The Political Economy of Emerging Markets and Alternative Development Paths 3031207017, 9783031207013

Table of contents :
Acknowledgements
Contents
List of Contributors
List of Figures
List of Tables
1 Introduction: Emerging Market Economies and Alternative Development Paths
Theoretical Framework(s) to Analyse Emerging Markets’ Varieties of Capitalism
The Aim, Approach and Structure of the Volume
References
2 Conflict Between Great Powers Is Back with Vengeance: The New Cold War Between the US and China Plus Russia
Geopolitics Is Back, But It’s in the Economy
United States
Western Democracies
China
Trade Cold War
Capital Cold War
High-Tech Cold War
Cyber Cold War
Conclusion
References
3 Middle-Income Trap and the Evolving Role of Institutions Along the Development Path
Introduction
An Empirical Illustration of the Middle-Income Trap
More Systematic Evidence on the Middle-Income Trap
The Example of the Soviet Economic Model
Theoretical Generalisation: Institutions and Development
Back to Empirics
Discussion
References
4 Populism and/or Developmentalism: Past and Present Experiences
Introduction
Populism and Developmentalism: The Latin American Experience
Populism as a (Purely) Political Strategy
The Resurgence of Populism and Developmentalism in Latin America: The Pink Tide
Inclusive Versus Exclusive Populism: The Case of CEE
Conclusion
References
5 Surviving and Competing Successfully? Internationalisation of State-Owned Companies in Central and Eastern Europe
Introduction
Review of the Literature
Defining SOEs and State-Owned Multinationals
SOEs in the Visegrad Economies
Are Visegrad SOEs Hybrid?
Concentration of SOEs in Sectors - Industries
Performance of Visegrad SOEs
The Regulatory Role of SOEs in the Visegrad Countries
State Intervention in Foreign Investments of Visegrad Firms
Visegrad Multinationals
Czechia
Hungary
Poland
Slovakia
Discussion
Conclusions
References
6 The Role of Manufacturing in the Central and Eastern European Countries in the Various Periods from Transition to Mature EU Membership
Introduction and Chronology
VoC and CEE in a Chronological Approach
Analysing the Role of Manufacturing in CEE
Sectoral Composition of Economies
Employment
One Important Aspect of the CEE Capitalism Model: Export-Orientation
Conclusions
References
7 The Belarusian Development Path: From Command Economy to State Capitalism?
Introduction
Literature Overview and Conceptualization
A Winding Road of the “Belarusian Economic Model”
The First Years of Independence
Emergence of the “Belarusian Economic Model:” from Rise to the Crisis (1991–2006)
Limited Attempts of Market Reforms (2007–2015)
Toward Stability Based on Market Mechanisms (2015–2020)
Tightening the Grip Again (Since Autumn 2020)
Formal and Informal Features of the Belarusian Economy
Ownership Structure and Ownership Control
State Planning System
Unequal Treatment of State and Private Businesses
State-Organized Informality
Conclusions and Discussion
References
8 Rent Streams and Institutional Development in the (Semi-)periphery: Iran and Hungary
The Role of Rents in the Economy and Economic Theory
The Various Types of Rents
The Economic Impact of Rents
The Iranian Case
Political Settlement in Iran
Rent Space in Iran
Evolution of the Deals Space in Iran
The Hungarian Case
Changes of Political Settlement in the Hungarian Transition Process
Rent Streams and Rent Space in Hungary
The Deals Space in Hungary
Comparative Analysis and Conclusions
References
9 The Return of Industrial Policy in Turkey
Introduction
Turkish Industrial Policy Followed Global Trends
Infant Industry, Import Substituting Industrialisation (ISI), and Five Year Plans (FYPs)
From Import Substituting Industrialisation to Export-Oriented Industrialisation (EOI): 1980s Crisis and the Washington Consensus
The 2001 Crisis, Post-Washington-Consensus Reforms, and the Retreat of Industrial Policy
Post-2009 ‘Return’ of Mainstream Industrial Policies
Covid-19 and Green Industrial Policies
New Industrial Policy
The Challenge of Decarbonisation of Turkish Industry
Positive Momentum in ICT and Defence Sectors and Some High-Tech Projects
Heading for a Middle-Of-The-Road Innovator Trap?
Recurring Turkish Features that Undermine Effective Industrial Policy
Navigating Uncertainty, Institutional Weakening, and Macro-Instability in Late AKP Era
Conclusion
References
10 Educational Developmentalism: A Key to the Success of the East Asian Developmental States
Introduction
Public education: similarities and peculiarities
Positions in PISA rankings
Public education in Singapore
Public education in the Republic of Korea (South Korea)
Public education in Taiwan
Conclusions
References
11 Are There Varieties of Capitalism in Developing Countries? Public Finance and Social Transfers in Türkiye and Poland
Introduction
Theoretical Framework
Social Transfers in Türkiye
Polish Social Policy
Conclusion
References
12 Emergism as Ideology: Zimbabwe’s Ill-Fated Policies for an ‘Emerging’ Upper-Middle-Income Economy
Introduction
Prospects for Zimbabwe’s ‘Emerging Market’ Status Vision by 2030
Ideologizing Emergism in African Economic Thinking
Zimbabwe: The Limits of Emergism
Conclusion
References
13 Conclusion: The Contradictions of Dependent Development in Hegemonic Transition
References
Index

