The Role of Energy Capital in Accounting for Africa’s Recent Growth Resurgence Stephie Frieda and David Lagakosb a Carleton
College, b UCSD and NBER
IMF Workshop on Macroeconomic Policy and Income Inequality February 9-10, 2017
Energy as a Driver of Growth in Sub-Saharan Africa?
In Sub-Saharan Africa since 2000 we have seen: 1
Large increases in per capita GDP
2
Large increases in energy consumption and investment
Our question • How much of the growth was driven by energy investment?
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Structural Macro Approach Quantitative general equilibrium model • Three goods: agriculture, non-agriculture, and energy • Most energy capital is financed by the government • Subsistence level of ag. consumption (e.g. Herrendorf et al) • Non-agriculture production requires energy
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Structural Macro Approach Quantitative general equilibrium model • Three goods: agriculture, non-agriculture, and energy • Most energy capital is financed by the government • Subsistence level of ag. consumption (e.g. Herrendorf et al) • Non-agriculture production requires energy
Counterfactual experiment • How much growth if Africa ↑ energy capital but nothing else? • Six largest Sub-Saharan African countries
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Contributions
1
Document new stylized facts on energy and growth
2
Energy investment explains ≈ one third of growth on average
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Contributions
1
Document new stylized facts on energy and growth • UDI World Electric Power Plants Data Base
2
Energy investment explains ≈ one third of growth on average
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Contributions
1
Document new stylized facts on energy and growth • UDI World Electric Power Plants Data Base
2
Energy investment explains ≈ one third of growth on average • Increases in energy consumption per capita are big • Energy is an important input in non-agriculture production • Pre-2000 levels of energy use are very small
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Related Literature Micro studies: effects of energy investments on development • e.g. Lipscomb, Mobarak, and Barham (2013); Rud (2012);
Dinkelman (2011) Macro studies: long-run effects of energy use • e.g. Golosov, Hassler, Krusell, and Tsyvinski (2014); Hassler,
Krusell, and Smith Jr. (2016); Hassler, Krusell, Olovsson (2015) Growth and development accounting • e.g. Klenow and Rodriguez-Clare (1997); Hall and Jones
(1999); Caselli (2005); Young (1995)
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Outline of Talk
1 Stylized facts: Energy and Africa’s growth resurgence 2 General equilibrium model of structural change and energy 3 Calibrate model to match a pre-2000 steady state 4 Contribution of energy capital to growth
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Large Increases in GDP in SSA Since 2000 Average Annualized Growth Rate of GDP 7
6.14
6 5
Percent
4 3 2
3.33 2.11
1 0 -‐1
-‐0.71
-‐2 GDP
GDP per Capita 1990s
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2000s IMF, February 2017, Stephie Fried
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Annualized GDPPC Growth In The Biggest 6 8 6.1
6
5.1
4
Percent
2
2.0
4.6
3.5
2.4
1.9
0.1
0 -‐0.5
-‐2
-‐1.0
-‐0.7
-‐4 -‐6 -‐8 -‐10
-‐8.6 D.R. Congo
Ethiopia
Kenya 1990s
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Nigeria
Sudan
Tanzania
2000s
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Large Increases in Energy Capital Since 2000 in SSA Average Annualized Growth Rate of Energy Capital 6
5.49
5
Percent
4 3
2.58
2.18 2 1 0
-‐0.61 Energy Capital per Capita
-‐1 Energy Capital 1990s The Role of Energy Capital
2000s IMF, February 2017, Stephie Fried
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Especially Large Increases in Energy Capital in Ethiopia
4000 3500
Beles
Megawatts
3000
Gilgel Gibe III Adama Ashegoda Wind Farm Wind Farm
Gilgel Gibe II 2500
Tekeze I 2000
Gilgel Gibe I 1500
Tis Abay 1000 500 0 1980
1985
The Role of Energy Capital
1990
1995
2000
2005
2010
2015
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Large Growth In Energy Consumption in SSA Since 2000 Average Annualized Growth Rate of Energy Consumption 7.60
8 7 6
4.73
Percent
5 4 3
2.81
2 1 0
-‐0.07
-‐1 Electricity Consump
Electricity Consump
11
Growth in Energy Consumption and GDP For the Biggest 6
12 10
Percent
8 6 4 2 0 D.R. Congo
Ethiopia GDP
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Kenya
Nigeria
Sudan
Tanzania
Electricity ConsumpEon
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12
Correlated Growth Rates of Manufacturing and Energy
NGA
Manufacturing VA Growth Rate 0 3 6 9
ETH COG TZA
SDN
COD BWA ZMB NAMKEN GAB ZAF
CMR
SEN
MUS
-3
ZWE
-3
0
3 6 Electricity Growth Rate
9
• Correlation coefficient: 0.76
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Why Do We Need a Model? Estimate the following regression instead?
