Electrification effects on firm productivity in Ethiopia

• Policymakers and academics are still in the dark about how exactly energy investments translate into growth in developing countries, and in particular how increased electrical capacity drives industrialisation.
• Using data on how Ethiopia’s electricity grid has expanded over time, this project estimated the impact of electrification on medium and large firms’ productivity.
• Preliminary results suggested that firm electrification is associated with a shift in production inputs away from labour towards capital.
• Additionally, the project’s findings and visualisations brought light to other important issues in Ethiopian energy policy.

Although it seems obvious to most observers that reliable access to energy is a key driver of economic growth, the exact relationship between energy and growth remains unclear. This project sought to uncover the mechanisms of this relationship in Ethiopia.

By combining firm panel data from the Ethiopian Central Statistical Agency and grid data from Ethiopian Electric Power (EEP), this project examined patterns in grid expansion in the country in order to estimate the effect of electrification on medium and large firms’ productivity in Ethiopia.

Preliminary results indicated that connected firms, conditional on size, productivity, and regional shocks, appear to shift production inputs away from labour in favour of a higher share of capital.

However, the implications of this factor substitution on productivity are still under study. Moreover, these correlational results are yet to be confirmed as a causal relationship, which the researcher plans to study further.

Nevertheless, these initial findings have suggested that electrification may be a significant driver of firms’ supply-side behaviour, with potentially significant consequences for economic growth.

A number of additional issues arose from discussions of the project’s preliminary findings with Ethiopian policymakers. Such issues included the financial viability of the tariff structure of Ethiopian Electric Power (EEP), and the need to further investigate infrastructure complementarities in Ethiopia, particularly in rural areas.