S7 Ep52: Is electricity a weak link in development?
In many cities in low-income countries, the grid fails often enough that businesses keep a diesel generator out the back. So an unreliable electricity grid looks like it is holding poor economies back. In many countries, lenders are putting money behind that idea.But Martin Shu and his co-authors, Jonathan Colmer and David Lagakos, set out to test it. They assembled data on power plants, fuel, workers and imported generators in 89 countries, and measured how productive each electricity sector was. In the poorest countries, electricity was about three-quarters as productive as in the US — in other words, much closer tot he frontier than their economies. And in the economic model they built using their data, bringing every country up to the world frontier adds only about 1% to long-run GDP.Shu presented the research at STEG's sixth Annual Conference in Nairobi in January 2026. He tells Tim Phillips where the productivity gap in electricity lies, why a shoe factory that is better at left shoes than right shoes explains the small gains, and which part of the economy is the real bottleneck.The research behind this episodeColmer, Jonathan, David Lagakos, and Martin Shu. 2026. "Is the Electricity Sector a Weak Link in Development?" Working paper, January 2026 version presented at the STEG Annual Conference, Nairobi. An earlier version appeared as NBER Working Paper 32041 (2024).To cite this episodePhillips, Tim, and Martin Shu. 2026. "Is electricity a weak link in development?" Conversations on Transformation (podcast).About the guestMartin Shu is Assistant Professor of Economics at the School of Management and Economics and the Shenzhen Finance Institute of the Chinese University of Hong Kong, Shenzhen. His research spans macroeconomics, development and labour economics, including what household and firm data reveal about structural transformation, and why children in poor countries are more likely to follow their parents into the same occupation. He holds a PhD in Economics from Boston University and bachelor's and master's degrees from the Hong Kong University of Science and Technology.Research cited in this episodeWeak links are sectors whose problems hold back the whole economy. When inputs are strong complements, output depends heavily on the least productive link in the chain, so a small sector can matter far more than its size suggests. The idea draws on Albert Hirschman's The Strategy of Economic Development (1958), and Charles Jones formalised it in "Intermediate Goods and Weak Links in the Theory of Economic Development" (American Economic Journal: Macroeconomics, 2011), which uses electricity as a motivating example. Shu and his co-authors ask whether electricity fits that description in poor countries today.Total factor productivity (TFP) measures how much output an economy or a sector gets from its inputs. If two countries have the same capital and the same number of workers, but one produces more, it has higher TFP. Shu measures each country against the United States. The figures for whole economies come from the Penn World Table, hosted by the Groningen Growth and Development Centre and described by Robert Feenstra, Robert Inklaar and Marcel Timmer in "The Next Generation of the Penn World Table" (American Economic Review, 2015). The paper uses version 9.1; the current release, PWT 11.0, is supported by STEG.Agriculture's productivity gap is the comparison Shu uses to show why measuring TFP is not enough. Farming in poor countries is far less productive than the rest of the economy, as Francesco Caselli ("Accounting for Cross-Country Income Differences," Handbook of Economic Growth, 2005) and Diego Restuccia, Dennis Tao Yang and Xiaodong Zhu ("Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Journal of Monetary Economics, 2008) document. Farmers are also the majority of workers in many developing countries. Yet few economists call agriculture a weak link. Whether a sector is a bottleneck depends on how it connects to the rest of the economy, and answering that needs a model as well as data.The electricity data combine several sources. Generating capacity comes from S&P Global Platts' World Electric Power Plants database, which lists more than 200,000 plants; the authors use generating capacity alone because it tracks transmission and distribution capacity closely. Power output and fuel use come from the International Energy Agency, and employment from national statistics offices. To count power from private generators, the authors use imports of generators recorded in the UN Comtrade database, an approach inspired by Francesco Caselli and Daniel Wilson ("Importing Technology," Journal of Monetary Economics, 2004). It works because few poor countries make their own generators. On the authors' conservative measure, generators supply about 7.6% of capacity on average.Labour's share of revenue in electricity is about 7%, in rich and poor countries alike. The authors collected annual reports, financial statements and SEC filings for 69 privately owned electricity companies in 31 countries, choosing private firms because their decisions follow profit rather than government mandate. Labour's share shows no relationship with GDP per capita. A share that does not change with income points to a Cobb-Douglas production function, in which each input's share of costs stays constant, and that simplifies the TFP calculation.Transmission and distribution losses are power that leaves a plant but never reaches a customer, lost as heat in wires and transformers, or stolen. According to IEA data, they average 14% of output across the sample, 22% in the poorest quarter of countries and 7% in the richest. They are the strongest predictor of low electricity TFP; once they are taken into account, the link between electricity TFP and national income largely disappears. Shu points to upgraded transformers close to end users, and ultra-high-voltage transmission lines, as the investments that would close the gap.Complementarity describes inputs that work together and cannot easily replace each other, like left and right shoes. The model sets the elasticity of substitution between electricity and everything else at 0.2, following Ernst Berndt and David Wood ("Technology, Prices, and the Derived Demand for Energy," Review of Economics and Statistics, 1975). Strong complementarity sounds as if it should make electricity more important. Shu's shoe factory shows why it does not: when a sector is already efficient, making it more efficient frees few resources, and output still waits on the less productive partner.Hulten's theorem, from Charles Hulten's "Growth Accounting with Intermediate Inputs" (Review of Economic Studies, 1978), predicts the economy-wide gain from a productivity improvement in one sector: multiply the improvement by the sector's Domar weight, its sales as a share of GDP. The authors treat any gain above that prediction as the sign of a weak link. Raising electricity TFP to the world frontier, defined as the 90th percentile, means an average increase of 43%, and by Hulten's rule it would add 1.7% to GDP. The model delivers about 1%, and only six countries beat the benchmark. The biggest exceptions are Ethiopia and Kenya, where frequent outages make power expensive or halt production. The authors also test their results against David Baqaee and Hannes Malmberg's "Long-Run Comparative Statics" (NBER Working Paper 33504, 2025), which extends Hulten's approach to allow for capital accumulation.Raising productivity outside electricity is the counterpart experiment. When the authors raise TFP in the rest of the economy by the same proportion instead, every country gains more than Hulten's theorem predicts, and the capital stock grows by 75% on average. Shu's conclusion is about balance. With complementary sectors, pushing one to an extreme achieves little, and today it is the non-electricity sector that lags.More Conversations on Transformation episodesA Microeconomic Perspective on Misallocation. Eric Verhoogen explains how economists diagnose the wedges that keep resources from their best use, the same kind of distortion Shu's model uses to capture outages and costly self-generated power.Structural change in sub-Saharan Africa. Gaaitzen de Vries and Kei-Mu Yi ask whether African economies follow the familiar path of structural transformation, a wider view of the sectors that Shu argues are holding growth back.Further readingCan Mass Electrification (Still) Cause Structural Change?, a STEG synthesis paper by Eric Hsu and Mitchell VanVuren, reviews the mixed evidence on whether connecting people to power still raises productivity and incomes in low- and middle-income countries, as it appears to have done in the past.Under the Grid: Price and Informational Barriers to Grid Densification in Benin, a STEG working paper by Arnaud Dakpogan, Megan Lang and Alpha Ly, finds that a connection subsidy did not raise formal connection rates on average, but information on costs and procedures nearly doubled them among households with no connection at all.
