Discussion Paper

No. 2016-6 | February 08, 2016
Energy Consumption and the Size of the Informal Economy

Abstract

The authors empirically investigate the relationship between energy consumption and the size of the informal economy. Relying on panel data regression models, their results show that at the aggregate level, energy intensity is inversely related to the size of the informal sector, providing actual empirical evidence on the presence of high labor and low capital intensity in the informal economy. Furthermore, the authors also find some support towards the presence of non-linearity and asymmetry in this relationship.

JEL Classification:

O17, O13, P48, E26

Assessment

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Links

Cite As

Mustafa Metin Basbay, Ceyhun Elgin, and Orhan Torul (2016). Energy Consumption and the Size of the Informal Economy. Economics Discussion Papers, No 2016-6, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-6


Comments and Questions


Anonymous - interesting paper
February 08, 2016 - 18:57

in my opinion it is a very interesting and valuable paper. one highly minor concern that I have is whether the results that the authors have obtained are robust to different estimates of informal sector data, other than the one they are using. Of course, I assume that such a ...[more]

... dataset (suitably long enough to be used for a VAR analysis) exists. If not, I guess the authors can leave the analysis as it is and the paper can be published without such a robustness check.


Ceyhun Elgin - reply to the comment
February 16, 2016 - 08:15

thank you for your comments. To the best of our knowledge, there is no alternative to the dataset we use in this paper that is at the same time also suitable (have a long enough time-series dimension) for a VAR analysis. In the revised draft of our paper, we will ...[more]

... make sure that this is the case and if yes, mention this within the revised paper.


Ceyhun Elgin - response
May 19, 2016 - 13:54

Thank you for your comments and suggestions. Unfortunately, there is no other dataset with a significant time-series dimension that we are aware of. The only alternative is the dataset by Schneider, Buehn and Montenegro (2010) that reports estimates from 1999 to 2007 (so the time-series dimension is 9 for most ...[more]

... countries and is 8 for some others in the dataset) Nevertheless, we mention this fact in the revised draft of our paper which will probably be posted here in a few days.


Anonymous - invited referee comment
February 10, 2016 - 07:27

a nice paper contributing highly to the designated literature. Here are my (highly minor) comments

- Conclusion and Policy discussion should be in separate sections. So I suggest the authors create a new (last) section titled conclusion and leave the policy discussion in the previous section.

- One ...[more]

... paper that can be cited is as follows:

http://www.sbp.org.pk/research/bulletin/2013/Vol-9-1/Environmental%20Regulation,%20Pollution%20and%20the%20Informal%20Economy.pdf

- Finally, the authors could also cite a few paper from the environmental economics literature that investigate the relationship between several environmental indicators (such as pollution which is obviously highly related to energy consumption) and informal sector size.One such paper for example is given by here:

http://www.sciencedirect.com/science/article/pii/S0921800912000092


Ceyhun Elgin - reply to the comment
February 16, 2016 - 08:17

thank you for your comments. We will revise our paper following your comments. Specifically, we will

- separate the discussion and conclusion sections
- cite the papers you suggested as well as some others from the environmental economics literature.


Ceyhun Elgin - response
May 19, 2016 - 13:55

Thank you for your comments and suggestions. Following your comments, we now have separated the conclusion and policy discussion section in separate sections We also have cited some papers from the environmental economics literature along with the suggested paper.The revised paper will probably posted here in a few days.


Anonymous - Comments
February 10, 2016 - 08:28

This paper finds that there is a negative relationship between the energy intensity of production in a country and the size of the informal sector. It also finds that it is non-linear and asymmetric. These results are expected, so the addition to our understanding of the world is limited.
The ...[more]

... data on informality (159 countries, 33 years) used in the econometric analysis comes from model simulations with a two sector dynamic general equilibrium model. Whether these results make sense is not possible to say, and there is no clear definition of “informal sector”. The same model is obviously used to measure the size of the informal sector in all countries, from the poorest to the richest. I would assume that the sectors are of different character in the different contexts, and that it would be hard to apply the same model throughout. While energy use is low in the informal sector in Africa, it is not clear that it would be lower in the black market than in the white market in Europe. And moreover, it is not clear what is included in the informal sector. Are African smallholders informal, for example? In any case, it is not shown in any way in the paper that the data used for the analysis make sense.

The data is then entered into a series of regressions linking the relative size of the informal sector to energy intensity. And the result mentioned above follows. The non-linearity implies that energy intensity actually increase when the informal sector reaches a size of 80%. I think that it would have been interesting to look directly at a scatter plot of the observations. The econometrics actually does not add much beyond being a compact data description. There is no explanation of the pattern coming out of the analysis.

There is some policy discussion in the concluding section, but it is not so enlightening. The first point is that one should be aware that attempts to reduce informality and increase formal production will lead to higher energy demand. Second, the elasticity of energy consumption with respect to informal sector size changes with varying informality. Third, a reduction in informal sector size has a larger effect on energy demand than an increase- These conclusions are not so exciting.

