China in Central and Eastern Europe – is energy in play?

  1. Introduction

The rise of China in international relations is the global event of our times. The Middle Kingdom is about to regain its leading role in the global economy (Semerák, 2015), and its president, Xi Jingping, announced that they are pursuing “the great rejuvenation of the Chinese nation” (Economist, 2013). The main tool for making this happen is the Belt and Road Initiative (BRI), which is the name for several ambitious infrastructure projects all over Eurasia, connecting China and the European Union on its two ends. Between the two main regions are also territories of interest, for instance Central Asia and Central and Eastern Europe (CEE). Central Asia’s role as a fossil fuel supplier is clear, it’s meant to soothe China’s insatiable appetite for energy. However, CEE is more interesting in this sense. Chinese foreign policy and influence was absent here until the late 1990s and early 2000s, but now this region of 16 countries can be the transportation bridgehead of the project connecting the East and West.

In this study I aim to clarify the general significance and role of the CEE region for China and the BRI and the motives behind the Sino-CEE cooperation. Additionally, I also intend to answer the research question whether Chinese investors are eyeing strategic energy assets in the region to build political leverage in the CEE countries or enhance their energy security.

I investigate the described questions through two case studies, Hungary and the Czech Republic. Hungary is the most vocal advocate of the Chinese presence in the region, they declaredly aim to attract the highest possible amount of Chinese capital and is the home of the largest Chinese diaspora in the region. The Czech Republic is the most developed country in the region, with an openly China friendly president. These two countries serve as a good example to determine whether positive political will from the CEE side yield the same results in each case in terms of Chinese investments.

In section 2 I build my theoretical viewpoint, in section 3 I elaborate on China’s multilateralism in the region, section 4 and 5 are the case studies, which I discuss in section 6, then I conclude the whole paper in section 7.

  1. Theoretical background

Searching for the theoretical underpinnings to understand China’s foreign policy can lead us to many dead-ends. One might think that liberalism is the key theory to understand the People’s Republic, since, multilateralism is key in either case (theory and China). The contemporary understanding of liberalism, is more of an interventionist one, limiting state sovereignty and reallocating political authority on the global scale (Ikenberry, 2009). However, it is essential to notice the peculiar nature of China’s multilateralism. It is declaredly non-interventionist, promotes peaceful coexistence and non-interference in domestic affairs (Kowalski, 2017). Additionally, the People’s Republic used multilateral structures to strengthen bilateral ties and not to build a multilaterally institutionalized order (Kowalski, 2017). Plus, as in the case of the 16+1 forum, Belt and Road Initiative (BRI) and the Shanghai Cooperation Organization (SCO), it seeks a clear leadership role, without the illusion of equality, while the traditional liberal institutions are built on principle of collective problem solving and parity (Ikenberry, 2009, Kowalski, 2017). In this case, a further argument against liberalism, is that in a system characterized by this theory the main inputs in the policymaking process are business interests. Since China is an authoritarian regime, where the state class determines policies, liberalism cannot be applied (Amineh and Guang, 2017). Thus, even though the promising signs, based on the analysis above, looking through the lenses of liberalism on contemporary China, is a dead-end.

If we turn to realism, we realize, that it falls short, as well, to fully explain China’s behaviour in external relations. The theory assumes an anarchic state where there is no central authority above states, while they aim to maximise power, through military means. This creates a continuous clash and a cycle of violence between great powers (Schmidt, 2004). The breaking with the Dengist orthodoxy in foreign policy (“Keep a low profile” or “Conceal your capabilities and avoid the limelight”) and the explicit pursuit to become a regional hegemon (Tao, 2017) might correspond to the realist theory. However, again, the tools used to facilitate the goals reveal that we should not take the realist approach to analyse Chinese foreign affairs. Despite its enormous latent and military power China does not show the signs of becoming a potential military aggressor on the world stage. The existing structures, the Belt and Road Initiative, the 16+1 forum and the SCO, all facilitate the projection of China’s economic and financial power.

As Robert Cox writes in his seminal work: “Theory is always for someone and for some purpose. There is, accordingly, no such thing as theory in itself, divorced from a standpoint in time and space.” (Cox, 1981: 128). Based on this, to understand the external relations of contemporary China, we need a theory crafted for this purpose. An approach fulfilling this condition is the theory of geopolitical economy. In the last decades China industrialized in a breakneck speed, while this process was engineered and supervised by the ruling communist elite. This and the subsequent opening of the Chinese economy created the condition of lateral pressure at home (Amineh and Guang, 2017). As formulated by the authors: “Lateral pressure in industrialized and industrializing countries increases when governments see themselves confronted with population growth, rising incomes, technological change, domestic resource-scarcity, and the social pressure of unfulfilled demands. These forces induce governments to expand beyond borders under stress as their capability to do so improves in absolute and relative terms.” (Amineh and Guang, 2017:24). In case of China this manifests in the fact that the continuous growth in living standards is the basis of the legitimacy of the ruling elite (Zhu, 2011). Also, further prosperity greatly rests on the energy security of the People’s Republic. To foster further growth and acquire the required resources, China must go abroad, not just with its products but as an investor, as well. The process of outward FDI and economic power projection in an authoritarian state-society complex, where the largest potential investors are state owned enterprises and firms closely linked to the party elite, is a government project. According to the theory of geopolitical economy if a state actor engages in cross-border activities, two logics are in play, a territorial logic of power (geo-political) and the capitalistic logic of power (geo-economic) (Amineh and Guang, 2017). Geopolitical logic of power puts the state-state relationship in a spatial, territorial context. The geo-economic approach puts the capitalistic logic of power, which is the continuous accumulation of wealth, to a territorial context, as capital has the tendency to expand geographically across borders (Amineh and Guang, 2017).

