Illuminated capital tells only part of the story.<sup>19</sup> There is also capital (or electricity consumption) that is not visible to the satellites. Non-visible capital includes all the capital equipment _within_ factories, offices, wholesaling hubs, storage facilities, retail shopping areas, and homes. For example, lighting accounted for only 12 percent of total 2012 electricity consumption in the United States.<sup>20</sup> Machinery used in agriculture, mining, and forestry is also typically not visible at night. Not all roads are illuminated, especially in poorer areas of the world.

Very few countries are able to directly measure the stock of physical capital within their borders.<sup>21</sup> Instead, it is common to assume the value of the stock equals the accumulated value of physical investment, less some amount of depreciation from use. This so-called “perpetual inventory method” has been subject to considerable criticism over many decades.<sup>22</sup> Despite the criticism, and perhaps because it is easy to calculate, it remains the most commonly used approach.<sup>23</sup> Night-time lights data should allow one to make a much more direct assessment, subject to the assumption of a fixed ratio between illuminated and non-illuminated capital.

It is not easy to infer solely from night-time lights data how much non-illuminated capital is installed in each building, farm, or mine nor how many people and how much cargo is moving on each illuminated road. Nor is it easy to infer the degree to which installed capacity is put to use and how many people are employed in association with that capital. Similarly, it is not easy to infer only from night-time lights data how many consumers are active within a retail district. There are also many examples of underground residential and shopping areas that will never be detectable via night-time lights sensors.<sup>24</sup> For these reasons, it is also not possible to know how much electricity is consumed within various buildings or within non-illuminated areas.

It is unlikely that the ratio of non-illuminated capital to illuminated capital will be constant over time for rapidly growing countries. For example, the share of manufacturing and services will be increasing while the agricultural share will be decreasing. As regards electricity consumption, it is also quite possible that the elasticity of night-time lights to electricity will change as the energy-intensity of _GDP_ changes, e.g. as some nations become more or less efficient.

# **V. Characteristics of Night‐time Lights Data**

We use a version of the so-called “stable lights” data set created by Elvidge et al (2013).<sup>25</sup> These data were provided by the National Geophysical Data Center (NGDC) of the US National Oceanic and Atmospheric Administration (NOAA). These data have been extensively cleaned and processed by the NGDC so that

> 19 Henderson et al “examine the ratchet issue: the possibility that economic downturns will not be reflected in lights. This could happen if lights data are associated with the installation of new capacity that is not easily undone.  Their data rejected the ratchet hypothesis.

> 20 The US Energy Information Agency, http://www.eia.gov/tools/faqs/faq.cfm?id=99&t=3

> 21 Japan is a rare example, having conducted two comprehensive national wealth surveys in 1955 and 1970.

> 22 For example, Pritchett (1999) reminds researchers that money spent on investment may not always be turned into useful productive capital services.  Other criticisms focus on the choice of a starting data and value, inaccurate valuation of investment, problems accounting for different vintages of capital, and varying depreciation rates depending upon rate of capital usage and types of capital.

> 23 See for example the version 8.0 of the Penn World Tables in Inklaar and Timmer (2013).

> 24 Many cities in Japan and the Republic of Korea have extensive underground shopping areas.  Montreal, Canada, is also famous for its underground shopping facilities.

> 25 Accessed from <u>http://ngdc.noaa.gov/eog/dmsp/download_national_trend.html.  Several other night-time lights data</u> sets are also available.  See <u>http://ngdc.noaa.gov/eog/dmsp.html.</u>