International Specialization, Sector Structure and the Evolution of Manufacturing Energy Intensity in OECD Countries.

• Author: Mulder, Peter

1. INTRODUCTION

   Changes in aggregate energy intensity result from energy efficiency improvements at the sector and firm level, as well as from changes in the structure of the economy. Efficiency effects are thought to be driven by energy-saving technological change, whereas the impact of a changing production structure (i.e. sector composition) results from the fact that some production processes inherently require more energy inputs than others, relative to capital and labor inputs. In the field of energy studies a popular line of research has been to separate the efficiency effect from the structure effect by means of index number decomposition (or shift-share) analysis (see Ang and Zhang (2000) and Liu and Ang (2007) for surveys). Despite differences as regards the use of data, methodologies, scope and sector detail in the numerous decomposition studies, it is safe to conclude from this literature that in the last three decades of the 20th century trends in aggregate energy intensity have been influenced more by energy efficiency change than by changes in the production structure.

   However, recently, evidence has been presented that the role of the structure effect is nonetheless sizeable and, interestingly, increasing in importance over time (e.g. Fisher-Vanden et al. 2004, IEA 2004, Huntington 2010, Ma and Stern 2008, Mulder and De Groot 2012, Unander 2007, Weber 2009). Moreover, some recent studies suggest that cross-country differences in energy intensity levels are mainly driven by differences in the structure of economies. For example, Taylor et al. (2010) find that structure effects are responsible for almost half of the variation in Manufacturing energy intensities across developed countries in 2005. Duro et al. (2010) and Mulder and De Groot (2012) find that cross-country convergence of aggregate energy intensity is mainly driven by convergence of energy efficiency levels across countries, rather than by convergence of the structure of economies.

   Understanding the (changing) role of structural changes in driving aggregate energy intensity trends is interesting for various reasons. First, a sizeable structure effect may limit the potential of energy policy to influence future energy efficiency trends, because changes in energy intensity due to shifts in the economic structure are likely to be independent of energy policy mandates (Huntington 2010). Second, production patterns across countries have changed considerably over the past decades under influence of a tremendous increase in scale and scope of international trade, stimulated by reductions in trade barriers and advances in transport and communication technology (Krugman 1991, Maddison 2001). The literature suggests various channels through which this development influences the use of energy in production. Depending on which mechanism prevails, growing international trade may contribute to either increasing or decreasing variation in energy intensity levels across countries. On the one hand, trade linkages may help reduce productivity gaps among countries by accelerating knowledge diffusion and equalization of factor prices, via high-tech imports or via increasing international competition (e.g. Alcala and Ciccone 2004, Coe and Helpman 1995, Comin and Hobijn 2004, Hayami and Ruttan 1985, Holmes and Schmitz 2001, Waugh 2010). On the other hand decreasing trade costs may stimulate international specialization and spatial separation, which could lead to divergence of factor productivity, via shifts in sector structure, learning effects or terms of trade changes (Copeland and Taylor 1999, Grossman and Helpman 1991, Young 1991).

   This paper provides new empirical evidence on cross-country energy intensity dynamics in relation to increasing international trade and globalizing production patterns. It focuses on the Manufacturing sector, for two obvious reasons. First, despite the emergence of the 'Service Economy', Manufacturing remains responsible for a substantial part of total final energy consumption in developed countries. Second, it is generally believed that production processes in the Manufacturing sector have been particularly influenced by globalization. More specifically, falling costs of transport and communication have greatly encouraged the trend in Manufacturing to slice up the value chain, i.e. to produce a good in a number of stages in a number of locations, adding a little bit of value at each stage. Evidently, such slicing up has greatly increase the volume of international trade (Krugman et al. 1995).

