Academic journal article The American Journal of Economics and Sociology

The Changing Role of the State in the Electricity Industry in Brazil, China, and India: Differences and Explanations

Academic journal article The American Journal of Economics and Sociology

The Changing Role of the State in the Electricity Industry in Brazil, China, and India: Differences and Explanations

Article excerpt

The role of the state in the economy has undergone a major shift over the last two decades. Using the labels proposed by sociologist Evans for the various possible roles for the state in the economy, (1) after 1945 many governments assumed "demiurge" and "midwife" roles. New planning agencies were established and staffed by technocrats. State-owned enterprises (SOEs) followed. Though operating from different ideologies, Brazil, China, and India were "developmental states," active in building their industrial bases, including an electricity infrastructure. Recently, however, as part of a worldwide trend, (2) the state has shifted in these countries from a "demiurge" to a "custodian" role--in other words, from a more interventionist stance involving the production of private goods to a less interventionist function of mediating between private interests. This paper focuses on this shift.

We use the evolution of electricity industry in Brazil, China, and India to understand the larger issue of the changing role of the state. (3) The three have taken differing approaches to the articulation and implementation of policies to restructure the industry. Our purpose is to understand the reasons for such differences and draw their implications. In our view, ideology, institutions, and interest groups lie at the heart of such differences.

I

Evolving Role of the State in the Electricity Industry

PUBLIC UTILITIES ATTRACT SCRUTINY, as they provide essential services such as water and electricity that are economically crucial and politically salient. Increased availability of these inputs is critical for development. (4) Per capita consumption of electricity, for example, increases by 30% more than per capita income growth, (5) In percentage terms, consumption rises fastest in developing countries. (6) Reviewing the literature on electricity regulation, we identify four arguments for state (7) involvement: natural monopoly, rent limitation, rent appropriation, and private sector limitations. They have been used alone or together to justify state intervention in electricity.

The dominant reasoning was that the electricity sector was a natural monopoly. Production economies of scale permitted one producer to supply large areas. More than one firm could not be given the right of way for laying cables. It was considered best if the same firm produced and distributed power. Thus the monopoly argument was complete for all parts--generation, transmission, and distribution. (8) The potential for the abuse of monopoly power led in most countries to public ownership of utilities so that economic and social rents would remain in the hands of the public; only in the United States and a few other countries did private ownership prevail, thanks to a regulatory system that limited rent extraction by the franchised utility monopolies. (9)

In developing countries, other arguments alleging limitations of the private sector buttressed this state ownership bias. Some policy makers felt that the private sector lacked entrepreneurs who could create large utilities. Dynamic public sectors would attract the best and the brightest of managers who would operate in the interest of society. Also, entrepreneurs might lack access to capital needed for lumpy investments, whereas the government would be able to mobilize resources. (10) Another argument was that regulation of private monopolies was infeasible since regulators would be captured by private interests, as economic and political power are often concentrated in a few individuals in these countries.

In the 1980s, this orthodoxy came under scrutiny. Technological breakthroughs, macroeconomic pressures, and new thinking in institutional and regulatory economics called into question the need for integrated utilities. Policy makers perceived the possibility of deregulating (or privatizing) utilities. At the technological level, the availability of natural gas and the development of efficient turbines meant that smaller plants could produce electricity cheaply. …

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