Vietnam, a leading indicator for the rest of the developing world, has seen tremendous growth in per capita energy consumption.
During a recent family vacation in Vietnam, I learned that the country is a microcosm for several major trends in energy consumption in the developing world: (1) there’s a thriving middle class, (2) hot and humid weather is driving air conditioning demand and (3) rural electrification rates are very high. (We also loved the food, culture and beaches, and we were gripped by the poignant remnants of the American War, as it’s known locally. I highly recommend it as a vacation destination if that’s your thing.)
Let’s start with some basic facts: Vietnam has seen extraordinary growth in per capita energy consumption over the past several decades. Since 1990, the earliest year for which data are available for most countries, total per capita energy consumption in Vietnam has more than doubled. (All the country-level data in this post come from the World Bank Development Indicators.) This puts Vietnam in the top 3% of countries in the world in terms of growth in per capita energy consumption. Of the countries with more than 5 million people, only China and Thailand have had more rapid growth.
Per Capita Energy Consumption Relative to 1990
What might be fueling this growth? Certainly, energy consumption grows with general development. But that’s not the whole story in Vietnam. It has definitely experienced rapid growth in per capita GDP, but it’s energy consumption has grown faster relative to GDP than many other countries. (In econ-speak, it’s income elasticity of energy consumption has been high.)
Rising Middle Class
Some of my previous research suggests that a growing middle class will drive rapid increases in energy consumption. As people come out of poverty and enter the middle class, they buy their first refrigerator or motorbike, or they take their first airplane trip. Those things require energy, as does building the infrastructure to support them. We saw a whole lot of road construction and brand-new highways and bridges as we drove around central Vietnam.
Paul Gertler, Orie Shelef and I analyzed data from around the developing world and noted a distinct pattern in the relationship between household income and energy use. When households move from extreme poverty to just being poor, energy use does not increase by much. These households typically use their growing incomes to consume more calories or higher quality calories. At the other end of the income distribution, when households move from middle to upper middle class, their energy use also does not change by much. It’s when households move out of poverty and into the middle class that their energy consumption really jumps.
This suggests that a dollar of GDP growth will have very different implications for energy use depending on what type of household gets it. When a country’s economic growth lifts many people into the middle class, its energy consumption grows quickly. This is where Vietnam is a standout. Income inequality in the country is quite low, possibly a legacy of communism. We saw signs of the thriving middle class everywhere, from the intersections clogged with motorbikes to packed domestic flights.
Our research suggests that the existing forecasts of world energy demand do not adequately account for growth driven by the rising middle class across the developing world. This omission could help explain why existing forecasts under-predict growth in energy demand, as I’ve blogged about earlier.
Vietnam’s hot and humid climate is another factor driving growth in energy consumption. Leo Biardeau, Lucas Davis, Paul Gertler, and I have some ongoing work documenting what we describe as “air conditioning potential” across the globe. This is basically a very fine-grained assessment of where people live and how many hot days they experience in a typical year.
Vietnam has nearly 100 million people, all of whom live closer to the equator than the whole Continental US and experience lots of hot days. If people in Vietnam used air conditioning the way Americans do on similarly hot days, Vietnam’s AC-driven energy consumption would equal the US’s, even though the population is one-third as large.
This isn’t just a theoretical possibility, either. Vietnam is starting to realize its air conditioning potential. From 2012-2016, air conditioning sales grew by a whopping 160%. Again, much of the developing world experiences warmer climates than the global north, so places like India and Sub-Saharan Africa are poised to see rapid increases in energy demand for air-conditioning.
Finally, Vietnam has made incredible progress on rural electrification, and is frequently cited as a role model at conferences I attend. Household electrification rates increased from 2.5% in 1976, just after the war ended, to over 99% in 2014, the last year for which the World Bank provided data. This World Bank report provides a fantastic overview of the process. It describes the “bottom-up” approach, particularly during the early years. EVN, the utility, was responsible for building the network to the communes and then a variety of local governments and organizations built the last-mile local distribution system to bring electricity to households. The local organizations continued to maintain the system, set prices and collect bills. Tariffs were not unified on EVN’s system until 2009.
It’s important not to mistake growing energy demand in Vietnam for high levels of demand. The average Vietnamese person consumes one-tenth of the average American. But, given that the government of Vietnam is forecasting 8 to 10% growth in electricity consumption in the near term, Vietnam could catch up pretty soon.
So, “Good Morning Vietnam”, a la Robin Williams, is appropriate: Vietnam’s energy appetite is awake and fully caffeinated. Growing energy demand is good news if you’re in the business of selling appliances in Vietnam, or if you’re a first-time appliance buyer, but it’s also something we need to wrap our collective heads around given the negative externalities associated with energy production.
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.