This post will be about some articles from Works in Progress that discuss the growth-hindering consequences of progressive regulation, the conundrum facing the electricity sector in Africa, and France's premature demographic transition.
1. How much regulation is too much? Specifically, what level of environmental and other safeguard permissions are required for infrastructure projects in developed countries?
Consider this on the prohibitive costs of environmental and other safeguards documentation required in developed countries to obtain permissions for large infrastructure projects,
1,961. That’s the number of documents contained within a single planning application for a wind farm off the northeast coast of England – capable of powering around 1.5 million homes. The environmental impact assessment and environmental scoping documents alone totalled 13,275 pages. To put that into context, that’s 144 pages longer than the complete works of Tolstoy combined with Proust’s seven volume opus In Search of Lost Time... EDF Energy had to produce 44,260 pages of environmental documentation for Sizewell C, a new nuclear power station to be built on the same site as two existing nuclear power stations in Suffolk, England.... a Freedom of Information request from New Civil Engineer magazine recently revealed that the UK’s National Highways agency spent £267 million preparing a planning application to build a 23-kilometer road. The planning application, which featured 30,000-plus pages of environmental documentation, was the longest ever prepared...
It takes, on average, ten years for an electricity transmission project to be completed. But before you get to that point, it can take as long as 13 years just to get approval for the project. For example, Harvard’s Belfer Center cites the case of the 732-mile Transwest Express high-voltage transmission line. It applied for its permit in 2007, but did not receive full approval for construction to begin until 2020. It’ll come online in 2026, 19 years after that first permit application was filed... Using the average environmental page count from a sample of 18 projects (11,756) gives us an average per-project cost of £98 million. And that’s before the projects have put a single spade in the ground and before any spending on environmental mitigations has taken place. Think what could be achieved with even half of that nearly £100 million cost per project.
In stark contrast, sample this from history
France responded to the oil shock of 1973 with the beautiful slogan: ‘In France, we do not have oil, but we have ideas’. Over the next 15 years, the French built 56 nuclear reactors. To this day, France gets more than two thirds of its electricity from nuclear power... consider the construction of Britain’s national electricity grid in the 1920s–1930s. In the space of three years, Britain devised a plan to connect over 100 of the UK’s most efficient power stations into seven local grids across the country, and passed legislation needed to enable the plan and begin work on it. It took five more years for the project to be completed, with 4,000 miles of cables running across 26,000 pylons around the country. A year after the seven local grids were built, a group of impatient and rebellious engineers decided it was easier to ask for forgiveness than permission, and switched on the connections between the seven grid areas themselves to form a single national system. That national system remains to this day. It is hard to imagine projects of similar scale taking place today at similar speeds.
In this context, Ezra Klein points to an ideological basis for this trend of regulatory excess seen in developed countries.
When faced with a problem of overriding public importance, government would use its awesome might to sweep away the obstacles that stand in its way. But too often, it does the opposite. It adds goals — many of them laudable — and in doing so, adds obstacles, expenses and delays. If it can get it all done, then it has done much more. But sometimes it tries to accomplish so much within a single project or policy that it ends up failing to accomplish anything at all. I’ve come to think of this as the problem of everything-bagel liberalism. Everything bagels are, of course, the best bagels. But that is because they add just enough to the bagel and no more. Add too much... and it becomes a black hole from which nothing, least of all government’s ability to solve hard problems, can escape. And one problem liberals are facing at every level where they govern is that they often add too much. They do so with good intentions and then lament their poor results....The challenge of the everything-bagel approach to governing is that sometimes, it’s exactly the right thing to do. On-shoring the supply chain for renewable energy makes real sense. Making sure jobs in semiconductor factories are good jobs is worthwhile. But there is a cost to accumulation. How many goals and standards are too many? And why is subtraction so rare? It is impossible to read these bills and guidelines and not notice that the additions are rarely matched by deletions. Process is enthusiastically added but seldom lifted. The result is that public projects — from affordable housing to semiconductor fabs — aren’t cost competitive, and that makes them vulnerable when a bad economy hits or a new administration takes over and the government cuts its spending. Liberalism is much better at seeing where the government could spend more than at determining how it could make that spending go farther and faster.
Everything bagel liberalism has strong resonance in developing countries like India. In many areas, developing countries tend to adopt state-of-art regulations from their developed counterparts. In fact, they are actively encouraged to do so by multilateral lending agencies and commentators. This has consequences that adversely impact their growth.