Thus, the outlined theory is the best suited to help us to understand the recent turn in China’s external relations. The new Chinese approach is an answer to the domestically developed lateral pressure, based on the two logics (geo-political and geo-economic). I theorize that the hegemonic endeavours are a necessity for the Chinese leadership to ensure their legitimacy and to further remain in power. The most ambitious real-world manifestation of these efforts, corresponding to the theory of Amineh and Guang (2017), is the Belt and Road Initiative. Additionally, the theory of geopolitical economy guides us in identifying the sources of the main policy inputs (state class), and the tools used (SOEs, multilateral institutions with Chinese leadership as the AIIB, 16+1, SCO) to facilitate the grand strategy.

  1. Chinese multilateralism in Central and Eastern Europe, the 16+1 Cooperation and the Belt and Road Initiative

As mentioned in section 2 Chinese multilateralism differs from its liberal counterpart, since it is not based on parity but on a clear leadership of China, and serves as the tool to strengthen bilateral relationship and not a building of a multilaterally institutionalized order (Kowalski, 2017). This pattern can be noticed in both cases which are in the focus of our interest, the BRI and the 16+1 Cooperation.

  1. 16+1 Cooperation

The last time the CEE region was present in Chinese foreign policy was in the 1950s, as a region of fellow communist states. Even in the 1990s the area was absent from Chinese interest (Pavlicevic, 2016). The true improvement in relationship came after the 2008 financial crisis, when the leading European states and the USA was hurt by the crash, while China continued to perform outstandingly in economic terms. In that time China was able to provide the necessary capital to Europe to get out of the slump, plus it weakened the perceived superiority of the West, making the Chinese model more credible in the eyes of Europeans. This was quickly followed, in 2012, with the first meeting of the 16+1 Cooperation in Warsaw (Fang, 2015).

With this Chinese EU relations became divided, one direction are the developed countries of Western Europe, the second are the developing (in the eyes of China) states of Eastern Europe. China sees the CEE countries as its traditional partners, as a reference to the post-communist past (Kowalski, 2017). Additionally, the two sides are increasingly on one page, since the CEE and Chinese leaders are both questioning the Western type liberal democracies (Kowalski, 2017). This development is upsetting for the EU, since it sees China’s involvement in the CEE region rather as a threat than an opportunity (Pavlicevic, 2016).

China’s goals in the region, however, were not exactly clear. Scholars and analysts lamented, whether China aims to utilize the high integration of CEE (especially Visegrad Group) countries to the international value chains and create complementing capacities and sell to third parties (Semerák, 2015). This approach is part of the story, since countries which are well integrated into the global and European value chains (Hungary, Czech Republic, Poland, Slovakia) are the largest recipients of Chinese FDI in the region (China Global Investment Tracker, 2017). Economic rationale of complementarity is strong here, since the CEE countries produce high-end, high-tech products and have direct access to the EU market, while China has vast and cost-effective manufacturing capacities (Fang, 2015).

However, we have seen that different projects are about to come into fruition, which are based less on the high integration into value chains. This is for instance the Budapest-Belgrade railway line, or the participation of Chinese companies in the building of a highway in Slovakia (Turcsányi, 2017, Bruegel, 2017). These kinds of investments follow a different rationale. China provides funding to large infrastructure projects, on the condition that it is built by Chinese companies, using Chinese materials. This is corresponding to how the Belt and Road Initiative works (Semerák, 2015), and also to the theory geopolitical economy. China needs to go abroad with its businesses to sustain the continuous economic growth at home, and to give an answer to the domestic lateral pressure. However, in CEE the Middle Kingdom can give only a one-sided answer to the developing lateral pressure, since the fossil fuel reserves are negligible in the region. So large scale investments into other strategic assets is what China might be doing. But, there are caveats. Out of the 16 countries involved in the 16+1 cooperation, 11 are EU member states. These countries have a more direct access to funding with better conditions through the European Union. Thus, the Chinese model is truly appealing only to the remaining 5 countries (Albania, Bosnia and Herzegovina, FYROM, Montenegro and Serbia) or to countries with not-so-rosy credit ratings. This is one of the reasons, why even though, the 16+1 cooperation started in 2012, there are no substantial results (Pavlicevic, 2016, Turcsányi, 2015).

The uncanny resemblance between the methods applied in the two initiatives (16+1 and BRI) is no coincidence. In 2017 November during the latest 16+1 summit in Budapest, the Budapest Guidelines were accepted, which announces the attachment of the 16 CEE countries to the Belt and Road Initiative. Thus, it can be concluded, that the previous diplomatic efforts by China, including the frequent and unprecedented visits of Xi Jingping, Li Keqiang and other high officials into the region (Góralczyk, 2017), served as the preliminary phase of the BRI. The goal of the 16+1 cooperation is bigger than just benefiting from the integrated value chains of the CEE countries or making money on infrastructure businesses. It was the missing piece, the political ground, in the trillion-dollar puzzle, going from China to Western Europe through the whole Eurasian continent.

