In 1930, fewer than 10% of farms in the US had access to electricity. By the mid-1950s, almost every farm in the country had electricity. While the US was able to extend electricity to its rural locations rapidly over a 25-year period, much of the developing world still remains without electricity today. In 2012, 1.3 billion people lived without electricity worldwide. In an effort to increase electrification rates and promote growth in developing nations, the World Bank provides over $8 billion in energy-related loans annually, with the bulk of these loans focused on large infrastructure investments, such as dams and high-voltage transmission grids.
Recently, economists have begun to study the effects of large infrastructure improvements on economic outcomes, such as poverty and economic growth. Studies by Duflo and Pande (2007) and Lipscomb et al. (2012) find that large-scale infrastructure investments tend to lead to economic growth and reductions in poverty, but with negative consequences for certain populations. In each of these studies, the cost of the infrastructure is significant.
Subsidised electrification and agricultural outcomes
While large-scale projects have demonstrated benefits, often at a large expense, the literature has neglected smaller, more targeted, less expensive projects. In new research (Kitchens and Fishback 2013), we focus on electrification projects that directly connect rural consumers to the electric grid. In 1935, the Rural Electrification Administration (REA) was created in the US. In a five-year period, the REA provided $3.6 billion in subsidised loans to newly established cooperatively owned utilities. With these funds, rural utilities doubled the number of farms receiving electric service, and constructed more rural distribution line than private companies had constructed in the previous 50 years.
Using a sample of approximately 1,400 rural counties in the US from 1930 to 1940, we estimate the relationship between changes in access to electricity via the REA and agricultural outcomes such as crop values, livestock values, farm size, and land values. We are interested in how counties that received access to electricity from the REA changed relative to similar counties that did not receive REA electricity.
Our empirical findings suggest that access to electricity improved outcomes in agricultural counties. While agriculture was in decline everywhere at the peak of the Great Depression, counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity relative to counties that did not obtain electricity from the REA.
While the empirical findings suggest that access to electricity stimulated agricultural production, it is possible that some other factor is driving the results. For instance, it could be the case that administrators of the REA selected loan applicants on the basis of potential success, leading to a selection bias. To address this sort of concern, we carefully examined documents published by the REA, which suggested that administrators were severely concerned with the ability of loan applicants to pay back the loan. Furthermore, the single largest factor affecting the ability of applicants to repay the loan was the wholesale power contact. As administrators noted,
“Sometimes a difference of a fraction of a cent per kilowatt hour in the wholesale rate will represent the difference between a sound and unsound project.” (REA 1937, REA1938, Slattery 1940)
To address the cost of wholesale power contracts, we constructed a measure of a county’s closeness to existing high-voltage transmission lines using published maps from the Federal Power Commission. After including this measure, we find no evidence of selection, suggesting that our estimates are not affected by selection.
Discussion and conclusion
The REA was different from many other electrification projects. First and foremost, it was a loan programme that focused on the construction of distribution lines and connecting customers, rather than direct investment in grid infrastructure and generation. It also worked closely with loan applicants to design a system that was financially successful in order to minimise the risk of default. At prevailing interest rates, the REA loans provided applicants an 18.9% subsidy on the principal of the loan, however the programme was so successful that many applicants were ahead of schedule on payments. Overall, the system proved to be fiscally sound – as of 1960, less than 1% of all REA loans were more than 30 days delinquent (NRECA 1960).
Electrification has been a central policy tool in developing countries, as nations look to invest in infrastructure. Several nations are currently seeking billions of dollars to extend and make their infrastructure more reliable to attract firms and promote growth. We show here that the REA’s extension of loans to cooperatives to electrify farms led to large productivity improvements in agriculture, which in turn led to increases in land values.
Duflo, Esther and Rohini Pande (2007), “Dams”, Quarterly Journal of Economics 122(2): 601–646.
Kitchens, Carl and Price Fishback (2013), “Flip the Switch: The Spatial Impact of the Rural Electrification Administration 1935-1940”, NBER Working Paper 19743.
Lipscomb, Molly, Ahmed Mushfiq Mobarak, and Tania Barham (2012), “Development Effects of Electrification: Evidence from the Geologic Placement of Hydropower Plants in Brazil”, American Economic Journal: Applied.
National Rural Electric Cooperative Association (1960), Rural Electric Fact Book, Washington, DC.
Rural Electrification Administration (1937), Report of Rural Electrification Administration 1937, Washington, DC: US Government Printing Office.
Rural Electrification Administration (1938), Rural Electrification on the March, Washington, DC: US Government Printing Office.
Slattery, Harry (1940), Rural America Lights Up.