@/alpha.ly@dauphine.eu

2

1Introduction

Lowlevelsofinfrastructuredevelopmentandpoorqualityserviceswithinacountrycanincreaseproductioncostsfordomesticfirmsanddiverttheirtechnologicalchoicestosub-optimalsolutions.Thisreducestheirlevelofcompetitivenesscomparedtoforeigncompetitorsingeneral.Furthermore,theeconomicliteraturesuggeststhatbetterpowerinfrastructuresignificantlystimulateseconomicgrowthandimprovesarangeofdevelopmentoutcomes.However,indevelopingcountries,firmsgenerallyhavedifficultyconnectingtothepowergridor,whentheyareconnected,theyfacefrequentscheduledorunscheduledpoweroutages(

Alam

,

2013

).Voltagefluctuationsandthefrequencyofpoweroutagesthereforeleadtomateriallossesandhaveanegativeeffectonmanufacturingcostsandproduction.

Asdriversofeconomicgrowth,amajorpartofthefirmsinthesedevelopingcountriescitepowerasthemajorobstacleoroneofthemainconstraintstotheiractivities(

Asieduetal.

,

2021

).Indeed,poweris

thesecondmostimportantconstraintafteraccesstofinance.Tworegionsareparticularlyaffected,namelySouthAsiaandSub-SaharanAfrica.Infact,about45.9%offirmsinSub-SaharanAfricaand41.2%offirmsinSouthAsiareportthatpowerisamajororsevereconstrainttotheiroperations.Theissueofpowerthusappearstobeofgreaterconcerntothesefirmsthanmanyotherissuessuchascorruptionandtransportinmostoftheseregions.

Giventhemajorroleofmanufacturingfirmsindevelopingcountriesandthegradualimprovementoffirm-leveldataavailabilityandquality,arecentliteratureisemergingontheempiricalassessmentoftheeffectofpowerconstraintsonfirms’performance.However,thisliteratureonpowerconstraintsandfirms’productivityisstillscarceandtheresultsremainratherinconsistentwhencomparedtoeachother.Forexample,somestudiesfindastatisticallysignificantnegativeeffectoftheseconstraintsontheperformanceoffirms(

HardyandMcCasland

,

2021

;

Abebereseetal.

,

2021

),otherstudiesfindastatisticallysignificantbutweakeffect(

GraingerandZhang

,

2017

)andstillothersdonotfindastatisticallysignificantrelationshipbetweenthesepowerobstaclesandtheproductivityoffirms(

Scottetal.

,

2014

).Thislackofconsistencyinthepreviousresultsfromtheliteraturecouldreflectthepotentiallimitationsofthedifferentempiricalapproachesadoptedinthisliteraturesofar.Forexample,

Xiaoetal.

(

2022

)considerpoweroutagesorconstraintsasacompletelyexogenousexplanatoryvariable.Meanwhile,authorslike

Fisher-Vandenetal.

(

2015

);

Allcottetal.

(

2016

);

Coleetal.

(

2018

)or

Elliottetal.

(

2021

)considerthisvariableaspotentiallyendogenousandproposeaninstrumentalvariablestechniquebasedonvariationsinthepowersupplyfromhydroelectricgenerationasaninstrument.

Thispapercontributestotheempiricalliteratureonthepotentialeffectsofpoweroutagesorconstraintsonfirm-levelTFPbyproposinganewmatching-basedapproach(EntropyBalancing)andbyextendingthepreviousresultsfromtheliteraturetothedegreeofseverityofthepowerconstraints.First,contraryto

Xiao

etal.

(

2022

)whopresentthepoweroutagesvariableasanexogenousenergyshock,weshowstatisticallythattheoutagestreatmentvariableisnotrandomformanufacturingfirmsindevelopingcountries.Second,inordertocompensateforthelimitslinkedtotheinstrumentationtechniquebythehydroelectricvariableinsomeanalysisofthisliterature(asin

Fisher-Vandenetal.

,

2015

;

Allcottetal.

,

2016

;

Coleetal.

,

2018

;

Elliottetal.

