Institutional Change in the Electricity Industry: A Comparison of Four Latin American Cases

This paper explores the institutional and political factors that have shaped the restructuring of the electricity supply industry (ESI) in four Latin American countries. The ESI is characterized by long-lived, illiquid investments and natural monopoly in some of its component activities, like the delivery of electricity through transmission and distribution networks. Restructuring the ESI therefore revolves around the problem of organizing investment in electricity supply when, once carried out, such investment can be appropriated by others without loss of its economic value; and the problem of limiting the allocative inefficiencies arising from monopoly power. This study purports to explain the responses to these problems in different countries by answering two major questions:

• What explains the degree of reliance on public versus private property in the reorganization of the ESI in countries where ESI restructuring has taken place?
• What explains the choice of mechanisms used to allocate resources (competition vs. monopoly) in the ESI in countries that have restructured this industry?
  
  The answers to these questions result from the interplay among the main actors involved in the ESI: politicians who aspire to control and who have their own ideological preferences; voters who make electoral choices on the basis of their own ideologies and self-interest; suppliers of inputs to the ESI who cannot vote, but who can make valuable contributions to the politicians; and lastly, the investors in privately owned utilities. Application of this framework suggests that three variables are key to explaining institutional change in the ESI: judicial independence, ideology, and distributional conflict.

The complexity of the "political bargaining game" outlined above, and the difficulty of measuring the hypothesized causal variables, call for a case-oriented empirical test. Therefore, the hypotheses are assessed through the comparison of four ESI restructuring cases: Argentina, Bolivia, Brazil, and Chile, using a "most similar cases" research design. ESI restructuring in Chile has relied most extensively on private ownership, and least in Bolivia, with Argentina and Brazil as intermediate cases. On the other hand, Chile''s ESI is highly monopolistic, while Argentina''s is extremely competitive. In Brazil, competition is severely restricted not only by market concentration but by design as well. The Bolivian reform relies on competition despite the small size of the market.

The proposed explanatory variables also differ across cases. Judicial independence is highest in Chile, with Brazil next and then Bolivia. The ideology of Chilean policymakers at the time of reform (under the Pinochet dictatorship) was radically in favor of free markets and private property, even to the exclusion of antitrust policy as a concern; in Argentina, President Menem''s weak ideological attachments enabled Minister of the Economy Cavallo to pursue an orthodox economic program within the government of a historically populist, labor-centered party; finally, in Brazil and Bolivia social democratic leaders favor a mixture of markets and private property while attending to the needs of groups harmed by competition and privatization. Distributive conflict has been least prevalent in Chile, where the political regime suppressed labor conflict and avoided the use of political patronage. At the other extreme, Bolivia has been wracked by patronage, labor, and regional conflicts. Brazil and Argentina lie nonetheless very close to Bolivia on the scale of distributional conflict, in the former country as a result of clientelism and federal politics, and in the latter as a result of long-standing political confrontation and territorial politics as well.

The four cases provide substantial evidence about the factors that shaped institutional change in the ESI in each country. Of the three causal variables, ideology has the greatest explanatory power. In particular, ideological considerations appear to play a leading role in determining competition outcomes. Distributional conflict also plays an important role in shaping institutional change, most often in the form of side payments to influential groups that alter the post-restructuring ownership structures. Judicial independence has the weakest effect on either ownership or competition. This may be due to the transformational nature of the institutional changes that have been examined above. The reform of the ESI and similar infrastructural sectors entails the creation of entities and forms of public sector behavior ex novo, that is without precedent in the country''s political and legal history. Policymakers may therefore disregard institutional precedents, such as the country''s prior record of judicial subservience, because they provide a poor guide for shaping the new institutions, or even as providing an example of what not to do.

The analytical framework presented in the paper can be extended in several ways: to restructuring experiences in other countries and in industries of similar technology, such as water, telecommunications, or natural gas supply; more generally, to processes of institutional change, by focusing on historical legacies, the power of ideas, and the role of distributional interests; to examine systematic differences, if any, between developed and developing countries in such processes; and to extend the temporal framework of the analysis to consider longer-term institutional dynamics.