Ask not what your country can do for you

bilbo

“Sorry Bilbo, I was going to take you on this *amazing adventure*, but then I checked your expenses from last year, and you seem to be spending your entire budget on food, not travelling.”

Economists can sometimes be a little sceptical of asking people what they want. If we’re trying to provide and finance a public good, for instance, we might be worried that beneficiaries will understate their value of that good to try and get away with paying less for it. Others – often those in the behavioural science camp – can be wary that people may not be reasonably informed as to what is good for them, or might let cognitive quirks and biases undermine their prioritisation.

Over at the African Can End Poverty blog, this scepticism seems to have been extended to Tanzanian businessmen, as Jacques Morisset argues that we should pay less attention to what local firms claim are policy priorities:

Allow me to illustrate. According to the entrepreneurs operating In Tanzania, electricity is their major constraint (85 per cent) followed by access to finance (52 per cent), taxes (37 per cent), and administrative red tape (25 per cent). Source: World Bank. Investment Climate Assessment, 2009. Surprisingly, labor and transports costs are only at the bottom of their concerns (less than 10 per cent). According to this ranking, the priority should be therefore given to reducing electricity costs, increasing access to finance and reducing taxation.

A closer look at the firms’ financial balance sheets provides a different picture. In reality, electricity counts for a marginal share of firms’ operating costs in Tanzania (see Figure). For example, it is equivalent to only 3 per cent for a standard firm operating in the apparel sector. In other words, a decline, say, of 50 per cent in electricity prices would only reduce its costs by 1.5 per cent – hardly a high number for such a big effort. By contrast, transport and labor costs are equivalent to 41 per cent and 38 per cent of its total operating costs. This means that reducing transport costs by only 4 per cent would achieve the same gains for the enterprise than cutting by half its energy costs.

I’m not entirely convinced by Morissets argument: he only presents data on the current breakdown of firm’s operating costs, but no evidence on how firm electricity usage might change if prices did come down. This is a little like arguing that that since poor, stunted children in a rural village only appear to consume maize, there’s little point in subsidising the cost of protein-rich foods.

Morisset admits that electricity access might be an issue, but then goes on to make his argumet based on the static view: that we should target inputs which are currently the most costly for Tanzanian firms. Perhaps this it the right course, but a difficult argument to make without more information on how firms change their behaviour when relative prices change.

5 thoughts on “Ask not what your country can do for you

  1. Ranil Dissanayake

    January 9, 2013 at 5:41pm

    “Perhaps this it the right course”

    No it’s not. It’s a flawed approach. Measuring current size on the balance sheet is not a good way of guessing how “important” a factor is in production. That 3% of money spent on electricity probably is utterly crucial to the productivity of the other 97% of the production process (think of workers standing next to machines that are switched off… in the dark). And electricity being a constraint probably means they either can’t get enough of it, or they can’t get it reliably enough – i.e. there are times when electricity is switched off. Power cuts.

    I can give a good example of this: Zanzibar in 2011/2012, when we had three months of 0 electricity and many months of unstable electricity. Every business in the country had one primary constraint: electricity. Even the ones who had generators.

  2. Hunter Pritchett

    January 9, 2013 at 6:16pm

    Do a search on “power cuts tanzania” in google. These people are obviously not talking about the price of electricity, they are talking about the fact that it is often not available, which would obviously qualify as a “major constraint” for many businesses. I really don’t know how Morrisset missed this.

  3. Hunter Pritchett

    January 9, 2013 at 7:59pm

    For some reason I missed the comment section on that blog when I checked before. I can’t seem to find the paper by A. Geld and Vijay that he is talking about, but I wonder if part of the reason that labor productivity is so low in Tanzania is because so much of the time workers are standing around waiting for the electricity to come back on…

  4. Steve

    January 13, 2013 at 11:33am

    I live and work in Tanzania. To a degree I think both views are right; labour costs are high and finding skilled workers difficult (hence their high wages). But, as other commenters here and on the original post point out, Morisset really did seem to miss the point on why electricity is a pressing problem. Many business people here would probably agree with me when I say that electricity costs should be higher … if (and critical if) that meant a significantly more reliable supply. But alas political interference makes for an utterly dysfunctional sector, something that donors are unlikely to be able to affect. (It will be interesting to see whether increasing political competition will change the situation, but I wouldn’t bet on it.) So ironically Morisset may be right: this survey is a poor guide for what donors should be focusing on, but not for the reasons that Morisset proposes.

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