  1. The Belt and Road Initiative

The concept is based on the ancient Silk Road, and its renewal, is revolving in the Chinese public discussion since the 1990s (Szczudlik-Tatar, 2013). The official revival of it was announced in 2013 in Astana, Kazakhstan in a speech made by Xi Jingping. The Chinese president outlined five points where China aims to foster cooperation: policy communication, transport corridors (from the Pacific to the Baltic Sea, Central Asia to the Indian Ocean), reducing trade and investment expenses, monetary cooperation (reducing currency risk) and people-to-people relations (Xi Jingping, 2013, Szczudlik-Tatar, 2013). As described in section 2 and the previous part of this section, the Belt and Road Initiative is a necessity for the Chinese leadership to remain in power. They need to reach new export markets in a more cost-effective way, and export their vast amounts of capital to spur further economic growth in the People’s Republic, which is the basis of the ruling class’s legitimacy. To make prosperity sustainable, China needs additional fossil fuel resources, as well. With the Belt and Road Initiative these goals are attainable. Central Asia and the Caspian region holds vast amounts of natural gas, crude oil and other valuable natural resources. Western Europe is a large and sophisticated export market. Plus, as outlined above, CEE is needed to connect the two important regions, thus making it the transport bottleneck of the initiative. The building of the political ground in the regions for the initiative goes on since 1996, by the establishment of the Shanghai Cooperation Organization (then Shanghai Five) and was followed with 16+1 cooperation in 2012 (Szczudlik-Tatar, 2013). The tools of the initiative are Chinese funded infrastructure investments realized by Chinese companies in Central Asia, South Asia, South-East Asia, Central, Western and Eastern Europe. The two main directions of the project are the economic belt (green band in Central Asia on figure 1) and the maritime road (blue band, in the Indian Ocean on figure 1), which are connected with six economic corridors the New Eurasian Land Bridge, China–Mongolia–Russia, China–Central Asia–Western Asia, Indo-China Peninsula, China–Pakistan, and Bangladesh–China–India–Myanmar. These corridors are going to be industrial and energy clusters, attracting Chinese investment, besides the transport infrastructure (McKinsey, 2016).

170515_MERICS_China_Mapping_BRI_March_2017_0

Figure 1: Belt and Road Initiative (source: Mercator Institute for China Studies)

To further the completion of the BRI, China established several multilateral institutions as the Asian Infrastructure and Investment Bank (AIIB) and the Silk Road Fund. As we can see on figure 1, the CEE countries are not AIIB members. This might be appropriated to the fact that these countries receive funding on more favourable terms from the EU (not as for instance, Western Europe, which is a net contributor, Institute for Fiscal Studies, 2016), plus they have more direct links to China trough the 16+1 forum (Kowalski, 2017, Turcsányi, 2017).

We can conclude that the CEE region is in a special situation from the viewpoint of China and the BRI. The countries are needed to complete the project, since they are the gateway to the wealthy Western European markets. The fact that the planned railways go through the region acknowledges this (in the south through Bulgaria, Serbia and Hungary, in the north through Poland and the Baltic states). However, the conditions offered in the framework of the BRI, which according to the Chinese are lavish and generous, are not received with exuberance of joy, as the reception is rather “lukewarm” (Casarini, 2015 as cited in Góralczyk, 2017). Additionally, as Turcsányi (2015) notes, often not just the economic viability of the projects, initiated by China, but their very necessity is in question. However, the role of Chinese capital in CEE is still negligible compared to other sources (Éltető, Szunomár, 2016), and a study showed that the positive perception of China results in better reception of Chinese investment in Europe (Roland Berger, 2013). Thus, it can be conceded that for China to attain results in the region of high importance, Central and Eastern Europe, political ground is needed. In the following two case studies I examine two countries where a recent turn in domestic politics created a fertile soil for China.

  1. Case study – Hungary

Hungary is small, developed and open economy in Central and Eastern Europe, which is part of the Visegrad Group (V4). It’s 2016 GDP per capita stands on 26,700 current USD on PPP basis (World Bank, 2017), while it is the 15th most complex economy in the world (OEC, 2017). The country is well integrated into the European value chains, with a positive trade balance totalling more than 11 billion USD in 2016. The car industry is the leading sector, the top exports being cars, vehicle parts, spark-igniton engines and combustion engines followed by pharmaceutical products (OEC, 2017). Hungary’s largest trade partner are Germany, Romania, Austria, Slovakia, Czech Republic, France and China (OEC, 2017).

 Capture1

The three largest companies of Hungarian ownership in Hungary by market capitalization in 2016 were the financial institution OTP Bank (6 billion EUR), the oil and gas company MOL Group (4.3 billion EUR) and the pharmaceutical giant Richter Gedeon (3.5 billion EUR) (Deloitte, 2016). All of them being in the top 20 largest CEE companies.

Hungary has very limited fossil fuel resources and a declining domestic production. The country is highly dependent on oil and gas imports (80%) from Russia and electricity imports from Slovakia (31%), while it is almost self-sufficient in terms of coal (10% import dependency) (OECD, 2016). Additionally, Hungary, as the member of the EU, strives to generate more and more of its electricity from renewable sources, reaching 10.5% in 2015 (MSZIT, 2016).