   To the best of our knowledge this paper is the first to explicitly link the structure effect commonly reported in the energy decomposition literature to changing global production patterns under influence of international trade and specialization. Our analysis consists of the following steps. First, we present (in Section 3) some key stylized facts about the changing role of the Manufacturing sector in the economy and the development of Manufacturing energy intensity across countries. Second, we use index number decomposition analysis to identify the impact of changes in the structure of economies on the evolution of aggregate Manufacturing energy intensity levels (Section 4). Third, we test for the assumption that countries with relatively high initial Manufacturing energy intensity levels tend to catch-up to more advanced countries (Section 5). Fourth, we examine how and to what extent these catch-up processes are influenced by changes in the structure of economies. To this aim we combine index number decomposition analysis with so-called [beta]-convergence and [sigma]-convergence analyses inspired by the empirical macroeconomic growth literature. Fifth, we identify the degree of specialization across countries and its evolution over time, both in terms of energy consumption and value added (Section 6). To this aim we measure the geographical concentration of Manufacturing energy use over time, and to what extent countries specialize in sectors for which they have a comparative advantage in terms of energy intensity. Finally, we link the observed patterns of specialization and concentration in Manufacturing to the role that structural changes play in driving the aggregate evolution of cross-country differences in Manufacturing energy intensity

   We make use of a new dataset that was introduced by Mulder and De Groot (2012), who used the data to present an economy-wide analysis of energy intensity trends across OECD countries. In this paper we single out the Manufacturing sector, to provide a more in-depth analysis. Unlike Mulder and De Groot (2012), we assess how energy intensity trends are influenced by changing global production patterns under influence of international trade and specialization, and we identify in detail which Manufacturing sub-sectors drive the observed trends. Clearly, given data availability, there is a trade-off between the number of sectors and the number of countries that one can include in the analysis. Cross-country decomposition and convergence analyses in the field of energy studies typically include up to 15 sectors, and mostly six or seven sectors (see, for example, Aldy 2006, Duro and Padilla 2011, Jakob et al. 2012, Markandya et al. 2006, Miketa and Mulder 2005, Liddle 2009, Romero-Avila 2008, Sun 2002, Unander 2007). In contrast, our analysis includes 25 Manufacturing sectors for 19 OECD countries, covering the period 1980-2005. This is a major advantage because aggregate energy intensity trends may obscure considerable differences across industries (see, for example, Huntington 2010, Jorgenson 1984, Mulder and De Groot 2007, Mulder and De Groot 2012) and the inclusion of a limited sector detail may underestimate the importance of structure effects in a decomposition analysis.

   In our analysis we find that, notwithstanding considerable sector heterogeneity, in most countries the rate of energy-intensity decline in Manufacturing accelerated considerably after 1995, especially in the USA and Eastern Europe. Structural changes indeed explain a considerable and increasing part of the observed trends in Manufacturing energy intensity. Cross-country convergence of Manufacturing energy intensity levels is entirely driven by efficiency improvements in lagging countries, while undermined by increasing international differences in sector structure. More specifically, we find that efficiency-driven catching-up processes only began to dominate the diverging impact of structural changes on aggregate energy intensity patterns by the end the 1990s, reversing gradual cross-country divergence of Manufacturing energy intensity levels into robust and rapid convergence. In agreement with this clear break in the trend, we show that increasing trade and market integration helped reducing energy productivity gaps across countries, despite the fact that increasing specialization contributed to growing cross-country variation in sector structure. Energy-intensive sectors play a major role in driving these trends, while various countries increasingly specialize in sectors for which they do not have a comparative advantage in terms of energy intensity performance.

   The paper proceeds as follows. In Section two we describe our data in more detail. In Sections three to six we present the various steps of our analysis, as described before. Section seven concludes.

2. DATA

   As mentioned before, we make use of a new dataset developed by Mulder and De Groot (2012), which is based on the EU KLEMS database (O'Mahony and Timmer 2009). (1) The dataset offers industry-level measures of both value added and energy inputs, together with supplementary input and productivity data series, derived from a consistent framework of national accounts and supply-and-use tables across countries. As a result, our energy and economic input series and value added series are mutually consistent and avoid the usual matching and aggregation...