Citation preview

The Political Economy of Emerging Markets and Alternative Development Paths Edited by Judit Ricz · Tamás Gerőcs

International Political Economy Series

Series Editor Timothy M. Shaw , Emeritus Professor, University of Massachusetts Boston, Boston, MA, USA; University of London, London, UK

The global political economy is in flux as a series of cumulative crises impacts its organization and governance. The IPE series has tracked its development in both analysis and structure over the last three decades. It has always had a concentration on the global South. Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe. An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies. It informs diverse policy communities as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise. NOW INDEXED ON SCOPUS!

Judit Ricz · Tamás Ger˝ ocs Editors

The Political Economy of Emerging Markets and Alternative Development Paths

Editors Judit Ricz Department of World Economy, Institute of Global Studies Corvinus University of Budapest Budapest, Hungary

Tamás Ger˝ ocs Centre for Economic and Regional Studies Institute of World Economics Budapest, Hungary

Institute of World Economics Center for Economic and Regional Studies Budapest, Hungary

Institute of World Economics Center for Economic and Regional Studies SUNY Binghamton, USA

ISSN 2662-2483 ISSN 2662-2491 (electronic) International Political Economy Series ISBN 978-3-031-20701-3 ISBN 978-3-031-20702-0 (eBook) https://doi.org/10.1007/978-3-031-20702-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: © Rob Friedman/iStockphoto.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

We dedicate this volume to the memory of our great friend and colleague, Zsuzsánna Biedermann, an outstanding scholar of African political economy.

Acknowledgements

We would like to express our gratitude to Timothy Shaw, the editor of the IPE series. Tim has been an endless source of inspiration, advice, and support throughout the process. We are also grateful to Anca Pusca, Uma Vinesh, and the rest of the Palgrave and Springer teams. The initial idea of this book comes from the series of international conferences entitled, “The Role of State in Varieties of Capitalism” (SVOC), organized by the Institute of World Economy (IWE) at the Centre for Economic and Regional Studies in Budapest, Hungary. The original idea of the research programme related to varieties of direct state economic involvement, as well as the foundation of the annual conferences on this topic, goes back to Miklós Szanyi (former Director of IWE). Magdolna Sass, the current Director of IWE has also joined our initiative and actively participated in the professional and organizational work related to recent SVOC conferences. We would like to thank both of them, for their professional support and enthusiasm accompanying our work throughout the years. This volume is an outcome of original research conducted in the framework of the research project ‘From developmental states to new protectionism: changing repertoire of state interventions to promote development in an unfolding new world order’ (FK 124573) supported by the National Research, Development and Innovation Office (NRDIO) of Hungary between 1 December 2017 and 30 August 2023.

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Contents

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3

4

5

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Introduction: Emerging Market Economies and Alternative Development Paths Judit Ricz Conflict Between Great Powers Is Back with Vengeance: The New Cold War Between the US and China Plus Russia Robert H. Wade

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Middle-Income Trap and the Evolving Role of Institutions Along the Development Path Tomasz Mickiewicz

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Populism and/or Developmentalism: Past and Present Experiences István Benczes

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Surviving and Competing Successfully? Internationalisation of State-Owned Companies in Central and Eastern Europe Magdolna Sass The Role of Manufacturing in the Central and Eastern European Countries in the Various Periods from Transition to Mature EU Membership Anita Pelle and Gabriella Tabajdi

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CONTENTS

The Belarusian Development Path: From Command Economy to State Capitalism? Piotr Kozarzewski and Aliaksandr Papko

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Rent Streams and Institutional Development in the (Semi-)periphery: Iran and Hungary Miklós Szanyi and Somayeh Sedighi

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The Return of Industrial Policy in Turkey Mina Toksoz

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Educational Developmentalism: A Key to the Success of the East Asian Developmental States Csáki György

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Are There Varieties of Capitalism in Developing Countries? Public Finance and Social Transfers in Türkiye and Poland Aslı Ceren Saral, Zeynep A˘gdemir, and Deniz Abukan