ln(Yi,t ) = β0 + β1 ln(Ei,t ) + i,t
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Why Do We Need a Model? Estimate the following regression instead?
ln(Yi,t ) = β0 + β1 ln(Ei,t ) + i,t Dual causality • ↑ energy ⇒ ↑ GDP • ↑ GDP ⇒ ↑ energy demand • Empirical analysis requires a country-level instrument
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Why Do We Need a Model? Estimate the following regression instead?
ln(Yi,t ) = β0 + β1 ln(Ei,t ) + i,t Dual causality • ↑ energy ⇒ ↑ GDP • ↑ GDP ⇒ ↑ energy demand • Empirical analysis requires a country-level instrument
Our approach: structural macro model • Counterfactual in which all growth is from energy investment
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Outline of Talk
1 Stylized facts: Energy and Africa’s growth resurgence 2 General equilibrium model of structural change and energy 3 Calibrate model to match a pre-2000 steady state 4 Contribution of energy capital to growth
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Overview of the Model Households • Consume agriculture, non-agriculture, and energy • Save physical capital
Perfectly competitive firms • Produce agriculture, non-agriculture, and energy • Labor and capital are perfectly mobile across sectors
Government • Finances energy capital • Lump-sum taxes on the household
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Households Households choose: • Consumption: Ca , Cn , Ce • Saving
Utility U(Ca,t , Cn,t , Ce,t ) = ωa log(Ca,t − a¯) + ωn log(Cn,t ) + ωe log(Ce,t )
Capital accumulation Kt+1 = (1 − δ)Kt + qIt
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Agricultural Production
θ 1−θ Ya,t = At Ka,t Na,t
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Non-agricultural Production
Yn,t = At (1 −
The Role of Energy Capital
θ 1−θ −1 µ)(Kn,t Nn,t )
−1
−1
+ µEn,t
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Energy Production
Aggregate energy input ρ Et = Eo,t Eg1−ρ ,t
Two types of energy • Off-grid energy: Eo,t • Grid energy: Eg ,t
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Energy Production
Aggregate energy input ρ Et = Eo,t Eg1−ρ ,t
Two types of energy 1−φ • Off-grid energy: Eo,t = Ao,t Ko,t φ No,t
• Grid energy: Eg ,t = Ag ,t Kg ,t φ Ng1−φ ,t
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Government
• Provides grid-capital
Kg ,t+1 = (1 − δ)Kg ,t + qIg ,t
• Finances investment through lump-sum taxes
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General Equilibrium Agents optimize • Households choose labor allocation, consumption, and saving • Firms choose production quantities
Markets clear • (wat , wnt , wgt , wot ) clear the labor market • (pat , pnt , pgt , pot , pet ) clear the goods market • (rat , rnt , rot ) clears the capital market
Government budget balances • Lump-sum taxes equal grid-energy investment The Role of Energy Capital
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Outline of Talk
1 Stylized facts: Energy and Africa’s growth resurgence 2 General equilibrium model of structural change and energy 3 Calibrate model to match a pre-2000 steady state 4 Contribution of energy capital to growth
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Calibration: Two Steps
1
Calibrate some parameters directly from data series
2
Calibrate remaining parameters using a method of moments
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Direct Calibration
Parameter
Value
Capital share in agriculture: θ 0.33
Source Capital’s share of income
Capital share in energy: φ
0.9 Capital’s share of energy (U.S.)
Depreciation rate: δ
0.04
Penn World Tables
Elasticity of substitution:
0.05
Hassler et. al (2012)
Utility weight on ag: ωa
0.02
Herrendorf et al. (2014)
