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Unfolding Energy Efficiency in Eastern Partnership Countries

Fostering energy efficiency is a prerequisite of sustainable development. A recently published Synthesis Report argues that the entire innovation ecosystem and the relationships within shall be analysed when promoting energy efficiency especially in countries like Eastern Partnership Countries of the European Union. A more systemic understanding is in order to stimulate the necessary paradigm shift towards more qualitative growth that enhances life.
Works on secular stagnation hypothesis have been blossoming (Teulings and Baldwin 2014; Eggertsson and Summers 2016). Even there are some caveats, one message to convey is that advanced countries – including Europe – must seek for a paradigm shift towards more qualitative growth. What Europe needs today is that what was proposed 32 years ago by the French economist, Yves Berthelot: “The transition to a new form of growth will not be able to be accomplished without a mastery of industrial structural transformation.” (Berthelot 1983:20).
The decision about the seventeen Sustainable Development Goals in the fall of 2015, as the successor of the United Nations’ Millennium Development Goals, demonstrates the widespread view that people and our planet need qualitative growth that enhances life. This concept views the economic, social and environmental systems as a mutually interdependent integrated living ecosystem of which growth process should shift from quantitative to a more qualitative growth featured with more efficient innovations in production processes and services by internalising environmental costs, involving renewable energies, zero emissions, continual recycling of natural resources, and restoration of the Earth’s ecosystems.
Interestingly, the goals are interspersed with the spirit of energy-awareness (e.g. increasing clean energy, well-being can also be spurred by pursuing energy efficiency, sustainable cities etc.). The experience of advanced and developing countries conveys the message that sustainable economic dynamism (quantitative and qualitative growth) is of essence because rising income levels are associated with observable decline in energy intensity (IPCC, 2000; Metcalfe, 2008). Stimulating socio-economic dynamism is therefore of key importance in coping with challenges like avoiding locking in energy inefficiency to reach eco-efficiency in the EU as well in securing the shift to a more qualitative growth. This approach shall reach even the Eastern Partnership Countries (EPCs) of the EU as well, such as Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine.

R&D&I for energy efficiency in EPCs – Institutional architecture matters

In a recent Synthesis Report prepared by ICEG European Center (Kovács, 2016a), we analysed the results of the national studies on major drivers, barriers and bottlenecks to increase energy efficiency in the innovation ecosystems of EPCs. The studies were prepared within the project INNOVER-EAST. In addition to identifying the major barriers and bottlenecks that are largely interrelated and are influencing the absorption, diffusion, demand and supply of R&D&I, the report also outlines policy recommendations with a list of potential innovation support services.
The report reveals inter alia that despite SMEs are employing almost 50% of the labour force in most EPCs, SMEs fall short in contributing to the GDP (on average 30% of the GDP is given by them) as compared to what extent SMEs do in OECD countries where more than 55% is determined by SMEs activity.
It points to the shortcomings of the entire innovation ecosystems EPCs have. What is more, due to the lower pace of development of the financial markets, intermediation sector remains highly risk-averse, as a corollary, the room for SMEs to be engaged in risky R&D and innovations as well as adaptations of best practices in pursuing energy efficiency is rather limited.
The report applies a systemic approach by showing that the quality of governance indigenously depends on the institutional framework in which innovation take place. EPCs are primarily found to have relatively less good governance and low institutional quality which hampers R&D&I in general (especially in areas like fostering energy efficiency via new innovative technologies and services).
An important aspect of what type of institutional architecture a country has is the degree of decentralisation. Literature suggests that a more decentralised system seems to offer more innovation freedom and thus competitiveness (European Commission, 2012). More innovation freedom means at least two things: (i) more role of decentralised initiation; and (ii) much more closeness among stakeholders being more likely to cooperate and create imitations and innovations (e.g. in fields like energy efficiency). The report illustrates that EPCs are alike exhibiting low fiscal decentralisation which is associated with low innovation performance.
Nevertheless, innovation performance is needed to be fostered. And since one of the thorniest challenges of the advanced world to spark shift towards more qualitative growth via innovation (i.e. bearing in mind the secular stagnation, excessive credit consumerism without lasting impetus on innovation as well as productivity, see: Kovács (2016b)), EPCs must also act in similar vein in supporting their healthy integration into the world economy.

Bottom line

The report deciphers that there is less room for decentralised initiation in EPCs which provides weaker incentives for being innovative in a legal and efficiency improving way (i.e. INNOVER National Studies also unravelled that the poor legal framework, the dysfunctional institutions, the lack of professionalism, and the corruption are prevalent features some of the analysed EPCs’ political-social and economic system). Under these circumstances, competition suffers and the underdeveloped character of financial intermediation together with the more centralised state structure (i.e. coupled with less efficient resource allocation) are more likely to lead to inflexible financing in general and that of innovation. The EPCs’ innovation ecosystem does not offer enough spaces for extensive experimentation, especially in fields like energy efficiency, although these would be the main prerequisites of an impulsive innovation ecosystem.

References

Berthelot, Y (1983), “World Economy: The Rise of Tensions”, European Association of Development Research and Training Institutes, Geneva, Bulletin, Vol. 2. pp. 13-27.
Eggertsson, G and L Summers (2016), “Secular stagnation in the open economies: How it spreads, how it can be cured”, VoxEu.org, August 2016
European Commission (2012), “Policies Supporting Innovation in Public Service Provision”, INNO-Grips Policy Brief, European Commission, DG Enterprise and Industry.
IPCC (2000), “Special Report on Emissions Scenarios”, Cambridge University Press, Edinburgh Building Shaftesbury Road, Cambridge.
Ivanyna, M and A Shah (2013), “How Close Is Your Government to Its People? Worldwide Indicators on Localization and Decentralization”, World Bank, Policy Research Working Paper No. 6138
Kaufmann, D and A Kraay and M Mastruzzi (2008), “The Worldwide Governance Indicators: Methodology and Analytical Issues”, World Bank, Policy Research Working Paper No. 5430
Kovács, O (2016a), “Energy Efficiency in Eastern Partnership Countries – Unfolding Research & Development and Innovation in Promoting Energy Efficiency”, INNOVER-EAST Synthesis Report.
Kovács, O (2016b), “Disorientegration – Encoded Weakening of the European Integration?” Paper presented at ECPR General Conference, Prague 2016, 7-10 September.
Metcalfe, G E (2008), “An Empirical Analysis of Energy Intensity and Its Determinants at the State Level”, The Quarterly Journal of the IAEE’s Energy Economics Education Foundation, Vol. 29. No. 3
Teulings, C and R Baldwin (2014), “Secular Stagnation: Facts, Causes and Cures”, VoxEU.org, VoxEU eBook.