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‘Energy-the lifeline of an economy’

Energy is viewed as oxygen for an economy and has been included as the seventh goal amongst the seventeen Sustainable Development Goals (SDGs).

This goal puts utmost focus on ensuring affordable and environment-friendly sustainable energy supply across the globe.

Thus, no stones should be left unturned to ensure its sustainable development and availability (energy security).

Failure to do so would definitely generate adverse consequences hampering the economic growth potentials, especially that of the developing economies such as Bangladesh.

Energy is correctly perceived to be the lifeblood of the economy towards its growth and development. It is a bedrock input for economic growth and a vital ingredient in attributing to improvements in socioeconomic conditions of underdeveloped countries in particular, including Bangladesh.

Thus, the utmost importance of exploring the immense economies of energy resources is of key significance for researchers and policy makers round the globe.

Economists assert, “Without heat, light and power you cannot build or run the factories and cities that provide goods, jobs and homes, nor enjoy the amenities that make life more comfortable and enjoyable.”

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 industrialization in those economies.

Thus, the energy industry is undoubtedly an engine of growth, since its products serve as inputs into production of nearly every goods and services that adds value to the gross domestic product of a nation. Furthermore, it also contributes to employment generation and poverty alleviation.

Traditionally, labour and capital were considered to be the main inputs in production models. However, as time progressed the importance of energy as a crucial input has been highlighted and more energy-augmented production models emerged.

The role of energy in development of an economy is multidimensional in nature. The energy industry contributes to economic growth in two ways. First, energy is an important sector of the economy that creates jobs and value addition by extracting, transforming and distributing energy goods and services throughout the economy.

In 2009 the energy industry accounted for about 4% of GDP in the United States. In some countries that are heavily dependent on energy exports the share is even higher: 30% in Nigeria, 35% in Venezuela and 57% in Kuwait.

The energy industry extends its reach into economies as an investor, employer and purchaser of goods and services. Second, energy underpins the rest of the economy. Energy is an input for nearly all goods and services.

In many countries, the flow of energy is usually taken for granted. But price shocks and supply interruptions can shake economies as a whole.

The energy industry directly affects the economy by using labour and capital to produce energy. This role is particularly important when economic growth and job creation are such high priorities around the world.

The energy sector directly employs fewer people than might be expected given its share of GDP, especially when compared to other industries. However, recent research demonstrates that the energy industry supports many more jobs than it generates directly, owing to its long supply chains and spending by employees and suppliers.

Energy-related industries do not have a large need for labour, but the workers they hire are relatively highly skilled and highly paid. As a result of their high salaries, employees of the energy industry contribute more absolute spending per capita to the economy than the average worker.

High wages in the sector reflect the fact that energy industry workers are much more productive than average, contributing a larger share of GDP per worker than most other workers in the economy. The impact of the energy sector in context of economic growth attainments can be easily explained using the expenditure approach for calculation of gross domestic product.

Under this approach, 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 the economy.

Firstly, lower energy prices reduce expenses for end consumers increasing their disposable income and raising their purchasing powers. Secondly, lower energy prices reduce input costs for producers of nearly all goods and services in the economy, thus reducing their costs of production which raises their profit opportunities as well.

Conversely, relatively higher energy prices place a drag on economic growth. In addition, rising energy prices take purchasing power away from consumers, particularly from lower-income groups. Loss of purchasing power is synonymous to 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 context of attainment of Sustainable Development Goals (SDGs) is put under immense 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 whereby ensuring energy sufficiency within the economy could be one of the most effective channels.

Compared to the developed countries there are numerous problems that can be associated with the energy sectors of the developing countries. These problems if kept unattended and unsolved would not generate the true potentials of those sectors with regard to attainment of economic growth and development in a sustainable manner.

The most important problem associated with the Energy markets of developing countries is too much of government intervention in the energy market contributing 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 characterized by a mixed economy rather than an optimal perfectly competitive market and as a result cost reflective prices do not exist. This is the main problem with regard to energy markets in the developing countries whereby economic growth and development are hampered adversely.

We know that under perfect competition and 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 are cost-reflective in nature.

Conversely, energy markets in the developing countries are characterized by high levels of government intervention that distorts 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 with regard to energy consumption.

The government supplies energy resources, used as industrial inputs, to producers at subsidized rates and as a result the private cost of the producers do not 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 subsidized rates which also triggers over consumption of energy also attributing to adverse economic problems. 

In recent years, macroeconomic 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 the 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 formalized 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 believed to be the driving force of the nation and it is very much in line with attainment of the SDGs in Bangladesh. The energy sector therefore has to be considered as 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 their Energy Sector’s development and in order to do so the economic policies have to be focused on accurate identification of the appropriate energy sector reform strategies in order to maximize the benefits from development of the energy sector.

Muntasir Murshed is a BS Graduate in the field of Economics from North South University, Bangladesh.

 

 

 

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