Utility weight on energy: ωe
0.04
U.S. energy expenditure share
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Direct Calibration
Parameter
Value
Capital share in agriculture: θ 0.33
Source Capital’s share of income
Capital share in energy: φ
0.9 Capital’s share of energy (U.S.)
Depreciation rate: δ
0.04
Penn World Tables
Elasticity of substitution:
0.05
Hassler et. al (2012)
Utility weight on ag: ωa
0.02
Herrendorf et al. (2014)
Utility weight on energy: ωe
0.04
U.S. energy expenditure share
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Direct Calibration
Parameter
Value
Capital share in agriculture: θ 0.33
Source Capital’s share of income
Capital share in energy: φ
0.9 Capital’s share of energy (U.S.)
Depreciation rate: δ
0.04
Penn World Tables
Elasticity of substitution:
0.05
Hassler et. al (2012)
Utility weight on ag: ωa
0.02
Herrendorf et al. (2014)
Utility weight on energy: ωe
0.04
U.S. energy expenditure share
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Direct Calibration
Parameter
Value
Capital share in agriculture: θ 0.33
Source Capital’s share of income
Capital share in energy: φ
0.9 Capital’s share of energy (U.S.)
Depreciation rate: δ
0.04
Penn World Tables
Elasticity of substitution:
0.05
Hassler et. al (2012)
Utility weight on ag: ωa
0.02
Herrendorf et al. (2014)
Utility weight on energy: ωe
0.04
U.S. energy expenditure share
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments Parameters: {q, A0 , Ig , µ, ρ, a¯} Moments Moment Capital-output ratio:
Empirical value K Y
1.9
Price of off-grid to grid electricity:
po pg
Grid-electricity-investment-output ratio: Electricity share of GDP:
pe E Y
Fraction of off-grid capital:
The Role of Energy Capital
Ig Y
0.008 0.10
Ko Ko +Kg
Share of employment in agriculture:
5
0.06 Na N
0.67
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Method of Moments: Parameter Values
Parameter
Value
Investment technology: q
0.52
TFP in off-grid energy: Ao
0.05
Grid-energy investment: Ig
0.01
Distribution parameter: µ
1.46e-14
Off-grid energy share: ρ
0.01
Subsistence consumption: a¯
0.83
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Model Fit: 4 Non-Targeted Moments pe Ce pa Ca +Cn +pe Ce
1
Energy share of expenditure:
2
Agriculture consumption share of GDP:
3
Subsistence requirement ≈ $1.82/day at PPP
4
Income elasticity of energy demand: 1.96
The Role of Energy Capital
= 0.01
pa Ca Y
= 0.72
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Model Fit: 4 Non-Targeted Moments 1
Energy share of expenditure:
pe Ce pa Ca +Cn +pe Ce
= 0.01
• Eberhard et. al (2001): average in Ethiopia in 2000 ≈ 0.02 pa Ca Y
= 0.72
2
Agriculture consumption share of GDP:
3
Subsistence requirement ≈ $1.82/day at PPP
4
Income elasticity of energy demand: 1.96
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Model Fit: 4 Non-Targeted Moments 1
Energy share of expenditure:
pe Ce pa Ca +Cn +pe Ce
= 0.01
• Eberhard et. al (2001): average in Ethiopia in 2000 ≈ 0.02
2
Agriculture consumption share of GDP:
pa Ca Y
= 0.72
• Herrendorf et al. (2014): average across African countries: 0.6
3
Subsistence requirement ≈ $1.82/day at PPP
4
Income elasticity of energy demand: 1.96
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Model Fit: 4 Non-Targeted Moments 1
Energy share of expenditure:
pe Ce pa Ca +Cn +pe Ce
= 0.01
• Eberhard et. al (2001): average in Ethiopia in 2000 ≈ 0.02
2
Agriculture consumption share of GDP:
pa Ca Y
= 0.72
• Herrendorf et al. (2014): average across African countries: 0.6
3
Subsistence requirement ≈ $1.82/day at PPP • World Bank thresholds on extreme poverty: 1-2 dollars per day
4
Income elasticity of energy demand: 1.96
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Model Fit: 4 Non-Targeted Moments 1
Energy share of expenditure:
pe Ce pa Ca +Cn +pe Ce
= 0.01
• Eberhard et. al (2001): average in Ethiopia in 2000 ≈ 0.02
2
Agriculture consumption share of GDP:
pa Ca Y
= 0.72
• Herrendorf et al. (2014): average across African countries: 0.6
3
Subsistence requirement ≈ $1.82/day at PPP • World Bank thresholds on extreme poverty: 1-2 dollars per day
4
Income elasticity of energy demand: 1.96 • Van Benthem (2015): average across LDCs ≈ 0.83 The Role of Energy Capital
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Outline of Talk
1 Stylized facts: Energy and Africa’s growth resurgence 2 General equilibrium model of structural change and energy 3 Calibrate model to match a pre-2000 steady state 4 Contribution of energy capital to growth
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Computational Experiment: Steady-State Analysis Year 2000 steady state • Normalize TFP to unity: A2000
Year 2013 steady state • Change TFP and energy investment: A2013 and Ig2013 • Match increase in electricity consumption and GDP per capita
