Electricity Consumption and Output Decline - An Update

by Istvan Dobozi

Our recent article (I. Dobozi and G. Pohl, "Real Output Decline in Transition Economies - Forget GDP, Try Power Consumption Data!," Transition, vol. 6, no. 1-2, p. 17) has provoked considerable response and demand for an update. Our updated statistics on power consumption confirm the earlier findings (see table).

To recapitulate our assertions, electricity consumption is a suitable proxy for guesstimating real output trends in Eastern Europe's transition economies (with the possible exception of the Czech Republic where official output statistics grossly undervalue the booming service sector). In these countries for the past five years of economic restructuring, the average, cumulative decline in power consumption closely matches the drop in GDP, yielding an electricity-GDP elasticity of about 1 (meaning that a 1 percent GDP fall produced about 1 percent drop in electricity consumption). Even in those East European countries where the economic structure and product lines changed drastically, as in Poland, the correlation between power use and economic activity remained fairly close.

In most FSU countries, however, the reported output declines are completely inconsistent with the power consumption trends; thus, the reliability of official statistics has to be seriously questioned. The gap between increasing electricity consumption and falling GDP can only be explained by gross underreporting of GDP. In the period between 1989 and 1994, output downturn in Russia and Ukraine may have been inflated by more than twofold, in Azerbaijan by as much as threefold, and in Georgia, Kazakhstan, Latvia, and Moldova by 50 to 90 percent.

Factors distorting official statistics include:

• Widespread underreporting of output in order to avoid high taxes.
• Overrepresentation of large state-owned industrial enterprises that are undergoing major retrenchment.
• Shortcomings of data collection in capturing ever increasing private activities

Although our article was generally welcomed as being on the right track, to obtain more reliable_and certainly low -cost_estimates of the extent of output retrenchment during the systemic transition, some skeptics argued that while power consumption and economic activity tend to move in tandem in market economies, it may not be relevant for transition economies that are experiencing rapid and massive structural changes. Many argue that the increase in electricity consumption may reflect structural movement toward higher electricity intensity in GDP.

Nonetheless, electricity consumption does seem to be a broadly correct output predictor for the Central and East European transition economies, some of which have undergone more rapid and more extensive restructuring than most FSU economies, including Russia and Ukraine. Moreover, all transition countries, including the slow-track reformers, have been restructuring basically in the same direction: away from energy- and electricity- intensive activities. The implied electricity intensity of measured GDP remained unchanged for Eastern Europe as a group (and even improved in Poland and Romania). But it increased to a large extent in a number of FSU economies_in Russia and Ukraine by 70 percent in only five years, despite offsetting changes such as increases in power tariffs and some restructuring toward a less energy-intensive basket of goods. This should serve as a warning that cumulative falls in reported GDP have been grossly exaggerated.

The author is Senior Economist (Technical Department, ECA/MENA Regions) at the World Bank.