While energy advocates have mostly focused on the 600 million people in sub-Saharan Africa that lack access to electricity at home, the region’s power shortages are especially damaging to firms. Companies across the continent suffer from unreliable power supplies, affecting productivity, employment, and growth.
But firms are not all the same. A small metalwork shop will adjust to electricity problems differently from a large brewery. How can we better understand how firms respond to power outages?
In our paper with colleague Manju Kedia Shah, we investigate the impact of an unreliable supply of electricity on firm growth by applying k-means clustering, a novel analytical technique that creates clusters from noisy data. For our data, drawn from a sample of 3,109 African firms, the k-means exercise identified six clusters based on outages, losses, growth, and other factors. These clusters reveal a surprising degree of within-country heterogeneity in the experience of firms. The six groups we found are:
Marchers: Large firms with moderate electricity costs, many with their own generators. These firms show a decent rate of growth in employment (8 percent), despite experiencing 25 outage hours per month.
Plodders: Firms with a relatively steady supply of power (only 11.4 outage hours per month). These companies, mostly in middle-income countries, lose hardly any sales but grow relatively slowly at 5 percent a year.
Racers: Cluster 3 is the most interesting group. These firms are coping with unreliable power and growing rapidly, roughly doubling in size over just two years. We found 286 firms in this cluster, spread all over the continent. About a quarter of all firms in Chad and Liberia belong to this group, as do about one in six Nigerian firms.
Survivors: We found more than 1,000 firms that suffer from unreliable power and grow slowly, only about 3 percent per year. These firms are geographically diverse, but especially prevalent in Niger, Mauritania, Guinea Bissau, Mali, and Zimbabwe.
Non-Adaptors: Cluster 5 contains 352 firms that report high outages (52 hours per month) and very high losses (a whopping 31 percent of sales).
Strugglers: These hard-hit firms face 218 (!) outage hours/month and are especially common in the Central African Republic, Nigeria, and Chad.
While previous studies have found, on average, a positive relationship between the reliability of power and firm growth, we try to explore this relationship beyond the averages. Some firms cope with an unreliable supply of power pretty well, while many others do not. If we hope to understand how boosting energy supplies can help create some of the 12 million jobs African economies need every year, we have lots more to learn.
Read the paper here.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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