Moreover, given that I am unsure about what is really being measured here, it is not clear that we can make use of the estimates anyway.


Anonymous - referee comment
February 10, 2016 - 14:56

The authors themselves could probably reply this comment better than I do but I very much disagree with the previous somewhat negative comment in its criticism towards the informal sector measures. It is very much true that size of informality is by definition hard to measure. However, none of the ...[more]

... measures are perfect. If the DGE measures by Elgin and Oztunali used in this paper are criticized, I believe that the MIMIC measures of Schneider and Buehn and others are worse. the good thing about the DGE measures is that they are based on microfoundations not on ridiculously oversimplified assumptions of the MIMIC approach.

On top of that I very much believe that this paper is highly policy relevant. However, I suggest that the authors expand a bit on the policy discussion.


Ceyhun Elgin - reply to the comment
February 16, 2016 - 08:19

Thank you for your comments. We will revise your paper following your comments. Specifically we will expand on the policy discussion section of the paper.


Ceyhun Elgin - reply to the reader comment
February 16, 2016 - 08:26

Thank you for your comments. Here are our responses

- Surely, none of the informality datasets (be it MIMIC or DGE or something else) are perfect as by the very definition of informality, it is hard to measure. However, we very much disagree that the dataset used in our ...[more]

... paper is unfit as suggested by the reviewer. We will elaborate on this in full detail in the revised draft of the paper.

- We will improve upon the the discussion of our findings beyond reporting the econometric regression results.

- We will improve upon the policy discussion. Indeed we will make it a separate section (as suggested by a referee) and expand upon it so that our contribution is clear in the revised draft.


Ceyhun Elgin - response to comments
May 19, 2016 - 13:56

Thank you for your comments and suggestions. However these comments are independent of whether we use the DGE approach or the MIMIC approach (the method developed by the reader who gave this comment) If we follow the reader’s comments, then one cannot conduct any empirical analysis using any informal sector ...[more]

... dataset as all these approaches are using “the same model to measure the size of the informal sector in all countries, from the poorest to the richest.” So for example, when using the MIMIC approach Schneider and his coauthors use the very same empirical model to estimate informal sector size in 162 countries. But this did not stop other economists (including A. Buehn) to use this dataset for empirical research.
As for the second main comment of the reader, we expanded on the discussion of our results (especially the finding that the relationship is non-linear which we believe is an highly interesting result.) The revised paper will probably be posted here in a few days.


Anonymous - Referee Comment
February 12, 2016 - 12:45

This is a nice paper that investigates the relationship between energy consumption and the size of the informal economy. I believe that the paper significantly contributes to the literature as there is no previous paper investigating this relationship. In that sense the contribution of this study is highly novel. (much ...[more]

... more novel than the ridiculous studies of others investigating the relationship between religiosity and shadow economy for instance)

I have two minor comments on the exposition though

1- the paper uses passive or active voice interchangeably in the paper. This has to change and the authors should either stick to passive or active voice in the whole paper.

2- Tables should be self-explanatory. That is, the authors have to provide notes under each table so that one can only use the information within the paper to fully understand what the table is about.


Ceyhun Elgin - reply to the comment
February 16, 2016 - 08:18

Thank you for your comments. We will revise your paper following your comments. Specifically,

1- We will grammatically use a consistent voice throughout the text.

2- Tables will be made self-explanatory as the referee suggested.


Ceyhun Elgin - response
May 19, 2016 - 13:57

Please see the attached letter.


Friedrich Schneider, Johannes Kepler University Linz - Report
February 15, 2016 - 09:49

see attached file


Ceyhun Elgin - reply to the comment
February 16, 2016 - 08:22

Dear Fritz, thank you for all your comments. We will revise the paper accordingly. Specifically,

- We will add a new section including theoretical considerations.

- Make sure that the ceteris paribus conditions are met.

- Further discuss and describe the informality dataset used in the paper.


Ceyhun Elgin - response letter
May 19, 2016 - 13:58

see the attached file detailing our revisions based on the comments from the reviewer.


Anonymous - Referee Report 1
March 15, 2016 - 09:10

see attached file


Ceyhun Elgin - reply to the comment
April 06, 2016 - 09:14

Thank you for your comments. We will address your suggestions and comments in the revision.


Ceyhun Elgin - response
May 19, 2016 - 13:58

see the attached file detailing our revisions based on the comments from the reviewer.


Anonymous - Referee Report 2
April 15, 2016 - 09:41

see attached file


Ceyhun Elgin - reply to the comment
April 15, 2016 - 12:57

thank you for your comments, we will address them in our revision.


Ceyhun Elgin - response
May 19, 2016 - 13:59

see the attached file detailing our revisions based on the comments from the reviewer.