Policy Reform and the Problem of Private Investment: Evidence from the Power Sector
Journal of Policy Analysis and Management, Forthcoming
133 Pages Posted: 24 Oct 2016
Date Written: August 5, 2016
Development economists frequently emphasize the importance of good infrastructure for economic growth. Can governments attract private capital in infrastructural investments through policy reform? We address this question by showing that, in the case of electricity generation, a simple legislation enabling independent power production increases private investment in electricity generation by more than an order of magnitude. Contrary to the conventional wisdom on the importance of constraints on executive power for credible commitment, we find that such constraints neither draw private capital nor condition the effectiveness of policy reform. We also find that both domestic and foreign investment increase with IPP reform. Evidence for these claims comes from an instrumental variable analysis of power sector reforms and private electricity generation in all developing countries for the years 1982-2008. Simple and politically uncontroversial policies can generate positive results in developing countries.
Keywords: international political economy, power sector reform, infrastructure investment, veto players, executive constraints, policy reform
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