EPRU researchers explore energy efficiency in Africa’s informal sector

Informal economies are key providers of livelihoods and employment in developing countries, especially in African countries. EPRU-EfD researchers have examined the impacts of these markets on energy efficiency, and their study provides policy insights. 83% of Africans work in the informal economy. Many African countries also receive large amounts of foreign direct investment (FDI), which could have an impact on energy efficiency. This research that examines how informal markets hinder energy efficiency covers a much-needed knowledge gap.

Researchers conducted a multi-method analysis

EPRU-EfD researchers Dr Princewill Okwoche and Professor Amin Karimu, along with Dr Milan Ščasný, used a variety of methods to examine the panel data. The panel data consisted of 46 different African countries from 1990 to 2017. This data had 42 Sub-Saharan African countries and 4 North African countries. The dataset was constructed by the researchers and used data from various international sources. The methods used included an autoregressive distributed lag (ARDL) model, which helps with analysing relationships between variables over time, and an efficiency stochastic frontier analysis (SFA) technique for deriving energy efficiency scores. The SFA is a useful technique for accounting for potential variables that impact the results, but have not been included in the model, such as work ethic differences between cultures. The paper examines the energy efficiency of informal economies and the impacts of both FDI and institutional quality, which are key control variables.

Large variance between African countries

 SFA analysis showed a stark difference in energy efficiency across African countries. The researchers looked at transient and persistent efficiency and used them to calculate a technical efficiency. Transient efficiency is the “short-term efficiency” and can be subject to large fluctuations from shocks. Persistent efficiency is the “long-term efficiency” which captures effects such as developed energy infrastructure, technology, and institutions as they aid energy efficiency. A higher persistent efficiency indicates better energy infrastructure or stronger institutions. When combining both results, the technical efficiency displays a full picture of a country's energy efficiency. The results showed large variation in both transient and persistent efficiency across African countries, indicating vast differences in energy infrastructure development and institutional quality between countries.

ARDL models had contrasting results

The researcher employed three different ARDL models at differing levels of complexity. As the models increased in complexity, the results shifted. The simplest model, the linear model, showed a positive effect of informal economies on energy efficiency. This is due to the simplicity of the model, which does not allow for a varied relationship between informal economies and energy efficiency and has less parameters. The more complex model, the nonlinear model, showed a positive effect up to a certain level of informal economy size, at which there is a strong negative effect between the two variables. Finally, the most complex model, the asymmetric model, saw that increases in informal economies led to decreases in energy efficiency. When examining FDI, it was found that increases in FDI lead to worsened energy efficiency, which was in line with the researcher’s hypothesis. Similarly, improved institutional quality had a positive relationship with energy efficiency.

Innovation is the key to energy efficiency

The researchers conclude that control heavy regulation may have negative effects. Instead, to improve energy efficiency, they suggest that governments focus on innovative policies that encourage businesses to register their operations. This can be done through minimizing bureaucracy or through creating financial incentives such as tax rebates. Capacity-building programs and creating platforms for dialogue are also vital to achieving real change.

To read the whole paper, please click here

Josh Gray