COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
PROGRAM OF ENERGY ECONOMICS

Literature Review; The Effects of Electric Power Outage on Economic

Development, Productivity and Income

SUMMITED BY: ID NO:

EBISA DIRIBI PGP 937/013
GEMEDA TUFA PGP

SUMMETED TO: ABDELLA MOHAMMED (PH.D)

DECEMBER, 31, 2021

 HARAMAYA, ETHIOPIA
Literature Review
In developing countries, access to electricity has received much attention from national
governments, international organizations and researchers. For example, the United Nations 7th
Sustainable Development Goal sets an agenda for 2030 to ensure universal access to affordable,
reliable and modern energy services. (Arrow, et al., 1993.), Power supply in many African
countries is generally known for its unreliability and high disruption costs, thus affecting
production efficiency and competitiveness. Unreliable power leads to disruptions in production,
loss of perishable goods, damage to sensitive equipment and loss of orders (Oshikoya et al,
2001).
Electricity was first introduced to Ethiopia around 1898 during Emperor Menilik’s era as the
then German Government provided the a Generator as a Gift to the Emperor mainly to supply
Electricity for lighting service to his place.
In Ethiopia, power outage has always been a problem, sometimes occurring so frequently that
people and enterprises often consider it as part of their life. According to the World Bank
Enterprise Survey (2015), in a typical power outage day, on average the power outage can last
for about 8 hours. It is one of the biggest challenges for production. Although the country has
been making significant investment in the power sector over the last decade (about 40% of
GDP), it has yet to resolve the problem of electricity shortages.

Electricity is exceedingly expensive to store, and firms respond to power outage in different
ways, generating electricity through diesel-fueled electric generators, shutting down their
enterprises during power shortages (Allcott et al, 2014) or engaging in outsourcing to minimize
productivity losses. Fisher-Vanden et al. (2015) found that firms provided substitution for energy
intensive inputs and engaged in outsourcing of activities during outage periods. The effect of
power outages on productivity and performance varied across firms depending on the type of
response. For firms that used generators, the productivity effect comes through the impact on
demand for other inputs while firms that shut down or outsourced found the power outage
directly reduced their output and often caused the waste of non-storable inputs (Allcott et al,
2014). There is growing empirical evidence on the negative impact of power outage on firms’
productivity in developing countries other than Africa. For example, Allcott et al. (2014) found
that a one-percent increase in power outage resulted in a 0.68% percent reduction in Indian
manufacturing firms’ revenue; Grainger and Zhang (2017) found that a 10 percent increase in the
duration of outages on average led to a 0.14 percent decrease in Pakistan firms’ total revenue and
a 0.36 percent decrease in the value added. The empirical evidence from Africa is thin and
qualitative/descriptive in its nature. One exception is the study by Mensah (2016), who looked at
the productivity and revenue effect of power outage on fifteen sub-Saharan African countries.
Using the World Bank’s Enterprise Survey, he found significant negative effects of electricity
shortages on firms’ revenue and productivity. As our review underlined, there has been no
previous empirical study that tried to study systematically the impact of power outage on firms’
productivity in Ethiopia. This study is, indeed, the first of its kind in Ethiopia in quantitatively
testing the relationship between power outage and firms’ productivity. We collected primary data
in 2017 from a total of 8174 micro and small-scale manufacturing enterprises operating in Addis
Ababa and nine major regional towns using a structured questionnaire, detailed enough to fully
define the complex relationship between power outage and enterprise productivity. Our results
found that a one percent increase in the average duration of power outage is associated with
0.54%, 0.17%, and 0.19%, decreases in TFP, labor productivity and revenue, respectively.

During the past decade, the Senegalese economy has undergone a major crisis in the electricity
sector. Failed privatizations, the increased cost of fuel, and lack of public investments are the
main factors that led to a poor electricity supply that shows in the daily occurrences of power
outages. This environment has undoubtedly affected economic activities, particularly industrial
production. In Senegal, the industrial sector contributes approximately 20 percent to GDP and
employs around 12% of the labor force (YENIYF2, 2009).
Impacts on Productivity
The literature examining the development impact of infrastructure, most of which includes
electricity infrastructure as one variable of interest, started with the seminal work of Aschauer
(1989). He finds that the stock of public infrastructure capital – including electricity – is a
significant determinant of aggregate total factor productivity (TFP). His results suggest that
infrastructure played an important role in the ‘productivity slowdown’ in the U.S. which started
around 1973. Earlier studies exploring this phenomenon had ignored the role of infrastructure
and focused on other factors such as energy prices or R&D (Gramlich 1994). Critics of
Aschauer’s

Impact on Household income

Other studies, however, found no positive effects on farm income. A study conducted in Bhutan
(ADB 2010) also found positive effects of electrification on non-farm income but not on farm
income. Non-farm incomes of electrified households were found to be 50-72 % higher than those
of unelectrified households, but these accounted for only 21-29 % of household income. The
aforementioned study conducted in the Philippines did also not find any impact of access to
electricity on agricultural output or income (ESMAP 2002). According to the authors, this can be
explained by the fact that the study area was experiencing a severe drought during the survey and
that only one of the four surveyed provinces had irrigation infrastructure. On average, however,
the study found incomes to be significantly higher for home businesses using electricity than
those who do not use electricity. Nevertheless, it should be mentioned again that this study does
not control for other factors that could have influenced the distribution of incomes (in fact, the
same is true for a study by Fan et al. (2005) looking at household income and poverty effects in
Tanzania).
 Reference
Allcott, A., Allan Collard-Wexler, and Stephen D O’Connell. (2014). “How do electricity
shortages affect productivity? Evidence from India.” Technical report, National Bureau of
Economic Research.
Arrow, et al., 1993. Report of the NOAA Panel on contingent valuation. National Oceanic and
Atmospheric Administration, Washington, DC.
Aschauer, D. A. (1989): Is Public Expenditure Productive. Journal of Monetary Economics,
23(2), pp. 177–200.
Grainger, C. A, and Zhang, F. (2017). “The impact of electricity shortages on Firm Productivity.
Evidence from Pakistan”. World Bank Policy Research Working Paper 8130.
Gramlich, E. M. (1994): Infrastructure Investment: A Review Essay. Journal of Economic
Literature, 32 (3), pp. 1176-1196.
John E. Besant-Jones. (2006). “Reforming Power Markets in Developing Countries: What Have
We Learned?” Energy and Mining Sector Board, Discussion Paper no.19 September 2006
Mensah, J. T. (2016). “Bring back our light: power outage and industrial performance in sub-
Saharan Africa”. Department of Economics, Swedish University of Agricultural Science,
Uppsala University.