The political ground for Chinese presence in Hungary was established in 2012, two years after Viktor Orbán took his place as prime minister, with the Eastern Opening Policy. The official documents say that Hungary aims to look towards the East to search for trade partners to fuel growth, because the West is still suffering from the aftermaths of the financial crisis (Portfolio, 2012). The same year the first 16+1 meeting was held in Warsaw. In the last 5 years the voice of Eastern Opening just intensified in the Hungarian government as personal changes happened, and Mr. Szíjjártó became the minister of foreign affairs in 2014. Running up to the 2017 Budapest summit of the 16+1 cooperation he said, that “the goal of the Hungarian Government is to bring the largest possible amount of Chinese capital destined for Europe to Hungary” (Ministry of Foreign Affairs and Trade, 2017). Since the Eastern Opening Policy is in effect Hungary managed to attract the 0.83% of all Chinese outward FDI to Europe, and 11.36% of all construction contracts granted to Chinese companies in Europe was in Hungary (China Global Investment Tracker, 2017). [1] In the recent years Chinese investors established their presence in the telecommunications (acquisition of Invitel by CEE Equity Partners, Huawei’s 1.5 billion USD greenfield investment), education (acquisition of Metropolitan University by CEE Equity Partners) and the chemicals sectors (Wanhua’s acquisition of Borsodchem). Chinese investors were inactive in the field of energy, which is even though the fact that Hungary has a developed energy sector lead by companies such as MOL, MVM (electricity generation) and MET (natural gas). However, as mentioned above, the fossil fuel reserves of the country are completely negligible, thus the investments in the energy sector would not enhance the energy security of China. Two considerations could be behind such investments, the attainment of political clout, or pure financial profit. Since, the Hungarian leadership is without doubt a great supporter of China, there’s no need for gaining such leverage, plus as Éltető and Szunomár argues (2016) higher returns can be made on industries, which enjoy larger integration to the European value chains (telecommunications, chemicals). On the other hand, Chinese firms won substantial construction contracts in the country, mostly in the railway sector (2.3 billion USD, China Global Investment Tracker, 2017), which can be seen as the preliminary test, for the nearly 3 billion USD Budapest-Belgrade railway line (Kowalski, 2017, Bruegel, 2017). This line, as seen on figure 1, is an integral part of the Belt and Road Initiative. The worrisome fact about this investment, on which agreement was strengthened during the 2017 Budapest summit of the 16+1 cooperation, is that the terms of the loan provided by China and the whole investment are classified for 10 years (Napi Gazdaság, 2017). Additionally, the feasibility and payback of the project is questionable, as well (Kowalski, 2017, Napi Gazdaság, 2017). This investment, might correspond to Turcsányi’s (2015) view, that often the Chinese investments in the region are not just economically not feasible, but not needed at all in the participating countries, except China.

  1. Case study – Czech Republic

The Czech Republic is the most developed member of the Visegrad Group, with its 2016 GDP per capita standing at 34,700 current USD on PPP basis (World Bank, 2017). It is also an open, trade-oriented economy, deeply integrated into international value chains. The country is the 9th most complex economy in the world, with a positive trade balance of 22.5 billion USD in 2016 (OEC, 2016). The leading sector is the automotive industry, top exports being cars, vehicle parts and seats, followed by computers. Germany, Slovakia, Poland, UK, France and China are the top trading partners of the country.

 Capture2

The largest company in CEE by market capitalization is the Czech energy company ČEZ (9 billion EUR). The second largest Czech owned company is the financial institutions Komerční Banka (6.6 billion EUR), while the telecommunication giant O2 Czech Republic (2.7 billion EUR) is also among the top 20 CEE companies by market capitalization (Deloitte, 2016).

The Czech Republic is relatively rich in coal, thanks to the fact that the most abundant coal basin in Europe (Upper Silesian, Ostrava-Karviná basin) is located in the country (Euracoal, 2016). The country exports coal and electricity to the neighbouring countries. Their overall energy dependency is modest (30%), while they are fully dependent on imports from Russian regarding crude oil (99%) and natural gas (99%). Renewable energy is a priority in the Czech Republic, due to its membership in the EU. The generation of electricity from renewable sources has shown a steady growth between 2000 and 2013, increasing from 2% to 9% (OECD, 2016).

The turn towards China in Czech politics happened in 2013 when Milos Zeman, a critique of the Western liberal order, became the president of the republic. In 2015 he attended a military parade in Beijing as the sole leader from the Western world (Kowalski, 2017). Chinese investors were active in the country since then, the largest deal was the acquisition of the majority stake of the J&T financial group by one of the largest Chinese, private firms interested in energy and the financial sectors, CEFC (J&T, 2017). CEFC also showed interest to bid for CEE media assets together, with the other important financial group in the Czech Republic, Penta Investments (Reuters, 2017). Plus, CEFC acquired a notable brewery (Lobkowicz), a football club (Slavia Praha), two historical buildings in Prague (to establish European headquarters), an airline (Travel Service) and used to have and indirect stake in EPH, a leading Central European energy conglomerate with 12 billion EUR in assets, through J&T (Turcsányi, 2017, EPH, 2017). CEFC is rumoured to have deep ties with the Chinese state leadership, while its chairman, Ye Jianming is the economic adviser to the mentioned Czech president, Milos Zeman (Kowalski, 2017).  As Turcsányi (2015) argues, based on his discourse analysis, each investment in itself was received better by the Czech public, than the overall presence of CEFC.

