Growth of an economy is heavily dependent on energy and its sustained supply. The indispensable role of energy has been acknowledged by historic events like the Industrial Revolution. Following its initiation in the eighteenth century, the revolution stood tall on four critical components such as labour, technological progress, capital formation and, most importantly, energy supply. Admittedly, access to energy sources fuelled the progress of the Industrial Revolution. In the early 17th century, timber was used for every possible purpose ranging from housing and cooking to transport in the form of wagons, etc. However, depletion of forests with time led to energy crisis around the globe which led to global use of coal as a possible source of energy. The significance of energy in economy is not a new phenomenon for mankind.
Energy is appropriately perceived to be the lifeblood of economy on its journey towards attainment of a country's development goals. It is referred to as a bedrock input for economic growth and a vital ingredient attributing to improvements in socio-economic conditions of underdeveloped countries in particular. There lies the importance of exploring economies of energy resources for researchers and policymakers worldwide. Economists assert that in the absence of heat, light and power it is literally impossible to build or run factories and cities that provide goods, jobs and homes, nor to enjoy the amenities that make life simple. Many parts of the developed world still face sluggish economic growth rates and negative externalities following financial crises. A possible reason for this is shortage of power which severely mitigates the pace of industrialisation in those economies.
The energy industry is undoubtedly an engine of growth; its products serve as inputs into production of nearly all types of goods and services that add value to the gross domestic product (GDP) of a nation. In addition, energy employment in the economy also accounts for employment generation and poverty alleviation, improving the macro-economic indicators of underdeveloped nations in particular.
THE CENTRAL ROLE OF ENERGY: Traditionally, labour and capital were considered to be key inputs to production models. However, as time evolved the importance of energy as a crucial input has been brought into the limelight whereby several energy-augmented production models emerged. The central role of energy in advancement of an economy is multi-dimensional in nature. For instance, the energy industry of a nation contributes to its economic growth through two foremost channels. Firstly, energy is an important sector of economy that creates jobs and adds value by extracting, transforming and dispensing energy with goods and services throughout the economy. In 2009, the energy industry accounted for about 4.0 per cent of the GDP of the USA, the largest economy in the world. In countries heavily dependent on energy exports, the share is even larger. Thus the energy industry actually extends its wide reach into economies as a prospective investor, employer and purchaser of goods and services. Secondly, energy is said to reinforce the rest of an economy. Energy portrays its role as an input for nearly all goods and services. However, in many countries, the flow and reserve of energy resources are usually taken for granted. Consequently, global energy price and supply shocks hold the power to shake economies everywhere.
The energy industry directly affects an economy by using labour and capital for production of energy. This role is particularly important when economic growth and job creation are high priorities around the world. However, the energy sector directly employs fewer people than might be expected given its significant share of GDP, especially when compared to other non-energy industries. Recent research demonstrates that the energy industry, in reality, supports many more jobs than it generates directly, owing to its long-run supply chains and spending by employees and suppliers. Energy-related industries do not have a large need for labour but the workers they employ are relatively highly skilled and highly remunerated. As a result of their high salaries, employees of the energy industry contribute more absolute spending per capita to economy than the average worker. High wages in the sector reflect the fact that energy industry workers are much more productive than the average, contributing a larger share of GDP per worker than most other workers in economy. The impact of the energy sector in the context of economic growth attainments can be easily explained, using the expenditure approach for gross domestic product calculation under which aggregate demand is expressed as the sum of total consumption expenditure, total private investment expenditure, government expenditure and net exports.
In addition to the energy sector's economic contributions in general, relatively lower and stable energy prices also help stimulate economy. Firstly, lower energy prices reduce expenses for end consumers, increasing their disposable income and raising their purchasing powers. As a result, their standards of living improve. Secondly, lower energy prices shrink input costs for producers of nearly all commodities in economy, thus reducing their production costs which raises their profit opportunities as well. Conversely, relatively higher energy prices place a hindrance to economic growth. In addition, energy price hikes take purchasing power away from consumers, particularly from lower-income groups. Loss of purchasing power is synonymous with reduction in average standard of living of the people within an economy which is not desirable at all from the perspective of economic welfare and prosperity. However, it must be kept in mind that low energy prices are desirable from the economic perspective but those low energy prices must be market determined under perfectly competitive framework rather than via government intervention in the energy market since such interventions have severe economic complications of their own.
According to the World Bank, it is impossible for any economy to attain and sustain economic development without exposing it to a minimum level of energy. Thus, the concept of energy security in the context of attainment of the Sustainable Development Goals (SDGs) is placed under serious consideration and emphasis by the World Bank, especially for the developing economies. The Bangladesh government is also working with the vision of achieving the SDGs by ensuring energy sufficiency.
ENERGY AND DEVELOPING COUNTRIES: Compared to the developed countries there are numerous problems that can be associated with the energy sectors of the developing countries. The greatest of all problems associated with energy markets of developing countries is too much of government intervention leading to absence of cost-reflective prices. In simple terms, cost-reflective price means that the price of the end products must reflect the true cost of producing those products.
The energy sector of most of the developing countries is characterised by a mixed economy rather than an optimal perfectly competitive market and as a result, cost-reflective prices don't exist. This is the main problem facing energy markets in the developing countries whereby economic growth and development are hampered adversely. We know that under perfect competition an economy performs optimally whereby resources are used efficiently and optimally, prices are determined by market forces and are cost-reflective in nature. However, this is not ensured in the energy markets of the developing countries mainly because of the provision of subsidies by the governments. In the developed countries there is minimal government intervention in the energy market and energy prices are market-determined and cost-reflective in nature. Conversely, energy markets in the developing countries are characterised by high levels of government intervention that distort energy prices and leads to inefficiencies in energy use. Governments with the intention of keeping energy prices low tend to provide both consumption and production subsidies. The government supplies energy resources, used as industrial inputs, to producers at subsidised rates and as a result the private cost of producers don't reflect the true cost, creating an externality and eventually leading to inefficiencies within the energy market. Since the producers are receiving their energy inputs at lower rates their energy demand and employment are higher than the optimal level which also leads to the more aggregated energy problems. Similarly, the government also supplies energy products to end users (consumers) at subsidised rates, which also triggers overconsumption of energy attributing to economic problems.
In recent years, macro-economic pressures have intensified on the Bangladesh economy resulting from a number of adverse internal and external developments. While the global financial and economic crisis in 2008 created certain pressures, the IMF stated that one of the major domestic factors creating fiscal pressure on economy is the below-cost provision of fuel and electricity against the backdrop of a rapid expansion in oil-dependent power generation.
The expectation is that the expansion of base power capacity would allow a gradual phasing out of the high-cost rental plants, and efforts to increase gas supply to base plants will further reduce generation costs. Moreover, in pursuit of the efforts to bringing subsidy costs fully on-budget, a plan setting out a schedule of disbursements from the government to the BPC has been formalised and approved. No doubt, such efforts should be implemented in a comprehensive manner to ensure full transparency of the energy subsidy costs. At the same time, subsidy costs need to be reduced to build up more space for development spending, such as through a gradual replacement of subsidies by targeted cash transfers.
Energy is the driving force of the nation and in line with attainment of the SDGs in Bangladesh. The energy sector, therefore, has to be considered the most important sector since its performance is linked with performances in almost all other sectors within an economy. It is a prime task for a developing economy to tap all possible options that are optimal for its energy sector's development. It should focus its economic policies on accurate identification of appropriate energy sector reform strategies in order to maximise the benefits from development of the energy sector.
The writer is Research Assistant, North South University.
© 2017 - All Rights with The Financial Express