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Case Study Analysis European Energy Market Economics Essay

European Union, which was established in 1993 by Treaty of Maashrist, for the determination of accomplishing political and economic amalgamation. Joining the Union community are 27 countries. EU, which is the largest regional trading bloc in the world, has been taking initiatives to liberalize the energy market since July 2007. The main reason to liberalize trade policies was to increase competition, as there was a monopoly of countries in this sector. Example: Electricitie de France, for example, has an 87 percent share of that country.
Regional Integration
There are many reasons for this regional integration of the EU, one of the main objectives has been to strengthen the trade integration in this area, aiding in private sector development which would impact the economic growth as they have created a single market through enforcement of standard laws which allows free movement of goods, people, capital and services. Regional integration has also helped in development of infrastructure and institutions, adroit governance, socio-cultural development, environmental development, fostering peace and strengthening security and strengthening regional interaction on a global platform.
Energy Market Scenario pre -liberalization
The national markets in the EU were dominated by a single enterprise in most cases a former state owned utility. To further complicate the matters these companies were vertically integrated hence establishing a monopolistic market condition. These national monopolies within the EU energy market, are causing high set up costs, vertical integration, high sunk costs, higher pricing systems, productivity is less causing low employment. They have been inefficient in achieving high economies of scale.
Need and Benefits of liberalization
As globalization is increasing the competiveness of companies is also on high. The EU is also trying to increase competition in the energy market, which would lead to lower costs and prices, directing towards establishment of an efficient market.
These are the similar factors the EU energy market and one of the reason the union trying to liberalize their trade policies as to use the resources in the best possible way through elimination of national monopolies and establishment of a single market in order to protect the interest of weaker member countries and protecting the member states foreign imports by erecting high tariff barriers. In order to liberalize the market they have insisted on de-integration of utilities and split it into generation, transmission and selling of energy.
Their basic aim has been to open the market to competition within the eu which would benefit in various ways increase competitiveness would decrease the prices and directly benefit the customers, as they are various alternatives to choose from and they would have to pay less because of the competitive pricing strategies. These completive strategies help in steadying the energy market and also protecting the environment. There would be lower government intervention. This regional integration would link various members states increase their dependency on each other and facilitate employment and investment opportunities.
Implications of liberalization and revolution in environment post -liberalization
Disintegration played a crucial role in the process of liberalization hence Separation of the three verticals (disintegration) in the power companies has changed the market structure and impacted the producers as well as the environment. It would eventually break national monopolies and replace the markets of 27 member states by a single -market for electricity
There are many implications post liberalization. Eu energy producers would face increased competition, hence Cost pressures would increase due to loss of monopoly and they would be forced to adopt competitive pricing. As a result of backward integration the monopolist companies would lose their shine and would have to produce cost efficient products hence each producer would focus on its core activity the quality and pricing of services provided to the end users. More jobs would be created, as the 3 verticals of an existing company would be disintegrated into 3 different companies.
At the same time big energy groups would acquire the permit to overtake smaller firms. (E.g. Enel and Endessa). There would be numerous acquisitions and mergers that will take place, every government will take various measures by imposing stringent regulations in order to protect the national firms from being taken over by the competitors. Larger and powerful firms would acquire small local country firms.
The entire market dynamics would change post liberalization. As the markets would open the companies would have to gear up for the competition receivable from other players from other countries. Such companies would have to reengineer their business process to make it more robust so as to accommodate low cost revenue generation activities. Competition would change the tradition of running business in EU post liberalization in the region. Adaption to new methods would be the key to survival.
Role of De-integration in liberalization of the EU energy market
De-integration of large international company is essential as integrated supply chain makes it impossible for new companies to enter at the middle stage and reduces incentives to trade on an whole sale market thus reducing liquidity in the market and is seen as a barrier, another important fact it unavailable and inefficient cross border transmission capacity is a barrier to national integration together with lack of transparency, weak network and reliability of information therefore it is essential for all these three departments to split their functions into generation, transmission and selling and separate the business of selling and producing energy this would enable independent power marketing companies to buy energy from the cheapest sources and offer to the end users hence induce competition in the market as this would permit new entrants into the market , it is clear as to why large German companies were resilient to disintegration as their structure was highly integrated and loss of monopoly was feared , but it has been essential to change the market into an oligopolistic market through emergence of innovative small firms , development in RnD , complexity in competition , low cost of operations , global accessibility developing intra -organizational structures .
Prevailing market scenario and reasons for slow progress
The EU energy market liberalization has been a story looking for a happy ending since 1990’s. To reap the benefits of the energy market, many directives have been introduced and all of them left some space for more improvisations every time. These unstable policy development is a time contributing factor and the acceptance of such directives/polices has also been a considerable factor, E.g.: The national energy ministers retaliated the European commission, which is the highest competition body of the EU and raised their doubts about the benefits thereby delaying the de-integration of the national power companies. The disturbed political scenario of few countries helped, E.g.: When France and Germany opposed the idea of de-integration of the national energy companies. Technology to create a system /utilities that can serve cross borders within the EU, pushed time away. Realizing that acquiring cross border utilities will help achieve economies of scale also created a lot of excitement in the market, but things were not falling in place for these acquisitions and the agenda was further delayed.
