Expanding Electricity Access Doesn’t Always Increase Wealth, Study Finds

It is widely believed that electricity access and economic growth go hand-in-hand. As such, developing countries have made large investments in efforts to expand their grid to rural, poor communities. In fact, expanding energy infrastructure to the nearly 1 billion people who lack access to electricity by 2030 is one of 17 global sustainable development goals set by the United Nations. A new study in the September issue of the Journal of Political Economy tests this basic connection between energy and growth.

“It’s clear that electricity access boosts GDP at the national level, but does it necessarily improve the lives of those living in small communities? We found the answer to be ‘no,’” says co-author Fiona Burlig, an assistant professor at the Harris School of Public Policy. “While we see large benefits to larger villages, bringing electricity access to the smallest, remote villages is expensive, and it doesn’t necessarily lift them out of poverty. It may well be much more cost-effective to do smaller solar home systems or mini-grids in small, remote locations and expand the grid to the larger villages.”

Burlig and her co-author, Louis Preonas from the University of Maryland, studied the economic impacts of electrification in the context of India’s massive national rural electrification program to expand electricity access to more than 400,000 villages. The researchers used the program’s rules to conduct a natural experiment, comparing villages just large enough to be eligible for electricity access with those just too small to be eligible. They also compared villages before and after electrification.

India’s effort succeeded in significantly increasing electrification to villages, and in larger villages of about 2,000 people or more, electrification caused a doubling of per-capita expenditure—an increase of about $17 per month (Rs 1,428). But the size of the village is critical. Burlig and Preonas found that in small villages of 300 people, electrification didn’t drive economic growth.  In fact, per-capita monthly expenditure barely changed.

Digging into these results, the researchers studied whether businesses developed in the communities after electrification—which could be one reason for an improvement in the economy. In the larger villages, the researchers found a 10 percent increase in the number of firms and 9 percent increase in the number of firm employees. The same was not true of the smaller communities.

Burlig and Preonas also found that the size of the village matters when determining the gains, as the benefits received from electrification in larger communities outweigh the costs of electrifying the village. In fact, the 2,000-person villages saw a 33 percent return on investment. This suggests that electrification was more effective at creating new income-generating opportunities in larger communities. There was zero rate of return from electrification over 20 years in the 300-person villages. of return, with

“When policymakers are weighing whether to expand the power grid, they should carefully consider the size of the community and let that be their guide,” says Burlig. “There are immense economic benefits to electrifying larger villages, but the benefits drop considerably with the size of the village. For the smaller villages, policymakers might want to try other strategies to reduce poverty.”