In 2016 economist Dani Rodrik documented a trend called ‘premature deindustrialisation’,  whereby countries tend to lose their manufacturing sector sooner and at much lower levels of income compared with the experience of the early industrialisers. This trend can have adverse effects on productivity and could slow down development more generally.

While others point out technological progress, trade and globalisation as drivers of premature deindustrialisation, power prices can augment these factors; yet empirical analysis of the relationship between power prices and industrial trends has been lacking, as has understanding of the mechanisms by which power prices influence structural development.

The authors of this paper aim to illuminate how high power prices can exacerbate premature deindustrialisation, using data from 33 countries and regional data from the Philippines. They find that higher power prices are associated with a downward shift in the share of industrial gross value added (GVA).

The results suggest that structural transformation is not independent of power prices, particularly in the Philippines. As such, it may be difficult for the Philippine government to increase the size of its manufacturing sector without lowering power prices, along with improving its service delivery (for example, reducing the frequency of power outages and making voltages less variable).

Key points for decision-makers

  • The authors investigate how industry share moves with economic development and estimate the relationship between power prices, the share of manufacturing output, and per capita output using data for 33 countries.
  • This allows them to illustrate the potential effect of high power prices on both the size and growth rates of industry.
  • They also apply the methodology across regions of the Philippines to examine if the same trend occurs at the local level.
  • For the sampled countries studied, they find that higher power prices are associated with deindustrialisation starting at lower levels of GDP per capita than was the case when deindustrialisation happened in developed countries.
  • The higher the power price, the steeper the downtrend tends to be.
  • The same trend was found at the regional level for the Philippines, where in 2015 industrial power rates were higher, at US$0.12/kWh, than in its ASEAN neighbours with the exception of Singapore, according to data from the International Energy Agency.

A more recent version of this paper has been published in the Journal of Asian Economics.

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