The first directive was introduce to improve the conditions of the energy sector by gradually opening up the market for competition hence resulting in cut-throat prices.
2001:further measures were initiative to reap the energy market benefits
2003:The concept of unbundling was introduced, which meant that the same company couldn’t perform power generation – or supply – and transmission..
2007:The Commission put forward its ‘third energy package’. The package provided companies in the member states with two options for separating gas and electricity production from supply provision. A third option was later added at the insistence of France and Germany
Corrective action was promised by the EU executive, which tabled a further package of proposals in September 2007.
2008:Energy Council reached broad political agreement on the Commission’s third liberalization package
2009:After long negotiations, the Parliament and the Czech Presidency struck a compromise deal on the legislative package on 23 March 2009.
Commission delivers impact assessment on the Internal Energy Market package. EU Council of Ministers adopts common position on third energy liberalization package.
Dis integration of European energy markets is a win- win situation for the vendors as well as for the consumers.
EU policies for liberalization will call for increased GDP for economy, better quality services of energy supply at cheaper prices and therefore an improved standard of living for consumers.
Moreover, the suppliers will enter into a battlefield where they will face a healthy competition and there will be survival of the fittest, as the most efficient player will take home maximum profits.
The economy as a whole will benefit in terms of more GDP and more employment, which is one of the major concerns today in the whole Europe.
However, there emerge some challenges, which need to be tackled carefully while implementing this policy. They are Security of supply and Sustainability of Environment. There may be a possibility that this competition may create a rift between the states and may ruin the initiative. The EU states need to make sure that there are prescribed a guidelines and a proper governance system to ensure a healthy competition and not a negative one. At the same time the principles of sustainable environment have to be kept in mind so that our future generations also reap the benefits of current policies.

Concept And Measurement Of Economic Development Economics Essay

The concern about the economic, social and political performance of the world’s poorest countries, as well as its potential consequences, has held important part of the economic thought in the last decades. This interest has been reflected through what now is known as the study of economic development. This essay critically discusses the concept and measurement of economic development by investigating two particular approaches: ‘Growth/Income’ or the traditional economic view and ‘Human Development’ or the well-being view (Cypher and Dietz 2008).
First, the essay gives a brief and very general perspective about the study of Economic Development. Subsequently it presents and discusses the above mentioned approaches and its measurements. Finally, it offers the final conclusions.
Development economics “[T]he widening gap between the developed and the developing countries has become the central problem of our times”
Pearson Report (1969 cited in Thirlwall 2002:4)
This quote written more than forty years ago condenses the hearth of development economics: the differences between developed and underdeveloped countries. In effect, many definitions about the ample scope of development economics not only take into account that gap, but also refer to development economics as the economics of the underdeveloped countries and the multifaceted process through which is possible to bring large-scale improvements in levels of living (Todaro and Smith, 2006: 8), as well as the study of the “nature and causes of poverty” (Thirlwall 2002: 21).
By other side, the fact that whether it is an independent branch of economics or not is still in the middle of a dispute. Todaro and Smith (2006), in opposition to an author they cite, Krugman (1993), argue that development economics is “a field of study that is rapidly evolving its own distinctive analytical and methodological identity”. Supporting this point of view, Thirlwall (2002) emphasizes that what makes a subdiscipline is the area of application. Under the lights of the last idea it is possible, thus, to argue that development economics is an independent branch of economics.
However, the central polemic lies upon the meaning of development. The concept and measurement of economic development depends on what it is understood as ‘development’. Even though the abundant literature, Nayyar (2003) suggests that “there is not enough clarity about what development actually means”. This constitutes the beginning of a very wide field of discussion.
‘Economic Development’: concepts and measurements One of the main confusions of development economics literature arises when trying to define the meaning of development and, thus, defining and measuring economic development. Two different approaches along the temporal spectrum are considered in this discussion: ‘Growth/Income’ and ‘Human Development’. This section presents and discusses the main ideas and its measures.
Before proceeding further it is cautious to narrow the field of analysis by clarifying the implications of the blending between economics and development. Economic development focuses its attention on the economic side of the international development (Tribe 2010). And as a social science, economics is concerned with human beings and the way in which they organize and plan the satisfaction of basic material and nonmaterial needs (Todaro and Smith 2006). This implies a widespread range of study that encompasses not only economic but also non-economic aspects.
Notwithstanding the previous clarification, traditional economics has defined development as the capacity of a national economy to increase the production of goods and services at a certain level of annual growth rates. This suggests, as stated by earlier literature, a strong relationship between development and capital accumulation (Nayyar 2003), or the limited idea that economic development is principally a function of economic growth or income generation. This explains the ‘Growth/Income’ label.
