11 estimate, and vice versa.

The main factors that could cause an upward bias in utilizing electricity consumption as a proxy for overall GDP are the following: (1) higher overhead and fixed electricity use per unit of output resulting from capacity underutilization during an economic downswing; (2) some technological redress due to the lack of basic maintenance; and (3) substitution of electricity for other energy sources (such as electrical versus gas heating)."<sup>9</sup> Conversely, the following factors would cause a downward (conservative) bias in utilizing electricity consumption as a proxy for overall GDP: (1) improved efficiency in electricity use, given the very low efficiency starting base and subsequent energy-saving reforms; (2) an increase in electricity prices; (3) a shift in output mix away from electricity-intensive industries (within existing enterprises and start-up businesses); and (4) increased underreporting of electricity consumption.

On balance, the consumption-increasing effects of the upward-biasing factors may be more than fully offset by the downward-biasing factors. This is equivalent to considering as conservative the assumption of unitary elasticity of electricity consumption response to output changes. Consequently, for our first FSU/CEE scenario, we will maintain an assumption of unitary elasticity, consistent with international estimates; one that assumes that the above factors roughly cancel each other out. Insofar as efficiency improvements and output mix changes have been particularly great, our estimates of the growth of the unofficial economy err in a conservative direction.<sup>20</sup> It is far from certain, however, that the assumption of unitary elasticity will hold across the board for all countries in transition. Hence, a second, more conservative, elasticity scenario is also to be used in our approach. Some countries may have become even more energy-inefficient during the transition, and others may have become more energy-efficient. Differences in energy efficiency across countries in the region are mainly the result of differences in the adjustment path in energy prices. The available evidence suggests that the price elasticity of electricity consumption is low, particularly in the short term. Unlike other energy sources, electric power pervades all aspects of modem economic activity, and substitution is difficult in the short term (unless there is significant excess generating capacity, such as in Kyrgyzstan). Generally, estimates for the price elasticity of electricity consumption are in the 0.05 to 0.15 range. But while the price elasticity may be low, the efficiency implications of large price adjustments can still be significant.

Drawing on the work of D. Gray, C. Freund, and C. Wallich,<sup>21</sup> as well as discussions with Dobozi and Pohl and the team preparing the World Bank Development Report 1996 on Transition, a simple three-tiered classification of output elasticity of electricity consumption is put forward: (1) the "energy-efficient" economies, which comprise the CEE countries where energy price adjustments have been more significant and started earlier--assumed output elasticity of electricity consumption of 0.9 (in the upswing); (2) the "energy neutral" economies, comprising the Baltics, where price adjustment has taken place but started later--assumed unitary