Measure the Energy Market Integration in East Asia: A Principal Component Analysis Approach

Miaojie Yu

from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: This paper measures the current energy market integration (EMI) in the 16 East Asia countries, comprising the ASEAN 10 countries, China, Japan, Korea, India, Australia, and New Zealand, by using the principal component analysis (PCA) approach. This comprehensive EMI index has four important components: (1) energy trade liberalization; (2) energy infrastructure development; (3) energy market liberalization; and (4) energy pricing liberalization. This index is constructed in two steps. I first construct the four indicators using PCA. After the predicted observation for the four indicators are obtained, I once again adopt the PCA method to calculate the EMI index. The scores show that countries like Japan and New Zealand have the highest extent of energy market integration. In contrast, countries like China and Malaysia, and India have lowest scores of EMI. Poorer countries are located in between. Such results are robust to different measures or data adopted.

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