The importance of financial development for infrastructures performance in developing countries - The case of the energy sector
L’importance du développement du secteur financier dans la performance des infrastructures des pays en voie de développement – Le cas du secteur de l’énergie
Résumé
The main goal of this dissertation is to highlight the beneficial effects of financial development resulting from financial reforms on performance of infrastructure industries, hence on economic growth, in emerging and developing countries through a set of empirical analyses on the power sector. The first chapter seeks to demonstrate that financial reforms implemented by a host of countries over the past decades have effectively improved financial systems’ development using a dataset on 54 emerging and developing countries incorporating newly available dimensions of reforms that have been applied in these countries’ financial sector during the mid-1970s through mid-2000s time period. We find a gradual, possibly two-year lagged, but positive and significant global effect of the reforms on the overall level of development of the financial sector.
More importantly, when the impacts of the banking and securities markets reforms on the respective sub-sectors are separately examined, we find that the reforms effectively spur the depth of the banking sector and stock markets’ size and liquidity as early as the year of their implementation. Interestingly enough, and consistent with the literature, our findings provide strong evidence that economic development, country risk, and the quality of institutions are key determinants of the financial sector level of development suggesting that these factors do affect the effectiveness of the reforms. In particular, higher economic, financial, and political risk, poorer quality and effectiveness of the legal system, and a more corrupt economic and political system have significant adverse effects on financial development. Regression results also highlight that low fiscal deficit and trade liberalization are beneficial to the financial sector’s deepening.
In the second chapter, we assess the extent to which the level of development of a country’s financial sector is a factor that draws private participation in infrastructure projects financing. We investigate this issue for the case of the energy sector in a 1990-2007 dataset on 56 developing and emerging countries and find that, unambiguously, a financial sector that offers proper financing solutions and risk-mitigating tools indeed contributes to improving private participation in energy projects. As expected, both economic development and macroeconomic stability are found to be significant determinants of a country’s appeal to private investors.
While greater energy needs, as reflected in important network losses, are found to attract private participation, political, economic, and financial risks dampen private investors will to participate in energy projects. A couple of interesting results that come out of the analysis, which contradict some existing empirical studies, is that higher interest rates and exchange rate risk do not divert away private investors from energy projects. These results can be interpreted as evidence of the positive role played by agreements schemes with governments in building investors’ confidence in the developing countries’ economic climate.
Putting together results from the two previous chapters, we make the hypothesis of the existence of a significant empirical link between infrastructure and financial sectors reforms the effects of which are reflected in infrastructure sectors growth and performance. In the third chapter, we seek to demonstrate this hypothesis which empirical validity would imply that infrastructure sectors can be expected to benefit from financial reforms in terms of growth and performance. We investigate the impact of four important components of the power sector reforms in developing countries on some of this sector’s performance outcomes and assess the contribution of the domestic financial systems. The power sector reform policies examined are the unbundling of generation, transmission, and distribution, the introduction of competition typically coupled with the implementation of privatization programs in the generation and distribution segments, and the creation of an independent energy regulatory authority.
In a dataset on 42 developing countries covering the 1990-2005 period, we find that private participation in generation and distribution has significantly improved power supply and operational efficiency as reflected in higher electricity generation per capita, greater labor productivity, lower distribution losses, and better coverage. The creation of a separate regulatory agency is also found to have enhanced the sector’s performance in terms of actual output, labor productivity, and coverage.
Interestingly, we find that the effects of the unbundling of generation, transmission and distribution segments, and the creation and experience of an autonomous regulator have been exacerbated by the modernization of the financial systems. In particular, deeper and more liquid financial markets have eased access to long-term financing for operators allowing them to upgrade their networks and hence to increase output, decrease power losses in distribution, and increase labor productivity and access. Therefore, these empirical results suggest that countries that have implemented reforms that deepen most their domestic financial systems have been able to tap on more benefits from their infrastructure sectors’ reforms.
L’objectif de cette étude est de mettre en lumière les effets bénéfiques du développement des systèmes financiers sur la performance des industries d’infrastructure, donc sur la croissance économique, dans les pays en voie de développement à travers une série d’analyses empiriques sur le secteur de l’énergie. Les résultats du premier chapitre mettent en évidence un effet positif et significatif, bien que graduel, des réformes financières sur le niveau de développement du secteur financier.
Dans le deuxième chapitre, nous confirmons que le niveau de développement du secteur financier d’un pays le rend plus attractif du point de vue des investisseurs privés pour le financement des projets d’énergie. Les résultats montrent également que ces investisseurs prennent en compte le niveau de développement économique, la stabilité macroéconomique, les risques pays et la qualité des institutions dans leur décision de participer à ces projets.
Étant donné ces conclusions, nous testons dans le troisième chapitre l’hypothèse de l’existence d’une relation significative entre les réformes des secteurs de l’électricité et financier dont les effets se reflètent dans la performance du secteur électrique. Nos résultats montrent que l’implication du secteur privé et la création d’une autorité de régulation améliorent l’offre d’électricité et la fiabilité du réseau. De plus, les impacts positifs du dégroupage des segments du secteur et de la régulation sont exacerbés par la modernisation des systèmes financiers. Ces résultats suggèrent donc qu’en facilitant l’accès au financement, un secteur financier plus développé permet aux opérateurs de moderniser et améliorer la performance de leurs réseaux.
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