,

2021

)andtoproperlyaccountforpotentialendogeneitywithrespecttoexposuretopowerconstraints,butalsotoaddressthelackofabalancedpanelstructure(surveydata),weuseamatching-basedapproach(EntropyBalancing).Ouranalysisisbasedontheideathatexposuretoconstraintsrepresents

3

atreatment.Thefirmsexposedtotheconstraintsconstitutethetreatmentgroup,theunexposedfirmsconstituteapotentialcontrolgroup.Third,weestablishastronglinkbetweentheseverityofself-reportedpowerconstraintsorobstaclesbyfirms(minor,moderate,major,severe,andbiggest)andthemagnitudeofproductivitylossforfirms.Inotherwords,thegreaterthelevelofpowerconstraintsself-reportedbyafirm,thegreatertheeffectoftheseconstraintsonitsproductivity,andviceversa.

Broadly,ourapproachshowsthattheoveralleffectofpoweroutagesonrevenue-basedtotalfactorproductivity(TFPR)isnegativeandstatisticallysignificant.Additionally,weshowthatothermechanismssuchastheacquisitionofback-upgenerators,orinvestmentinR&Dallowfirmstofightagainstthesevereconstraintsencounteredinthepowersector.Wealsoshowthatconstraintsinthepowersectoraffectfirmrevenue-basedtotalfactorproductivitymainlythroughthechannelofnon-optimalreorganizationoffirmoperations(reducedcapacityutilization)andthroughthechannelofproductionlossesduetopoweroutages.

Therestofthepaperisasfollows:theliteraturereviewinsection

2

,thetheoreticalframeworkinsection

3

,dataandmodelinsection

4

,empiricalresultsinsection

5

andsection

6

concludes.

2Relatedliterature

Someanalyseshavefocusedontheeffectofinputsmarketconstraintsonproductivity(Prescott

,

2002

;

HsiehandKlenow

,

2009

;

Jones

,

2011

).Theseanalysessuggestthatinputmarketconstraintspreventtheachievementofanefficientallocationofresources,thusreducingtotalfactorproductivity.Inthesamevein,

Brandtetal.

(

2013

)findthatTFPlossesduetoinputmarketconstraintsarestillhighinmanycountries.Morespecificallyinourfieldofresearch,energymarketconstraintsarealsoassessed.Indeed,

Shiand

Sun

(

2017

)findthatenergypriceinstabilitynegativelyaffectsoutputgrowthintheshortandlongrun.Asfor

Bernanke

(

1983

),heshowsthatuncertaintyaboutenergypricescaninducefirmstopostponetheirinvestmentdecisions,thusleadingtoadeclineinoveralloutput.Similarly,

ElderandSerletis

(

2009

)suggestthatoilpriceuncertaintymaytendtoreinforcethenegativeresponseofproductiontooilshocks.Finally,

Chengetal

.(

2019

)showthatanincreaseinoilpricevolatilityreducesrealGDPandinvestment,whileadecreasestimulatestheeconomy.

Withrespecttopowersectorconstraints,

Coleetal.

(

2018

)findthatpoweroutageshaveanegativeandsignificanteffectonfirmsalesin14Africancountries.Theeffectfoundislargerwhenendogeneityistakenintoaccount.

1

Theyalsofindthatpoweroutagesaffectfirmprofitsandtotalfactorproductivity.Furthermore,alsousingahydro-instrumentalvariablestrategy,

Elliottetal.

(

2021

)showthatVietnamesefirmswithlessreliablepowerhavelowerproductivityin2005and2015.Theyconcludethatreducingthelengthofpoweroutagesby1%wouldhaveincreasedoverallrevenuesby4.66billionUSD.Inthesamelineofinstrumentalvariables,

Allcottetal.

(

2016

)alsousechangesinpowersupplyfromhydroelectricgenerationasaninstrumenttoestimatetheeffectofpoweroutagesontheIndianmanufacturingsector.Finally,asimilarapproachistakenby

Fisher-Vandenetal.

(

2015

)whoexaminetheeffectsofpoweroutagesonfirmperformanceinChina.

Meanwhile,theeconomicliteratureremainsrelativelywell-suppliedontheothercommondeterminantsoffirm-levelperformance.Amongthesedeterminants,wecanmentioninternationaldevelopmentaid,fi-nancialinclusion,bankconcentration,financialinnovation,inflation,ortaxation.Internationalaidisakey

1Useofahydro-instrumentalstrategy.

