Center for Effective Global Action

Is electricity supply a binding constraint to economic growth in developing countries? And to what degree is a binding constraint of inadequate electricity supply problems reflected by very high average prices for electricity? There is a large empirical literature on “binding constraints,” much of it using the Hausmann-Rodrik-Velasco (2005) framework and applying it to particular countries. There is also a large literature on the quality of the investment climate, much of which draws on the World Bank enterprise surveys. Our paper undertakes a systematic review of the published and grey literature that has applied the HRV framework at the country level in order to ascertain how frequently electricity supply is identified as a binding constraint to growth (and differentiating between access, reliability and price). It also examines the rankings of constraints provided in the World Bank’s Enterprise Surveys in order to assess the extent to which businesses regard electricity as a major constraint. We find strong evidence that electricity is a constraint to growth in several developing countries with over 40% of the studies reviewed identifying electricity as a binding constraint. But high electricity prices are not necessarily a signal of electricity being a binding constraint, although they do tend to be associated with poor quality and reliability of supply.