A cross-country analysis of electricity market reforms: Potential contribution of New Institutional Economics

The paper explores whether the question of why some countries are able to implement more extensive reforms is closely related to the question of why some countries have better institutions than others. We analyze this question by using an empirical econometric model based on Poisson regression with cross-section data covering 51 states in the US, 13 provinces in Canada and 51 other countries. In the course of the study, we check the validity of three important arguments of New Institutional Economics (NIE) for the power market liberalization process. The first argument is the “path-dependency”. To test its impact on the reform progress, we try to explain whether the background of the chairperson of the regulatory agency when reforms started or that of the governor/minister responsible for energy policy at that time has an impact on the subsequent reform progress. The second argument is the impact of “democracy” as an institution on the reform progress. We look at the effect of two important indicators of democracy (i.e., civil liberties and political rights) on the reform progress. The final argument of NIE is about transaction costs. We concentrate on the level of corruption in a country as one of the key factors that determine transaction costs and try to explore its impact on the reforms. The results show that the backgrounds of the chairperson and the minister/governor, the level of democracy and corruption in a country are significantly correlated with how far reforms have gone in that country. The negative relationship between reform progress and civil liberties may indicate that reforms may be limited in democratic countries with strong civil society institutions such as trade unions or other organized structures in the society that may consider reforms as ‘harmful’ to their self-interest.