4

factorinimprovingtheperformanceoffirmsbyalleviatinginfrastructureandfinancingconstraintsinde-velopingcountries.Inthissense,

ChauvetandEhrhart

(

2018

)findapositiveeffectofforeignaidonthegrowthoffirms’sales.Furthermore,

ChauvetandJacolin

(

2017

)findthatfinancialinclusion,i.e.thedis-tributionoffinancialservicesinfirms,hasapositiveeffectonfirmgrowth.Thispositiveeffectisamplifiedwhenthereisgreatercompetitionbetweenbanks.Inthesamevein,

Leeetal.

(

2020

)showthatfinancialinclusionhelpsfirmstoincreasetheirsalesgrowth.Ontheotherhand,theyparadoxicallyfindthatfinan-cialinnovationhasanegativeeffectonthegrowthrateoffirms’sales.Intheirpaper,

Bambeetal.

(

2022

)showthatinflationtargetingincreasesthegrowthandproductivityoffirmsintargetedcountriescomparedtonon-targetedcountries.Indeed,inflationtargetingimprovestheperformanceofdevelopingcountriesbyreducingthelevelandvolatilityofinflation(

LinandYe

,

2009

).Finally,

ChauvetandFerry

(

2021

)showthattaxrevenuesboosttheperformanceoffirmsthroughthefinancingofessentialinfrastructureforbusinessdevelopment.

Inthispaper,wemainlycontributetothisliteratureontheeffectsofpoweroutagesorconstraintsbyproposinganewmatching-basedapproach(EntropyBalancing)andbyextendingthepreviousresultsfromtheliteraturetothedegreeofseverityofthepowerconstraints.

3Theoreticalframework

Themainpurposeofthistheoreticalframeworkistwofold.First,wehighlightthedifficultyofdirectlydrawingconclusionsabouthowenergyshockswouldaffectfirm-leveltotalfactorproductivityfromathe-oreticalframework.Thesecondmainobjectiveistoestablishtheoreticallythatproductivitylossincreaseswiththeseverityofenergyconstraintsfacingmanufacturingfirms.

Althoughsomeofthestudiesinthisliteraturepointoutthateconomicgrowth,forinstance,decreasesintheeventofanenergyshock(

Chengetal

.,

2019

;

Sadorsky

,

1999

),weshowinthistheoreticalframe-workthatthiscouldhaverathercontrastingeffectsonthetotalfactorproductivityofmanufacturingfirmsdependingonthemarketstructure.Sincepowerconstraintsareanimportantmanifestationofinputmarketdistortion,ourtheoreticalframeworkiscloselyrelatedtotheliteratureontherelationshipbetweeninputmarketdistortionandfirm-leveltotalfactorproductivity.

Thistheoreticalframeworkofintermediategoodsandoutputpriceadjustmentcausedbyanenergyshockisbasedonthatof

HsiehandKlenow

(

2009

)and

Xiaoetal.

(

2022

).Wederivetheexpressionfortotalfactorproductivityatthefirm-levelandanalyzetheeffectofenergyshocksonfirm-levelTFP.

Weassumemonopolisticcompetitionwithheterogeneousfirmsthatfacedifferentdegreesofenergyconstraints.Indeed,thereareseveralreasonswhyweconsiderpowerconstraintstobefirm-specificratherthansector-specificinthisframework.First,thepowerinfrastructureofacountryorregioncanvaryconsiderablyintermsofreliabilityandquality.Somefirmsmaybelocatedinareaswithbetterpowerinfrastructure,whileothersmaysufferfrequentconstraintslikeoutagesduetoinadequateinfrastructureormaintenance.Second,somefirmsmayhaveinvestedinbackupgeneratorsoralternativepowersourcestomitigatetheimpactofpowerconstraints.Thesefirmswouldbelessaffectedbygeneraldisruptionstothepowersupplythanthosewithoutsuchback-upsystems.Third,firmsinthesamesectormayhavedifferentoperationalrequirementsandproductionprocesses.Somefirmsmaybehighlydependentonacontinuouspowersupply,suchasthoseinvolvedinrefrigerationorotherelectricity-intensiveoperations.Ontheother

5

hand,somefirmsmayhavemoreflexibleproductionprocessesthatcanadapttotemporarypowersupplyinterruptions.Finally,firmsmayadoptdifferentmechanismstocopewithpowerconstraints.Forinstance,somefirmsmayadjusttheirproductionschedules,switchtooff-peakhoursorimplementenergy-savingmeasuresduringoutages,helpingthemtominimizethenegativeimpactofpowerdisruptions.

