What Drives Firms’ Intention to Prioritise Public Spending in the Energy Sector?: Evidence from Eastern Europe and Central Asia

Research by: Hassan F. Gholipour, Amir Arjomandi & Florian Gerth

Executive Summary

The prioritization of public spending by firms in the energy sector remains a relatively underexplored area, despite energy being a fundamental input across all industries. This study delves into the factors driving firms’ preferences for energy-focused public expenditure over other critical sectors such as education, healthcare, and infrastructure. The analysis is based on the 2019 World Bank Enterprise Surveys, encompassing data from 18,854 firms across 30 countries in Eastern Europe and Central Asia. These nations, many with post-communist legacies, face distinct economic and institutional challenges, particularly in their energy infrastructure.

Through Probit regression analysis, the study reveals that firms experiencing frequent power outages and perceiving electricity as a significant operational barrier are most likely to advocate for prioritizing public spending in the energy sector. This phenomenon is particularly acute in emerging markets and low-income economies, where outdated and inefficient energy systems inherited from centralized governance continue to hinder business operations.

The study further finds that firm-specific characteristics such as size, age, ownership structure, and political affiliations exert limited influence on energy policy preferences. Instead, the type of industry, especially energy-intensive sectors like manufacturing, plays a critical role. Firms in manufacturing, which consume over 50% of global delivered energy, are significantly more inclined to prioritize energy investment than those in retail or service sectors.

In terms of broader implications, the findings suggest that addressing energy infrastructure challenges can foster economic resilience and long-term growth. The results highlight a pressing need for policymakers to invest in energy reliability, particularly in post-communist and transitioning economies. Such investments are not only pivotal for reducing operational inefficiencies but also for building confidence among businesses, paving the way for broader policy engagement and investment in other sectors.

Key Findings:

1. Energy Infrastructure Gaps: Frequent power outages and electricity shortages drive firms’ preference for prioritizing public spending on energy infrastructure. These challenges directly impact firms’ profitability and operational efficiency.
2. Economic Development Dynamics: Firms in emerging and low-income economies exhibit stronger preferences for energy-related spending compared to those in advanced economies. This reflects the infrastructural and governance disparities across economic classifications.
3. Sectoral Priorities: Energy-intensive industries such as manufacturing show a pronounced inclination toward energy investment, emphasizing the critical role of sector-specific needs in shaping policy preferences.
4. Gendered Preferences: Female business leaders prioritize social welfare and environmental initiatives over energy infrastructure, revealing gendered differences in business policy preferences.
5. Policy Context: The transitional nature of post-communist economies shapes firms’ preferences, with structural inefficiencies in energy systems requiring targeted interventions. Addressing these issues can stimulate broader economic stability and innovation.

To cite this article: Fereidouni, H. G., Arjomandi, A., & Gerth, F. (2024). What drives firms’ intention to prioritize public spending in the energy sector?: Evidence from Eastern Europe and Central Asia. Post-Communist Economies, 36(8), 993–1013. https://doi.org/10.1080/14631377.2024.2439199

To access this article: https://doi.org/10.1080/14631377.2024.2439199

About the Journal

Post-Communist Economies is a peer-reviewed journal advancing the understanding of economic institutions, policies, and performance in former communist countries, primarily in Europe, the former Soviet Union, Mongolia, China, and Vietnam. It emphasizes original research in applied economics and political economy, focusing on themes such as reform policies, institutional change, economic performance, cross-country comparisons, and international economic relations. High-quality think pieces, surveys, and relevant theoretical papers are also considered.

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