Additional, potential Sino-Chinese projects, are the building of two new nuclear reactors in the country, which was indicatively agreed during the 2014 Blegrade summit of the 16+1 cooperation (Turcsányi, 2017).

As we see, again, political ground was needed for Chinese investments to be realized in the country. Before the presidency of Milos Zeman the inflow of Chinese FDI to the Czech Republic was negligible (China Global Investment Tracker, 2017). Regarding the energy sector, the situation slightly differs from the Hungarian one. The Czech energy sector is developed as well, the most prominent companies being ČEZ and EPH. One of the distinctions lies in the resource endowment, since the Czech Republic has major coal reserves. However, this holds hardly any significance for China, because the Inner Mongolian mines make China the largest coal producer in the world (EIA, 2017). However, the story of the indirect stake in EPH, through J&T, is more intriguing. EPH’s major assets are power plants in Hungary, Slovakia and the Czech Republic, Eustream (the Slovak natural gas transmission operator), the Slovak Power Works (including 2 nuclear power plants, 2 coal-fired and 31 hydroelectric ones), LEAG (the 4th largest power plant operator in Germany), EP Produzione (4.3 GW of gas fired capacity in Italy), SPP (owner of the 98% of the Slovak gas distribution network) and many others (EPH, 2017). Interestingly the stake was completely sold after CEFC entered to J&T. The leaders of J&T argued that this sale is a “monetization of gains on an extremely successful project” (The Slovak Spectator, 2016). This move does not support the view, that China aims to invest in strategic, energy assets in CEE in order to build up political leverage. Instead, it supports the argument that the investments of CEFC can be regarded as driven solely by financial motives. Or the Chinese are being more cautious, and take care of their perception by the Czech’s, and not invest in strategic assets. However, what is inarguable, that there are no talks on such large-scale infrastructure investments in the Czech Republic as for instance the Budapest-Belgrade railway line in Hungary. This also manifests in the data on granted construction contracts, which are standing at a negligible 0.30% of all construction contracts granted to Chinese companies in Europe since 2007 (China Global Investment Tracker, 2017).

  1. Discussion

Based on the two case studies, it is clear that China is not interested primarily in the energy sector of the Central and Eastern European countries. This can be concluded even though the fact that highest proportion of outward FDI from China to Europe went to the energy sector (Turcsányi, 2017). The reason behind this are not natural resources as in Central Asia, but the West European energy companies are the main patent holders in the industry, especially if speaking about renewables (40% of global patents, Bruegel, 2017). However, CEE countries cannot offer any of these for China. Thus, FDI flows from China to CEE can be characterized into two categories. First, firms deeply integrated into the European value chains (Invitel), or possessing strong brands (Lobkowicz, Slavia) or extensive relationships and clientele in the region (J&T). Investments in this category serve the capitalistic logic of power, when accumulated domestic capital searches for return abroad (solely geo-economic). Second, large-scale infrastructure investments (Budapest-Belgrade railway line) fitting into the Belt and Road Initiative, serving both logics underpinning the theory of geopolitical economy.

Finally, an important condition for these investments to successfully happen is the friendly political atmosphere in the highest circles on the side of the recipient countries. This was present in case of both countries from 2012 and 2013 respectively.

  1. Conclusion

The main motive of China to be engaged in the Central and Eastern European region lies at home, and in the continuously building up lateral pressure to spur further economic growth and provide energy security. This yielded the Belt and Road Initiative as a foreign policy strategy, which can be best understood through the theory of geopolitical economy. CEE is a piece in this trillion-dollar puzzle, acting as the transportation bridgehead for the BRI. The region also presents a good opportunity to make return on excess domestic capital, by investing there. These are the two aspects where the significance of Central and Eastern Europe lies for China, enhancing energy security is not among them, as argued previously.

The EU is continuously worried (Pavlicevic, 2016) about the presence of China in CEE, however, as shown, it is not getting hold of strategic assets. The reason the Chinese are welcomed in the region is the crisis of Western liberalism itself, which is well understood by local leaders who turn their attention eastwards. However, still the amount of investment and political influence of China in the region is completely negligible compared to the one asserted by the European Union and the US. Plus, Chinese FDI is present in larger amounts in the West, CEE makes up for just 10% of all Chinese FDI in Europe (China Global Investment Tracker, 2017, Szunomár, 2016). The leaders of the EU should rather worry about the bigger picture and what the BRI as a whole holds for the future of Europe.

As there are several quantitative studies on the matter, to better illuminate the nature of China’s involvement in the CEE region, future research should focus on case studies on additional countries in the region. This would help to firmly establish the link between positive political perception of China and Chinese investment, as in the case in Hungary and the Czech Republic. Plus, taking a step back, the reason behind why CEE leaders choose to look eastwards, should be investigated, as well.

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  1. Websites

 

[1] Both figure should be understood in value terms, since 2012/01/01 till today. Both greenfield and brownfield investments are included.

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Neoliberalism, Global Order and the Bottom Billion

  1. Introduction

In my essay I am going to argue that the policies and behaviour of high-income countries and the institutions they have created for governing the global economy are the main impediment of successful development in emerging economies.