Inafullycompetitivefinaloutputmarket,thereisasinglefinalproductY,anditisaggregatedfromtheoutputYsofSmanufacturingindustries(orbranches)bythefollowingproductionfunction:

SS

s=1s=1

Y=∏Ysθs,where∑θs=1(1)

whereθsisanoutputelasticityparameterforindustrys.Minimizingproductioncostsimplies:

PsYs=θsPY(2)

PsisthepriceoftheoutputYsoftheindustrys,andthepriceofthefinalproductisP≡∏=1()θs.The

outputYsoftheindustrysistheCESaggregateofMstypesofdifferentiatedproducts:

σ

(3)

Ys=(Ysiσ1)σ−1

whereσistheelasticityofsubstitutionbetweenthedifferentiatedproductswithintheindustrys.

TheproductionfunctionofeachdifferentiatedproductisgivenbyaCobb-Douglasfunctionofthefirm’sTFPandthreeproductioninputs,includingcapital,laborandenergy:

Ysi=AsiKsLE−αs−βs

(4)

whereαsdenotesthecapitalshareofindustrys,βsdenotesthelaborshareofindustrys,(1−αs−βs)denotestheshareofintermediateproductsortheshareofenergyofindustrys,andAsidenotesthelevelofTFPoffirmi.Notealsothatthisframeworkallowsinputsharestodifferbetweendifferentindustriesbutnotbetweenfirmsinthesameindustry.

TheprofitmaximizationprogramformonopolisticallycompetitivefirmswithrespecttoKsi,Lsi,andEsi

isasfollows:

maxπsi=PsiYsi−rKsi−wLsi−(1+τEsi)PEEsi

(5)

s.t.Ysi=AsiKsiαsLsiβsEsi1−αs−βs

whererrepresentsthepriceofcapital,wrepresentsthelabourcost,PErepresentsthecostofintermediateinputs,i.e.energy.τEsirepresentstheenergyconstraints(increaseinthecostofenergy,poweroutagesleadingtoadditionalcostsforback-upgenerators,increaseinlossesforfirms,etc.)facingarepresentativefirmi.

Themaximizationoftheprofit(

5

)usingtheLagrangianmethodofoptimizationcombinedwiththefirstorderconditionsyields:

6

TheanalysisoftheeffectofenergyconstraintsτEsiontheequation(

10

)revenue-basedTFPleadsto:

'''λAsiαsKsiαs−1LsiβsEsi1−αs−βs−r=0

〈Ksi=rβs×Lsi

w1−αs−βs1

wαs

'(Esi=PEβs(1+τEsi)×Lsi

whereλ=Psi

(6)

(7)

(8)

Bysubstitutingtheequations(

7

)and(

8

)intotheequation(

6

),weobtainthestandardconditionthatthefirm’soutputpriceisafixedmarkupoveritsmarginalcost(r,w,PE):

Psi=()αs()βs×()1−αs−βs×

(9)

TheoutputpriceisincreasingwiththeenergyconstraintsτEsifacingtherepresentativefirm.Undertheassumptionthattheoutputpriceincreaseswiththelevelofenergyconstraintfacingtherepresentativefirm,thiscouldleadtoageneralizedpriceincreaseintheoutputmarketifasignificantnumberoffirmsfaceenergyconstraintsintheeconomy.Indeed,manyanalysespointoutthatenergyshocksgenerateoutputpricesadjustmentbyproducersintheeconomy(

BarthIIIandRamey

,

2001

;

Bodensteinetal.

,

2011

;

Choi

etal.

,

2017

).

