Energy Market Integration (EMI) has been a goal for many regions, including the European Union and East Asia, for quite a long time. How it could play a role in facilitating equitable economic growth among a group of countries remains an empirical question that this paper will attempt to answer. The paper uses economic convergence analysis (including both the σ-convergence and β-convergence approaches) to examine the impact of EMI – measured by two newly constructed indexes (namely, the energy trade index and the energy market competition index) – at the country level on dynamic economic growth paths across countries. Its special interest lies in informing policy making related to promoting EMI. The results show that countries involved in a more integrated energy market are more likely to reduce their income disparity, suggesting that EMI may help the region to achieve equitable growth through the accelerated economic development of lagged economies.
Understanding the role of energy consumption in the pursuit of equitable growth across countries has emerged as a primary concern for policy makers in the past two decades. While the role of energy in promoting economic growth has been well addressed in the literature, little attention has been paid to the question of how institutional reforms in the energy sector, such as Energy Market Integration (EMI), can affect equitable growth among a group of countries. This is an important issue as it is often perceived that globalization, including economic integration, has widened the gap between rich and poor, and increased inequality [1].
Theoretically, EMI may promote regional economic development, but there are only a few empirical studies providing supportive evidence. Recent studies on EMI [2] and [3] have found that the benefits from EMI have generally outweighed its costs. More generally, Park [4], followed by Lee et al. [5], Lee and Plummer [6] and Velde [7], showed that free trade agreements (including for energy products) may bring positive economic impacts to the member countries.
However, there are many limitations in the above literature. First, most of these studies used computable general equilibrium models and did not indicate positive economic effects directly obtained from EMI for the region. Secondly, EMI has always been defined as “tariff cutting” in these studies, which understates EMI’s benefits through the elimination of non-tariff barriers, improvements in market accessibility and market efficiency. Thirdly, all these studies focus on the net welfare improvement provided by EMI but ignore its re-distribution effects between countries. In particular, they cannot inform policy makers about whether EMI is able to narrow development gaps across countries, and thus to facilitate equitable growth within a region. The answer to this question is important in encouraging the participation of developing countries in EMI. Further empirical studies are thus required to address all three limitations.
This paper examines the impact of EMI on equitable economic growth, aiming to inform policy makers of the potential role of EMI in reducing income disparity. To do so, we use economic convergence analysis to examine the impact of EMI on equitable growth across countries, using two innovative indexes to measure the level of EMI. The research provides useful information on the dynamic path of income disparity across countries resulting from EMI, in particular the impact of EMI on the ability of developing countries to reduce the level of economic inequality between themselves and developed economies (hereafter shortened to “catch-up”). The empirical results show that EMI is likely to promote the economic growth of individual countries, as well as to facilitate equitable growth within a region. This finding supports the qualitative analysis that economic integration will generally benefit all participants in terms of economic growth and income disparity reduction [4], [7] and [8]. The positive impact which regional integration has on equitable growth should also give policy makers more confidence in promoting EMI.
The remainder of the paper is arranged as follows. Section II presents the methodology, model specifications and data. Section III introduces the measurement of EMI. Section IV reports the estimation results. In the last section, we present concluding remarks.