For example, we have regulations that have conditions on labour standards, safety, gender, corruption, small business promotion, domestic content requirements, environmental protection, consumer protection, affordability, inclusivity, and so on. Many of them are a staple requirement of all legislation. And, for sure, some of them should rightfully be included. But others are merely included for purely ideological (or political correctness) reasons. Further, those included have excessively aspirational standards that impose prohibitive costs as to make the underlying activity being proposed unviable.
Historical trajectories of economic growth of today's developed economies point to a Maslowian hierarchy of values. The early development pathway of all these countries, including that of China recently, has been characterised by considerable externalisation of costs by all economic agents. While gains have generally been privatised, environmental and social costs have been externalised to society. Looser regulations and their enforcement, corruption, crony capitalism, etc., are inevitable accompaniments to rapid economic growth from a low baseline. Once countries reach a certain income level and command adequate tax revenues, they venture into the higher levels of the values hierarchy. This is a messy reality of development.
2. Arguably the single most important economic growth constraint facing African countries is the availability of uninterrupted and good-quality power.
According to Nigeria’s National Bureau of Statistics, the country’s national grid is only fully up and running for seven hours a day, and according to the World Bank’s survey of 2,916 Nigerian firms, there are 32 outages per month, each averaging 11.6 hours... On average, African firms deal with over a week of outages a month, and 40 percent of businesses across Africa identify lack of electricity as a major constraint to growth. In Ghana, where the problem is less acute, companies still have had to send their workers home, fire their most expensive employees, and suspend production in response to frequent power outages. Outages have meant that grocery stores, hotels, and restaurants can’t reliably keep food refrigerated and sometimes have to throw out what they had planned to sell...
A 2014 World Bank survey estimated that 71 percent of Nigerian firms use generators, as do nearly half of households... In order to expand access to electricity, African governments have tried to make it very cheap, usually through a government-owned energy company... And state-owned companies are largely responsible for transmission and distribution as well... The price that electricity utilities are allowed to charge is not sufficient to cover the cost of generating and distributing electricity. For instance, in 2014, Nigerian energy companies only collected about $0.06 for every kilowatt hour they provided, even though they spent around $0.20.
So firms use generators, with their set of competitiveness and other problems,
Powering a business by running a diesel generator is expensive. It costs about $0.44 to generate one kilowatt-hour of electricity with a small diesel generator in Nigeria. Not only is that many times the grid price in Africa, it is more expensive than the retail price of grid electricityanywhere in the world... They pay that when the grid is up; for the rest of the time, when they’re running a generator, they are paying about $0.44/kWh, plus the cost of the generator. The think tank Energy for Growth estimates that Nigerian firms run generators 59 percent of the time, so the average price they pay is thus a whopping $0.24/kWh across the workday. This is not only almost three times the official price, it is almost double what the average American business pays... In Liberia, the reliability-adjusted price for power that includes the cost of generator-produced energy is $0.45/kWh, nearly three times what an American would pay. In Ghana, it’s $0.22/kWh; in Kenya, it’s $0.17/kWh. So businesses in some of the poorest countries in the world pay considerably more for electricity than they would in one of the richest – and, of course, business owners in sub-Saharan Africa have considerably lower revenues with which to pay these high bills. Business owners often then pay their staff less so that they can still pay their electricity bills – leaving employees worse off than they otherwise might be.
This pretty much sums up the challenge
The demand for power in Nigeria is at least four times what is available at the current price – but at that price, the four companies that provide Nigerian power don’t have the money (or the incentive) to build four times their current capacity. Indeed, they’re already losing so much money they require periodic bailouts; they can hardly invest in any new equipment at all... But in Africa, the opposite is true. Every new customer, every village that is connected to electricity for the first time, is a liability to the utility. They have no incentive to expand coverage; indeed, they would lose less money if their customer base shrank. They do not want to increase the number of hours of electricity supplied; that, too, just increases their losses. They are less ‘companies’ that attempt to provide a service and more ‘endless money pits’ that are better off the less electricity they actually provide.
While not as bad, the situation was not much better in India three decades back. Power generation was entirely in the public sector, tariffs were low, distribution losses high, utilities were losing money on each unit sold, load-shedding was pervasive, unreliable power was the biggest problem for industries, and so on. Things have changed dramatically since in terms of the supply-side, despite the less-than-required improvements on the distribution side on tariff setting and distribution loss reduction. The single biggest contributor has been the privatisation of the power generation sector. From being a government monopoly, it's been paradigm redefining for the government to have become a marginal player in incremental generation capacity expansion.
