Energy and economic development: underlying macroeconomic and institutional factors

Abstract

Energy technologies and mixes have recently begun to change. For instance, there have been high recent growth rates in solar and wind energy consumption. This is important because affordable and clean energy is a crucial contributor to economic development. There are many impacts of energy on economic development through social, health, economic, and environmental channels. This thesis investigates the underlying macroeconomic and institutional factors that contribute to differences in energy use across countries. I focus on potentially important factors underlying energy outcomes that have not received prominent attention in the previous literature. I find that the size of financial capital stocks is an important contributor to energy mix differences across countries. The type of financial capital is also important. Both private credit from banks and domestic private debt have positive impacts on wind energy consumption. I do not find evidence of an effect of equity. I also find that citizen preferences matter for energy transitions. Solar energy use is greater in countries that have a higher proportion of citizens who perceive climate change to be a serious personal threat. Aggregate policy support and the specific policy of carbon pricing have also been important for solar energy. Another finding is that the effectiveness of governments is the most important governance aspect underlying electricity sector development in low- and middle-income countries. Sudden shocks can also have large impacts on both energy and economic development. There was a major fall in energy use for road transport following the 2010 earthquake in Haiti. This likely contributed to the transmission of a potentially permanent earthquake impact on gross domestic product. This thesis also considers a potential causal relationship from electricity to economic growth. While the availability of electricity provides numerous benefits, I do not find evidence that initial electricity availability is a key factor explaining differences in subsequent national economic growth performance. The results suggest that indirect policies, other than just specific energy policies, could make a valuable contribution to energy sector outcomes. These indirect policies include financial policy that affects financial system size and structure, education to help shape energy preferences, institutional reform, and investment to foster resilience to natural disasters. Improved energy outcomes can then contribute to economic development outcomes including social, health, and environmental improvements. Show more