Development is not just economic growth but a continuously faster one from emerging countries than developed countries. The international order is made to serve the interests of those who construct the global rules of the game, the developed countries. It is fair to assume that if the global environment is tailored to advanced economy needs it is easier for them to sustain growth. Developing countries must adhere to the global rules of the game, and implement the global standard institutions, regardless their effect on economic development. Thus, the global order makes it difficult to gain on developed countries in living standards. Continue reading “Neoliberalism, Global Order and the Bottom Billion”

Analysis of the EU-Russian natural gas relations

INTRODUCTION – PROBLEM STATEMENT

The energy dependency of the European Union has shown a steady growth since 1990 and peaked in 2008. After the record highs (54.5%) it mingles slightly above 50% as seen in Figure 1 (Eurostat, 2016).

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Natural gas has been the second most important primary energy source in the European Union, providing between 17.9% and 25.3% of gross inland consumption (Figure 2, Eurostat, 2016). The import dependency of natural gas was even higher than the average energy dependency, it stood at 65% in 2013 (increasing from 43.3% in 1995). The majority of natural gas imports (39%) comes from Russia through pipelines (European Commission, 2016). Russia, and formerly the Soviet Union has historically been a reliable and cheap supplier of natural gas in the last five decades (Mitrova, 2017). However, the disruptions in the supply of gas in 2007 and 2009 and the geopolitical tensions between the West and Russia due to the annexation of Crimea jeopardized the formerly balanced relationship and put question marks on the reliability of Russia as a supplier of natural gas. Continue reading “Analysis of the EU-Russian natural gas relations”

A different meaning of “Made in China”

Question answered: 

‘As the ‘post-industrial’ global economy emerges, there is frequent concern in the media and elsewhere that soon ‘there will not be enough work to go around’; such concerns/fears are an important ingredient of the political dynamics we currently see in advanced (Western) democracies. At the same time, however, unemployment in these same countries is  currently very low. To what extent (and how) can theories of trade, labour markets, value chains, and collective action explain what is going on, both economically and politically?’

  1. Introduction

The fears that there’s ‘not going to be enough work to go around’ can be fuelled by two factors, one is technological progress the other is international trade. As the literature overviewed in this essay says, on the long run, the net economic effect of these factors on jobs were either positive or economically negligible. Even though this, throughout the history, both mechanisms were in the centre of political turmoil. The reason to this might be the difficulties of adjustment, including lack of policy solutions, to the new economic order by the low-skilled workforce.

In my essay I build largely on Richard Freeman’s 2008 article in what he argued that the global labour force doubled at the advent of the second millennium as China, India and the former Soviet Union opened their economies up (Freeman, 2008). He argues that the adjustment to this might the greatest challenge for the US economy since the Great Depression. I illustrate his negative prediction with data and conclude that the adjustment might be failing and the emerging markets, especially China aims to compete with the US where it hurts the most, high-tech industries.

The West should not fear robots in general, but robots, which are developed in China and are more productive than their Western counterparts. Continue reading “A different meaning of “Made in China””

Wealth Inequality and Populism in the West on the Long Run

Introduction

In my essay I will put forward an argument, which should be tested with utmost scientific rigour, however unfortunately the scope of this paper does not make it possible. Therefore, my aim is to spark discussion on the long-term relationship between populism, wealth inequality and the current economic situation in the West. My hypothesis builds on the relative deprivation theory (Smith et al, 2015:2) but in different way as the majority of the already existing literature does. The rise of populism in rich Western countries is a longer process, than just the recently unfolding phenomenon (Mudde, 2017), therefore we need a long-term explanation to fully understand it’s nature. My proposition is that wealth and not income inequality (and other macroeconomic factors, such as unemployment, GDP growth, etc..) can be the main economic pillars of the populist attitude in the last decades. The surge in wealth inequality from the 1970s in Europe and the US (Piketty and Saez, 2014: 839) coincides with the occurrence and rise of populist parties. While developed Western countries, excluding the US, have excessive welfare policies to foster income equality, they completely neglect such equalizing measures concerning the inequality of wealth. However, the vast differences in one’s starting point in life is what cements societal differences through intergenerational inequality (Corak, 2013).This explanation does not fully contradict with the other arguments building on relative deprivation theory. Rooduijn and Burgoon (2017:27) argues that an individual benchmarks its situation to the whole and if the whole is performing better, while the individual perceives his circumstances to be worse, he feels relatively deprived and is more likely to vote for a populist party. Continuously over time being less well off than the whole means that the individual’s relative low prosperity is being solidified, I argue that this happens through the accumulation, or this case in more precisely in the not accumulation, of wealth. Continue reading “Wealth Inequality and Populism in the West on the Long Run”

Reading Blog 9: Corporate Governance, Inequalities and Social Responsibility

Firms maximize profits. To do so they need integrated market and nonmarket strategies (Baron, 1995). Corporate social responsibility and exerting power on stakeholders is part of the nonmarket strategy. While lowering inequality is a surprising side-effect of corporate success.

Are businesses the saviours of our society? Or to ask it more precisely, citing one of the pieces, is the “decentralized correction of externalities and inequality” is? (Benabou and Tirole, 2009:15). Should these problems be corrected independently of democratically elected governments? Do we need governments at all?

This is what we think of when reading about extensive corporate social responsibility programs and lowering inequality due to expanding corporations. If we agree, and say that more decentralization is the better, then how we ensure that the acts performed on behalf of the people by corporations are indeed what people want? Even if we say that yes, this what people want, can we be sure? No, we can’t. Fuchs and Lederer masterfully broadens one’s horizon regarding how business can exert its power. For the mentioned situation, we can say that this is a prime example of the discursive power of business. This approach says that “power not simply pursues interests, but creates them.” (Fuchs and Lederer, 2007:9).