Following this logic, some of the perspectives about the economic growth along the past decades have emphasised the role of structural changes, the relevance of investment, productivity and technological change, the role of the state, and at the other hand, the role of the market (Thirlwall 2002; Toye 2003; Todaro and Smith 2006).
Mainly based on the above mentioned factors, a significant number of theoretical approaches and quantitative models have tried to explain the economic growth process by identifying its determinants and the relationships among them. Some of them attained to demonstrate an acceptable degree of accuracy and applicability for policy design, but they, as a group, “have in many ways missed some of the crucial issues for developing countries” (Stern 1991: 129). Going further, disappointments came not only from the side of theoretical propositions but also from empirical evidence. For example, a case study presented in Todaro and Smith (2006) concludes that Brazilian economic growth was not enough to ensure social development. Lastly, several studies claim that growth in aggregate income is not a guarantee for achieving development and eliminating deprivation (Stern 1991; Thirlwall 2002; Toye 2003). For this, it is reasonable to consider the limitations of economic growth as the only measure of well-being and prosperity.
Under this view, economic growth is commonly measured in terms of the Gross National Income (GNI), the Gross Domestic Product (GDP) or their ‘per capita’ variations. They have been used as approximations of well-being and the level of economic development (Cypher and Dietz 2008). However, it is very presumptuous to pretend to measure welfare and other human conditions with such a biased indicator just because of the assumption that economic growth will ensure the satisfaction of human material and non-material needs.
Contrasting to the ‘Growth/Income’ approach, the ‘Human Development’ proposition considers development as a process in which cultural, human, institutional and social components play an important role in conjunction to the economic dimension. Development is not anymore considered as a mere income-generating process. This suggests the inclusion of the social component and its vastness when defining economic development.
Sen’s conception that economic growth is a means for attaining development and that the latter is the process of enhancing the freedoms we enjoy (Sen 1999), has completely changed and clarified the perspective of our understanding of ‘development’, precisely emphasizing the limitations of economic growth to foster and accelerate the development process by itself. As the Human development Report (2001) states, cited in Thirlwall (2002), “although GDP [or GNI are] absolutely necessary to meet all essential human objectives, countries differ in the way that they translate growth into human development”, clarifying even more the fact that economic growth it is not sufficient and amplifying the importance of social and human factors.
Furthermore, other approaches also consider development as a multifaceted process and as the mixture of economic, human and social factors. Cited in Todaro and Smith (2006), Goulet (1971) recognizes three core values of development: sustenance, self-esteem and freedom from servitude, all of them with clear and high social and human content.
As an alternative to the GNI and GNI per capita, the ‘Human Development’ notion has led to the born of the Human Development Index (HDI), a mixture of three components: longevity, knowledge and standard of living (Cypher and Dietz 2008). This index has opened new perspectives for measuring and analyzing the potential of an economy and its development. However, conversely, there are critical voices claiming for the HDI index not only to clarify some technical aspects but also to “reinvigorate its relevance” and to incorporate sustainability concerns (Sajar and Najam 1998: 262).
Even though the marked differences between the two approaches and the high correlation found amidst both set of measures (Cypher and Dietz 2008: 56), remains clear that actually there is no consensus about the concept of economic development.
Conclusions To sum up, two different points of view about what really economic development means have been in the scene in different forms and shapes. From the limited concept of economic growth as economic development to the wider idea that the economic development process has a vast range of determinants that go far more than the mere income generation process.
In conclusion, there is no consensus about the concept of economic development and its measurement, and there is neither concrete evidence nor established formulas about how exactly to boost economic development. In my view, both approaches snap important determinants and consider the two opposite borderlines of what economic development could mean. In fact, I believe that the second approach constitutes the natural evolution of the first one. Additionally, the study of economic development should take advantage of different approaches and consider every one of them as an enriching and valuable element to enhance the way in which economic development is measured and driven, and to cultivate a very elastic framework capable to adapt itself to any country or situation.
I understand economic development as the process that, in essence, not only ensures the economic success in terms of growth, productivity and resources allocation but also the one that guarantees the correct distribution of the attained benefits among the population. All this to allow and ensure the satisfaction of basic human needs, the enforcement of capabilities for empowering people’s choices and opportunities, and the construction of solid and ‘healthy’ societies. Clearly influenced by Sen’s approach, I strongly believe that economic development is also a process that seeks to empower human freedoms through a wide range of means, including not only the income generation process but also the reinforcement of human capabilities through the combination of multidisciplinary theoretical approaches and policies.
By other side, the measurement of such a multidisciplinary process perhaps requires a combination of different measures and perspectives, all of them in mutual agreement about their limitations and scope, benefits and omissions.
The amount of related literature is vast and the different approaches and concepts have always proven to be valuable in different situations. However, we must never lose the idea that the main purpose of economic development is to preserve, improve and sustain living conditions for human beings, for our generation and beyond.