Summary of the East European Studies discussion with Michael Cain, an Associate Professor of Political Science at St. Mary's College of Maryland and a Title VIII-supported Research Scholar.
Energy sector reform is a critical component for economies in transition. This element provides fundamental welfare for each country's population and affects more than 60 million people. In a study conducted with USAID, Michael Cain assessed the status and discussed implications of energy sector reform in five countries: Armenia, Bulgaria, Hungary, Kazakhstan, and Romania. Dr. Cain argued that energy sector reforms require careful attention to the social sector – an element missing from many discussions on privatization.
Preliminary results of the study reveal that social protection for the poor has been neglected throughout the reform process. The social safety net, at present, is not strong enough to support the poor with energy sector reform. Subsidies are inefficient and the goals for decentralizing the government directly conflict with social protection for the poor. However, the study did note that the countries in Central Europe possess the means to provide social protection. What is needed is greater coordination among the actors and a multi-sector approach that includes various local and national ministries as well as international groups.
Removing subsidies presents one of the more challenging aspects of energy sector reform. Residential prices must increase to cover the costs of producing energy. Yet, all five countries continue to have subsidies for some aspect of the energy sector. Furthermore, these subsidies are structured in such a way that the rich are being subsidized, while the poor are left out. Dr. Cain provides two explanations for the slow progress in removing prices subsidies. 1) Politicians are held responsible for price increases and thus are reluctant to eliminate subsidies. Large numbers of the population will have a hard time with a price increase and don't want to bear the additional burden. 2) Liberalizing the energy sector is a public good, but the costs are privately borne. Subsidy removal depends in large part on the structure of political competition.
Energy sector reform has a major dilemma to overcome. If it liberalizes too slowly, the infrastructure may be damaged, making reforms more difficult. If it liberalizes too quickly, large numbers of the population will be unable to pay their bills, eroding a payment culture and facilitating corruption. Based on these findings, the study proposed a new reform strategy, highlighting four specific suggestions. 1) Recognize the importance of price liberalization and social safety net reforms. 2) Coordinate energy sector reforms with realistic budgets through the ministries dealing with social protection. 3) Create more reliable and stronger energy assistance programs. 4) Provide poor households with real choices for decreasing consumption. Adopt metering, energy efficiency programs, and transparent billing with strong incentives to save.