2

Thisiscalledcost-pushinflationoroutputmarketdistortion.Dependingonthestrengthoftheinteractionsbetweenthedifferentsectorsoftheeconomy,adistortionoftheoutputmarketasaresultofenergyconstraintsmayleadtodistortionsofthelabor,capitalandevenenergymarketsagain,thusleadingtoadangerousviciouscircle.

Now,letusrecallourdefinitionoftheTFP.Weoptedfortherevenue-basedTFP(TFPR).Here,theTFPismeasuredbyrevenueproductivityorrevenue-basedproductivitysuchthatTFPRsi=AsiPsi(asin

Hsieh

andKlenow

,

2009

).Fromequation(

9

),wecanthereforeexpresstheTFPRsioffirmiinthesectorsas

TFPRsi=()αs()βs×()1−αs−βs×(1+τEsi)1−αs−βs

follows:

(10)

=()αs()βs×()1−αs−βs×

(11)

Basedonthevaluetakenbytheelasticityofsubstitutionσinmonopolisticcompetition,thefinalexpressionobtainedinequation(

11

)iseithernegative(whenσ<1),positive(whenσ>1),orindefinite(whenσ→1).Therefore,itisnotpossibletodrawhereanyconclusionabouthowenergyshockswillaffecttotalfactorproductivityatthefirm-levelfromatheoreticalperspective(H1).Thatmeansforinstance,theanalysisoftheeffectofpowerconstraintsontheproductivityoffirmsthusremainsanempiricalquestionthatwewill

analyzeinthenextsection

4

.

Furthermore,asthelimτEsi→+∞?convergestowardzero,wecanalsohypothesizethatthegreatertheenergyconstraintsfacingfirms(τEisislarge),themorethereverseeffectsofpowerconstraintsonTFP

aresignificant(H2).Forinstance,thiswouldmeanthatthegreaterthelevelofpowerconstraintsfacedbyafirm,thegreatertheeffectoftheseconstraintsonitsproductivity,andviceversa.

2Forexample,for

Choietal.

(

2017

),a10%increaseininternationaloilpricesraisesinflationby0.4percentagepointsonaverage.

7

Themainpurposeofourfollowingempiricalapproachwillbetotestthesetwomainhypotheses(H1andH2)putforwardthroughthistheoreticalframework.

4Empiricalstrategyanddata

4.1Empiricalstrategy

Oneofthemainchallengesinquantifyingtheeffectofpowersectorconstraintsonfirmperformanceisthatfacingornotpowerconstraintsmightbenon-random(

Alam

,

2013

;

Coleetal.

,

2018

;

Elliottetal.

,

2021

).In-deed,thepowerconstraintsfacedbyfirmsinacountrycanbeexplainedbythemacroeconomic/institutionalphenomenaofthecountryinquestion(lowqualityofregulation,lackoffinancing,politicalinstability,etc.)and/orfirmcharacteristicssuchassize,maturity,qualityofmanagementorevenownership(publicorpri-vate,domesticorforeign).Theserealitiescanalsoexplainthelowlevelofperformanceoffirmsoperatinginthatcountry.Evenwithinthesamecountry,wecanmentiontargetedpublicinvestmentinenergyinfras-tructurenearthebestperformingfirmstosupporttheiroperations,andpublicinvestmentininfrastructure(roadsandrailways)thatcanbothimprovethereliabilityofpowersupply(easeofmaintenanceofpowertransmissionlines)andthetransportationofproductsforfirms.

Todealwiththisidentificationissue,someauthorsinthisliteraturehaveoptedfortheinstrumentalvariablestechniquebasedonvariationsinthepowersupplyfromhydroelectricgenerationasaninstrument(

Fisher-Vandenetal.

,

2015

inChina;

Allcottetal.

,

2016

inIndia;

Coleetal.

,

2018

in14selectedSub-SaharanAfricancountries;

Elliottetal.

,

2021

inVietnam).Meanwhile,webelievethatthisidentificationstrategymightpotentiallyhavethreemajorlimitations:

First,itisnotapplicabletoalargersample,asnotallcountrieshaveanenergymixbasedmainlyonhydropower.Asaresult,studiesusingthisidentificationstrategyfrequentlyfocusonasinglecountry,oronasmallnumberofcountriessimilarintermsofenergymixmainlybasedonhydro-generationoftheelectricity,thusreducingtheexternalvalidity