Furthermore, firms made us think that they are more efficient than states. The slow-moving mastodon with high transaction costs is in everyone’s mind if we say state action. However, as we read in the brilliant piece by Mariana Mazzucato last week, this is not that straightforward. Generally, state is needed to make innovation happen, because it’s risk tolerant and funds what private capital is not. So maybe the “decentralized correction of externalities and inequality” is not that efficient either as it might sound.

Also, if we add Ronald Coase’s powerful argument to it, we realize why extended types of governance (states) are needed. Higher the complexity of a situation, higher the transaction costs, higher centralization is needed to deal with the problem. In case of a system where is no state, but transaction costs are present, how would two decentralized actors solve their nuisance? Clearly the rules of the game are essential to it.

Additionally, Davis and Cobb state that higher the concentration of employment, lower the inequality in a country. The question is what makes high concentration of employment possible? According to the actors it’s “likely to depend on several factors … national culture and managerial ideologies” (Davis and Cobb, 2010:51). These are soft, informal factors embedded in individuals. If the wants and decisions of these individuals aggregate up, they yield a national culture. If there’s no discrepancy between formal and informal rules, this national culture is codified in regulations. Therefore, institutions foster corporate expansion and the lowering of inequality.

The point I’m trying to press is the following. As an economist I find the decentralized, market like solutions to externalities and inequality as a beautiful thing. My inner Bernard Mandeville would applaud the findings of Davis, Cobb, Bénabou, Tirole and the others. But if I aim to think as a political economist, I must criticise these solutions. They happen, only due to the institutional environment making it possible. Business, by undermining institutions through exerting different types of power on them and taking up their very roles (CSR), cannibalizes its natural habitat. As Schumpeter put it in “[capitalism] very success undermines the social institutions which protect it” (Schumpeter, 1943:61). Business is not our saviour, however it’s an immensely important part of the system, therefore the delicate balance of the actors need to be kept to make it work on the long run.

Reading blog 8: Division of Labour, Innovation and Value Chains 

Are we progressing? If we do, how? And also, where? These were the questions raised in this week’s pieces. The big picture is the following: most of the researchers are occupied with the first two questions, while Joseph Schumpeter gave his elegant and bold answers to each of them. Yes, we are progressing, capitalism decomposed feudalism, and by the way we are richer than we used to be. We are progressing by the method of creative destruction. To where? Right to the very reality of socialism, to where road is paved with capitalism. In Schumpeter’s argument, the creative destruction process is so powerful it destroys his own child, as well, the capitalist system. If we interpret the welfare state regimes in Scandinavia as Schumpeter’s socialism, we can conclude that he was right. But rather say that it’s a bit more complicated matter, and that’s complexity what the remaining pieces aim to tackle.

Helpman brilliantly demystifies that how growth is measured and what the top macroeconomists regard as economic growth in recent times. Beautifully illustrates the way how technology from an exogenous factor became an endogenous, integral part of growth theory. How we progressed from Solow to Romer, also by incorporating Schumpeter’s notion of creative destruction. The theory Helpman arrives to as being sufficient to describe why there’s a growth in total factor productivity, makes technology innovation endogenous through the private sector. The argument is as follows. Firms are incentivized to invest in R&D because patents can ensure them monopoly profits for a period of time, which can be reinvested to further R&D, which yields further patents, and so on.

All this would be perfectly persuasive, if I haven’t read Mazzucato’s piece right after it. She takes on the dirty, real world side of the innovation debate. By busting the six common myths regarding innovation policy, Mazzucato makes a great service to society. I, personally, believed in each of these myths. She illustrated with scientific evidence, that for instance, why the link between (private) innovation and R&D is not that straightforward. She argues, that: “There are very few studies which prove that innovation carried out by large or small firms actually increases their growth performance. Therefore, macro models (Schumpeter, new growth theory) does not have the micro foundation.” (Mazzucato, 2013:44. She also replaces the enterprising, champion-of-innovation picture of the private sector with a risk-averse, opportunistic one. But, on the other hand she does the same with the state, she aims to establish a view that the sovereign is a potent force in innovation. The state achieves it by investing in projects possessing the attributes of high uncertainty and potential, which are too risky for the venture capitalists and large corporations.  Mazzucato also puts innovation to context, which are the national systems of innovation. Combining all this together, we get her main argument, which is that innovation is not an activity which happens in isolation in certain private enterprises. It is very much a process, which is the product of a system with deep interdependencies between private and public actors.

These interdependencies, at least the private side of them, are illustrated in the paper of Gereffi, Humphrey and Sturgeon. They argue that the “different ways of dealing with asset specificity and different motivations in building firm-to-firm relationships yield three modes of industrial organization: market, hierarchy and network, but not all networks are alike” (Gereffi, Humphrey, Sturgeon, 2005:82). The theory results in 5 modes, which can help us to understand how the diffusion of knowledge happens in industrial networks. This paper presents the missing modes of governance between markets and hierarchies.

But, not just that. Schumpeter gave us the underlying behavioural pattern of the system (creative destruction), Mazzucato the state’s role and the national system of innovation, Gereffi et al the nature of governance in these systems, Helpman clarified how we should measure the result of the interplay of these parts and Gordon and his critiques provided the historical analysis of the results.

