Reliable Electricity Access, Micro and Small Enterprises, and Poverty Reduction in Indonesia

Abstract

While subsidising electricity tariffs, the Indonesian government has launched a massive electrification campaign to improve the quality of life of Indonesians. However, whether these efforts have increased access to energy for all and whether this access reduces poverty is unclear. We empirically test the causal effects of electricity access on poverty reduction. We also investigate the potential role of micro and small enterprises (MSEs) as the transmission channel for poverty reduction. To isolate any endogeneity, we use the instrumental variable approach. We exploit the village’s proximity to the nearest power plant in 1985 as the exogenous variation of the historical least-cost distance by the state-owned electricity company, PLN, to instrument the endogenous nature of current-time electricity access. Our results show that expanding reliable electricity services contributes significantly to poverty reduction. Nevertheless, we find no evidence that the development of MSEs has an influential mediating role in the poverty reduction effects.