Hypothetical steady state • All growth comes from energy investment • A = A2000 and Ig = Ig2013 The Role of Energy Capital
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Role of Energy Capital 140 Data Model: Grid Energy Investment Only Percent Explained
GDP Per Capita Growth: 2000−2013
120 100 80 60 40 20 0 −20
Congo
The Role of Energy Capital
Ethiopia
Kenya
Nigeria
Sudan
Tanzania
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Role of Energy Capital 140 Data Model: Grid Energy Investment Only Percent Explained
GDP Per Capita Growth: 2000−2013
120 100 80 60 40 20 0 −20
Congo
The Role of Energy Capital
Ethiopia
Kenya
Nigeria
Sudan
Tanzania
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Energy Investment Explains ≈
1 3
of Growth on Average
140 Data Model: Grid Energy Investment Only Percent Explained
GDP Per Capita Growth: 2000−2013
120 100 80 60 40 20 0 −20
Congo
The Role of Energy Capital
Ethiopia
Kenya
Nigeria
Sudan
Tanzania
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Large Effects Due to Three Main Features of the Data
1
Large energy increases between 2000-2013
2
Energy is an important input in non-agriculture production
3
Grid-energy consumption per capita in 2000 is very low
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Large Effects Due to Three Main Features of the Data
1
Large energy increases between 2000-2013 • Avg. energy consumption per capita increases by 75%
2
Energy is an important input in non-agriculture production
3
Grid-energy consumption per capita in 2000 is very low
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Large Effects Due to Three Main Features of the Data
1
Large energy increases between 2000-2013 • Avg. energy consumption per capita increases by 75%
2
Energy is an important input in non-agriculture production • Energy share in manufacturing is approximately 10%
3
Grid-energy consumption per capita in 2000 is very low
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Large Effects Due to Three Main Features of the Data
1
Large energy increases between 2000-2013 • Avg. energy consumption per capita increases by 75%
2
Energy is an important input in non-agriculture production • Energy share in manufacturing is approximately 10%
3
Grid-energy consumption per capita in 2000 is very low • Avgerage HH in our study consumes 67 kwh • Average U.S. HH consumes 13,671 khw
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Decomposition Exercise
Experiment
Average Percent Explained
Baseline
35.4
Halve Ig growth
24.8 pe E Y
13.1
Double pre-growth Ig
10.0
Halve pre-growth
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Decomposition Exercise
Experiment
Average Percent Explained
Baseline
35.4
Halve Ig growth
24.8 pe E Y
13.1
Double pre-growth Ig
10.0
Halve pre-growth
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Decomposition Exercise
Experiment
Average Percent Explained
Baseline
35.4
Halve Ig growth
24.8 pe E Y
13.1
Double pre-growth Ig
10.0
Halve pre-growth
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Decomposition Exercise
Experiment
Average Percent Explained
Baseline
35.4
Halve Ig growth
24.8 pe E Y
13.1
Double pre-growth Ig
10.0
Halve pre-growth
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Energy Is An Important Driver of Recent African Growth
1
Big increases in energy use since 2000
2
Energy increases account for ≈
The Role of Energy Capital
1 3
of African growth
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Energy Is An Important Driver of Recent African Growth
1
Big increases in energy use since 2000 • Avg. energy capital per capita increased by 20% • Avg. energy consumption per capita increased by 75%
2
Energy increases account for ≈
The Role of Energy Capital
1 3
of African growth
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Energy Is An Important Driver of Recent African Growth
1
Big increases in energy use since 2000 • Avg. energy capital per capita increased by 20% • Avg. energy consumption per capita increased by 75%
2
Energy increases account for ≈
1 3
of African growth
• Magnitude varies by country • Results driven by importance of energy in production, low
initial levels of energy, and large increases in energy
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Energy Is An Important Driver of Recent African Growth
1
Big increases in energy use since 2000 • Avg. energy capital per capita increased by 20% • Avg. energy consumption per capita increased by 75%
2
Energy increases account for ≈
1 3
of African growth
• Magnitude varies by country • Results driven by importance of energy in production, low
initial levels of energy, and large increases in energy
Thank You! The Role of Energy Capital
IMF, February 2017, Stephie Fried
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