At the end of the day was Schumpeter, right? Are we heading to socialism? Gordon’s explicit answer is no. But even though that Schumpeter might be right. Since the prediction of the Austrian not inherently differs from Gordon’s conclusion.

The Importance of the Alignment of Formal and Informal Institutions in the Dynamics of Aggregation and Behavior. Illustrated by the Example of the Post-Communist Transformation in East and Central Europe.

  1. Introduction

Markets and hierarchies dichotomy (Williamson, 1975) is not useful in capturing the dynamics of aggregation and behaviour. The dichotomy represents two ideal types, which manifest themselves extremely rarely in the real world, however the communist regime in East and Central Europe (ECE) was one of the remarkable occasions when we could witness a nearly pure hierarchy. Additionally, the post-communist transformation is the rare example of a regime change, when countries tried to go from one end of the dichotomy, pure hierarchy, to the other, markets.

The aggregation happens in the following way. Individuals think, decide and act based on the bounded rationality principle (Simon, 1955), they form organizations (Coase, 1937), which act on the behalf of the individuals. The tool to make these arrangements happen, and the whole aggregation process viable, are contracts. Organizations are set of contracts. Beyond these straightforward mechanisms are other forces working to make aggregation from the individual to a national economy happen. These factors are informal rules, what can be debunked into norms, conventions and culture, and formal rules, which are the constitution, laws and their enforcement mechanism like the judiciary system. If formal and informal rules are not aligned in a society, problems arise regarding the explanatory power of the dichotomy. In my example regarding the transformation, introducing market arrangements in the economies of ECE haven’t yielded the results predicted by the markets and hierarchies framework. (Pejovich, 2003, Swatek, 2008, North,1993) Continue reading “The Importance of the Alignment of Formal and Informal Institutions in the Dynamics of Aggregation and Behavior. Illustrated by the Example of the Post-Communist Transformation in East and Central Europe.”

Reading Blog 7: Trade and Migration: Cost, Benefits and the Rules of the Global Game

This week’s pieces touched on the fundamental issue of moving of goods, capital and humans. How to ensure, or to ensure at all, the movement of these factors? This question can be clearly linked to development.

The basic, underlying idea of the article written by Estevez-Abe, Iversen and Soskice is that we should regard humans as rational agents who evaluate the returns of their investments in themselves (education and skills), before making them. This closely corresponds with Pritchett’s view of the human being. He argues, the fact that “we prevent people from moving their human capital for higher returns but allow them to invest their physical and monetary capital elsewhere creates perverse incentives”. (Pritchett, 2006) If we add the “new trade theory” to the equation by Paul Krugman, which states that: “Increasing returns provide an incentive to concentrate production of any one product in a single location, given this incentive to concentrate, transport costs are minimized by choosing a location close to the largest market, and this location then exports to other markets.” (Krugman, 2008), we easily conclude why development is not a piece of cake. To plainly state, people tend maximize their skills to enhance their returns, if those returns can’t be reaped at home (production is concentrated elsewhere), then they wish to move to attain higher returns, but movement is restricted. To solve the problem, we should let people move freely, which is politically contestable in most receiving countries, or establish production at emerging countries where individual returns can be reaped.

Realizing the importance of the problem, Pritchett outlines a solution package, which is in his opinion is both politically acceptable and development-friendly. But admits that the details, which are about to be developed are where the devil resides.

On the other hand, Hoekman and Kostecki’s piece aims to describe the existing solution we have for the other part of the story (trade and industry policy). They state that openness, and most importantly the depth of that, is what leads to economic growth (in my argument to the individual’s rent realization at home). However, they also state that it’s a complicated issue, with almost more constraining factors than dynamics working in favour of that. But they emphasize one important point, which leads back to many of our past readings, the rules of the game of global trade. They argue that rules should be laid in order to provide legal security and property rights in the system. Therefore WTO, which can be seen as a mechanism for exchanging trade commitments and also as a code of conduct, is a necessary, and constantly evolving, institution for development. Furthermore, the five basic principles of WTO serve as an insurance for participants than no member will take advantage of the other in the system, and no strong country will exploit others, which is essential to make development happen.

While the global rules of the game regarding trade are set, the same should be done for migration, the other way of individual return maximization. However, other rules of the game are in play, which are the rules of the home labour markets of countries. Based on Estevez-Abe, Iversen and Soskice it’s possible to argue that these are endogenous to the former two in a globalized economy. Since the welfare production regime in a country is conditional on the median voter, which are those who are most favoured by the system in place. As we know trade liberalization always has winners and losers, just as migration, as well. For instance, if unskilled labour is let to flow freely in a country of general skill orientation wage inequalities will emerge and the skilled middle-class is becoming the favoured, therefore the median voter, determining further political outcomes.

As we see there’s a high degree of interdependence between the global regime of trade, migration and the welfare production regime in a given country, but it’s important to see that the interplay of these will either make or break development in emerging markets.

Sources:

  • Paul Krugman – Prize Lecture, 2008
  • Estevez-Abe, Iversen, Soskice – Social Protection and the Formation of Skills: a Reinterpretation of the Welfar State, 2001
  • Hoekman and Kostecki – The Global Trading System, 2001
  • Lance Pritchett – Accomodating Forces and Ideas to Achieve Development-Friendly Labor Mobility, 2006