UMD Researcher Finds Population Size Determines Uneven Economic Impacts of Electrifying Rural Villages
Data from a large government program to electrify rural areas has shed light on the benefits.
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Nearly 800 million people in the world lack access to commercial electricity. It is easy to assume that connecting them to the grid will reduce poverty and improve lives. In fact, expanding energy infrastructure to everyone on the planet by 2030 is one of 17 global sustainable development goals set by the United Nations.
But studies on the benefits of such efforts are mixed. At the national level, greater access to electricity is correlated with higher GDP. However, at the village level, there is evidence to suggest electrification has little or no impact on village economies or quality of life.
New research from the University of Maryland and the University of Chicago clarifies the issue, revealing that village size determines the benefit of electrification. The study, which appears in the September 2024 issue of the Journal of Political Economy, showed significant benefits of electrifying villages with populations over 2,000 people, but no benefits in villages with 300 or fewer persons, and variable, modest benefits in between.
“It is a huge investment, billions of dollars a year, for governments of low-income to continue building out their electricity grids. The question we ask in this paper is; are those investments going to bring people out of poverty? It looks like the answer is no, at least not in the smallest villages” said Louis Preonas, an energy and environmental economist in the Department of Agricultural and Resource Economics at the University of Maryland and co-author of the study. “That may sound depressing, but we are in the business of figuring out what works, and what works might not be electricity. It may be health clinics, schools, or roads. Or it might be electricity coupled with many of those things.”
To understand the benefits of electrification in rural areas, Preonas leveraged data from a massive national electrification program by the Indian government titled Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The program connected 17.5 million households—roughly 1 in 5 previously unelectrified rural households—between 2005 and 2011.
Using data on household electricity consumption before and after electrification, Preonas and his colleague, Fiona Burlig from the University of Chicago estimated the impacts of connecting every home in rural India to the grid. They also analyzed census data and household survey data from thousands of villages in hundreds of districts across India, comparing things like household expenditure, school attendance, new jobs and growth of microbusiness before and after electrification.
Their study found that in villages with populations of 2,000 or more, household expenditure doubled after electrification, suggesting an increase in expendable income. He also saw significant growth in microenterprises and off-farm employment, both key indicators of economic development. Meanwhile, 300-person villages saw a small decline in household expenditure, and no significant change in other indicators of economic growth. In the middle, villages with around 1,000 residents saw a very small gain in household expenditure, suggesting a possible bump in household income.
“When we looked into the data, what also stands out is that people started micro enterprises in large villages,” Preonas said. “You can imagine that being able to start a micro enterprise is really dependent on having electricity for a lot of reasons, whether you're going to be a tailor or have a shop, or have refrigeration or anything like that.”
In smaller villages, there was no increase in microenterprises. This is significant because in 2022, the majority of places that remain to be connected to the grid are smaller villages where the cost per capita of connecting to the grid is very high.
It is important to note that in such places, people without access to an electrical grid are not without electricity. They often obtain limited power through solar panels or diesel generators. This could be why connecting to the grid did not increase the number of microenterprises or produce increases in household expenditures. The study suggests that access to electricity is not what limits businesses or personal income in the smallest villages, or at least it is not the primary limiting factor.
Preonas adds that in such small villages, connection to the power grid may provide other, less easily measurable quality of life improvements from the perspective of the villagers, although the study was not designed to quantify those factors.
“But as a poverty-reduction strategy, connection to the power grid does not provide returns on what is a very significant government investment,” Preonas said.
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The paper “Out of the darkness and into the light? Development effects of rural electrification,” was published in September 2024, in the Journal of Political Economy