If there is one thing that the India experience and Eskom mess in South Africa shows, it's just that there may be a low-hanging fruit in promoting large-scale private participation in power generation in Africa. The only challenge will be to get investors into power generation. And this, in turn, is dependent on tariff increases and the distribution side loss reduction. While private generators can take care of the latter, tariff increases is a difficult political economy problem. It will be a long haul before Africa transitions to a regime of reliable and uninterrupted supply. For industries, especially the large ones, one solution would be to allow captive power plants.
3. A third essay tracks the reasons for France's relative decline, its premature demographic transition.
If we were to condense all of human history into one short telling, it would look like this: millennia of stagnation, then the industrial revolution (in the eighteenth century), then the demographic transition (in the nineteenth century), then sustained economic growth – the dramatic leap forward experienced by humanity in the past few centuries...France’s emergence as a major global power spanned several centuries, from the foundation and expansion of the Kingdom of the Franks under Clovis and Charlemagne in the fifth and ninth centuries to Napoleon. During the Hundred Years’ War in the fourteenth century, the population of Rouen, only France’s second city, was 70,000 inhabitants – almost double London’s. By the seventeenth and eighteenth centuries, under the long-lived Louis XIV France boasted the continent’s largest population and the world’s second largest colonial empire, after Spain... The historical decline in fertility took hold in France first, in the mid-eighteenth century and more than a century earlier than in any other country in the world. At the time, there were 25 million inhabitants in France and 5.5 million in England. Today, there are 68 million inhabitants in France and 56 million in England. Had France’s population increased at the same rate as England’s since 1760, there would be more than 250 million French citizens alive today... I estimate that the decline in fertility took hold in France in the 1760s, more than a century earlier than in any other country. The average number of children per woman declined from more than 4.5 to 3.5 in less than 40 years. In the meantime, the average English woman was bearing six children.
In my research, I argue that the diminished sway of the Catholic Church, nearly 30 years before the French Revolution, was the key driver of the fertility decline... Whether it was dechristianization, secularization, or simply a loss of influence of the clergy is hard to say, but the data shows that attitudes toward life and death changed radically in the course of the eighteenth century... With the loss of influence of the Church, the clergy could not oppose fertility controls anymore. In the eighteenth century, Casanova resorted to condoms... The regions that secularized experienced a much earlier decline in fertility than those that did not. The difference between Provence, a stronghold of dechristianization, and Brittany, a stronghold of Catholicism, is almost as large as that between France and England.... the French regions where the Counter-Reformation was strongest are those which secularized the most, suggesting that secularization might have been a backlash against religious powers closely connected to absolutism... French historian Fernand Braudel argued that ‘the entire course of French history since then has been influenced by something that happened in the eighteenth century’, and asks, ‘did France cease to be a great power not, as is usually thought, on 15 June 1815 on the field of Waterloo, but well before that, during the reign of Louis XV when the natural birth-rate was interrupted?’
This is an interesting contrast between England and France.
While England was the cradle of the industrial revolution and developed with innovations and industrialization, France developed by challenging the authority of the Church and decreasing fertility and population growth, achieving growth in income per capita equivalent to that of England after 1760. Income per capita is, by definition, total income divided by population. In a nutshell, England increased the numerator while France limited the growth of the denominator – a radically different, but very effective, path of development... The decline of Catholicism, and fertility, in eighteenth-century France turned it from a demographic powerhouse – the China of Europe – to merely a first-rank European power among several, but also allowed it to keep up with British living standards without an industrial revolution.
On a similar note, Jared Rubin and Mark Koyama in their excellent book on national economic growth highlight two examples of demographic disruptions.
The Black Death, the bubonic plague which ravaged Europe and elsewhere during the mid-fourteenth century and wiped out 20-50% of the population in European countries, had several consequences. One of its lasting consequences was that it brought about an end to serfdom in Western Europe. In England, where half the rural population were serfs who owed labour and other dues to their feudal lords, the nearly 55% decimation of the population led to massive labour scarcity, which made it impossible for feudal lords to impose servitude among their erstwhile serfs. Serfs could flee to another manor or urban areas. Serfdom declined sharply in England from the 1350s. Much the same trends played out in many parts of Europe. The collapse of serfdom allowed the flowering of agrarian capitalism, where landholdings were consolidated and leased out to tenants. This increased agricultural productivity and created the conditions for the Industrial Revolution.
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