percentage point reduction in manufacturing energy intensity. A 10 percent increase in the price of electricity is associated with a 2.6 percentage point reduction in manufacturing energy intensity. Furthermore, energy intensity slightly increases with the increase in the share of manufacturing exports in output, suggesting that trade induces specialization on more energyintensive industries.

In spite of many existing cross-country studies on energy intensity comparison and determinants (for example, Howarth et al. 1991; Uanander e al, 1991; Mulder and de Groot 2007), relatively few have looked at the trends in developing countries. Frankhauser and Cornillie (2004) and Markandya et al. (2005) are some exceptions who examine economy-wide energy intensity change in the ECA region. Our analysis differs from their analysis in that we focus on the manufacturing sector, the largest energy user in the region and a sector that perhaps also offers the largest opportunities for energy savings. We also cover more countries and years and look at changes during the second decade of transition.

The rest of the paper proceeds as follows. Section II provides background information about the manufacturing sector in ECA. Section III describes the data. Section IV presents empirical methods and results. Section V discusses the conclusions and policy implications.

# **II. Background – Manufacturing in Eastern Europe and Central Asia**

During the Soviet era, manufacturing was the cornerstone of centrally planned economies of ECA. Leaders emphasized rapid industrialization, particularly of heavy industry, to foster economic growth. This heavy industry was also vastly inefficient. To facilitate industrial production and social welfare, central planners kept energy prices well below cost recovery levels. Of all non-OECD subsidies to fossil fuels (including electricity) in 1991, totaling $270$330 billion, roughly two-thirds were in the former Soviet Union and Eastern Europe (Myers and Kent, 2001). Subsidies distorted price signals and led to extraordinary profligacy in the use of energy. In 1990, the former Soviet Union’s energy intensity, defined as the ratio of primary energy consumption to GDP, was 70 percent higher than the United States and 2.5 times that of Western Europe. The gap is especially evident in the manufacturing sector where energy use per unit of output was 3 times higher than in the U.S. and 3.5 times higher than in the Western Europe (U.S. Congress, 1993).

The early years of transition brought a sharp contraction in manufacturing output following the disruption of traditional trade and financial links and an end to centrally planned production (Havrylyshyn et al, 1998). Between 1991 and 1993, manufacturing value added fell on average by 30 percent. In parallel, manufacturing energy consumption dropped on average by 27 percent across all countries. Most transition countries continued the comprehensive reform programs, including the liberalization of energy prices. Price supports for fossil fuels in Russia and Eastern Europe were greatly reduced. Bringing laws into agreement with the EU’s further accelerated the process of eliminating remaining subsidies. Even in Russia, gasoline and diesel prices for 3