The impact of blackouts on the performance of micro and small enterprises: Evidence from Indonesia

•This paper analyzes the causal impact of blackouts on the performance of micro and small enterprises in developing economies.•Estimates the cost of blackouts in Indonesia.•Finds that blackouts negatively affect average labor productivity.•Shows that installing a captive generator is a common strategy for mitigating the impact of blackouts.•Provides evidence to assist developing countries in prioritizing electricity reliability. The reliability of electricity supply is one of the most pressing challenges faced by many micro and small enterprises (MSEs) in developing countries. MSEs play a pivotal role in generating employment in these countries, yet the productivity of MSEs is relatively low. Little is known about how blackouts affect performance of MSEs. This paper is the first study to estimate the impact of such power blackouts on productivity of manufacturing MSEs and to discuss the role of the government in addressing the problem. We employed a pseudo-panel dataset covering six firm cohorts within 21 regions the Indonesian national electricity company operates in from 2010 to 2015. Our identification strategy firstly involved examining blackouts determinants and then using these determinants as instruments in an instrumental variable (IV) dynamic panel fixed effects estimation while controlling for factors that potentially affected productivity and correlated with blackouts. We found that electricity blackouts reduced average labor productivity and the resultant losses amounted to approximately IDR 71.5 billion (USD 4.91 million) per year in Indonesia. Therefore, it is crucial to improve electricity supply reliability in developing countries. We found that introducing a captive generator as a way to cope with power outages is positively associated with productivity, and that MSEs that have captive generators benefit when the power supply is poor. Our findings will assist policy makers to prioritize addressing power blackouts relative to other constraints MSEs face.