Black Shadow: Effect of Energy Poverty on the Informal Economy in Developing Countries

Abstract

Energy poverty is a major problem in developing countries, with informal businesses often forced to use inefficient generators or equipment to produce electricity, which can lead to high production costs and lower productivity. As a result, these businesses may be less competitive on the market, which may lead them to operate informally to avoid the high costs associated with regulation and taxes. The aim of this paper is to assess the effect of fuel poverty on the informal sector in developing countries. We start from a sample of 95 developing countries, over the period 1993-2017, specify and estimate a static and dynamic model by Robust Pooled Ordinary Least Squares (Robust POLS) and System Generalized Method of Moments (sGMM). The results suggest that energy poverty increases informality in developing countries. The analysis remains robust to the consideration of disaggregated indices of fuel poverty, and alternative measures. The mediation analysis suggests that the effect passes through several mediators. Our policy recommendation is to improve access to clean energy and electricity for developing countries, which has an impact on informal entrepreneurship.