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Emergism as Ideology: Zimbabwe’s Ill-Fated Policies for an ‘Emerging’ Upper-Middle-Income Economy Tinashe Nyamunda

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Conclusion: The Contradictions of Dependent Development in Hegemonic Transition Tamás Ger˝ ocs

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Index

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List of Contributors

Deniz Abukan Department of Public Finance, Kır¸sehir Ahi Evran University, Kır¸sehir, Turkey Zeynep A˘gdemir Department of Public Finance, Kır¸sehir Ahi Evran University, Kır¸sehir, Turkey István Benczes Department of World Economy, Corvinus University of Budapest, Budapest, Hungary; Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary Tamás Ger˝ ocs Centre for Economic and Regional Studies, Institute of World Economics, Budapest, Hungary; Institute of World Economics, Center for Economic and Regional Studies, SUNY Binghamton, USA Csáki György Kodolányi János University, Budapest, Hungary Piotr Kozarzewski Faculty of Economics, Maria Curie-Skłodowska University, Lublin, Poland Tomasz Mickiewicz Aston University, Birmingham, UK Tinashe Nyamunda Department of Historical and Heritage Studies, University of Pretoria, Pretoria, South Africa

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LIST OF CONTRIBUTORS

Aliaksandr Papko Eurasian States in Transition Research Center, Warsaw, Poland; Centre for East European Studies, University of Warsaw and Eurasian States in Transition Research Center (EAST Center), Warsaw, Poland Anita Pelle Faculty of Economics and Business Administration, University of Szeged, Szeged, Hungary Judit Ricz Department of World Economy, Institute of Global Studies, Corvinus University of Budapest, Budapest, Hungary; Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary Aslı Ceren Saral Department of Public Finance, Ankara University, Ankara, Turkey Magdolna Sass Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary Somayeh Sedighi Department of Economics and Business Administration, Szeged University, Szeged, Hungary Miklós Szanyi Department of Economics and Business Administration, Szeged University, Szeged, Hungary; Center for Economic and Regional Studies, Institute of World Economics, Budapest, Hungary Gabriella Tabajdi Faculty of Economics and Business Administration, University of Szeged, Szeged, Hungary Mina Toksoz Faculty of Humanities, Alliance Manchester Business School, Manchester, UK Robert H. Wade London School of Economics, London, UK

List of Figures

Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 3.4 Fig. 5.1 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 6.4 Fig. 6.5 Fig. 6.6 Fig. 6.7 Fig. 6.8 Fig. 6.9

GDP per capita in 1953 and 2019 GDP per capita in 1953 and 2019 divided by the corresponding global mean GDP growth rate explained by lagged income per capita, categorised GDP growth rate explained by lagged income per capita expressed as third order polynomial Product market regulation: Indicator of state control Share of industry GVA in total national GVA, %, 1995–2020 Share of CEE countries’ industry GVA in total EU27 industry GVA, %, 1995–2020 Share of NACE sectors in GVA in EU14 and CEE in 1995 and 2020 Share of industry employment in total employment, %, 1995–2020 Industry value added per worker, EUR/y, 1995–2019 The role of exports in CEE, goods, 2012–2021, 2011 = 100 The role of imports in CEE, goods, 2012–2021, 2011 = 100 The role of exports in CEE, services, 2012–2021, 2011 = 100 The role of imports in CEE, services, 2012–2021, 2011 = 100

40 42 45 46 103 126 127 129 130 132 133 134 134 136

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LIST OF FIGURES

Fig. 8.1 Fig. 8.2

Iranian oil exports Structural changes of the Iranian economy

Chart 9.1

The Value of Incentive Certificates (1980–2020, Turkish Lira bn.) State share of Total Investment (1950–2019, %) Gross Domestic Expenditure on Research and Development in Turkey and Poland (as % of GDP, 2000–2019)

Chart 9.2 Chart 9.3

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List of Tables

Table 3.1 Table 3.2 Table Table Table Table Table Table

5.1 9.1 11.1 11.2 11.3 11.4

Table Table Table Table

11.5 11.6 11.7 11.8

Table 11.9 Table 11.10

GDP growth rate explained by lagged income per capita GDP growth rate explained by lagged income per capita and institutional indicators State-owned multinationals in the Visegrad countries ICT and R&D indicators Social protection benefits in Türkiye (2008–2019) Social Assistance expenditure in Türkiye (2004–2006) Social assistance expenditure in Türkiye (2016–2020) Employment, unemployment and labor force in Türkiye (2010–2020) Macroeconomic indicators in Poland (2008–2020) Social protection benefits in Poland 2008–2019 At-risk-of-poverty rate in Poland 2010–2020 Employment, unemployment and labor force in Poland 2010–2020 Social protection benefits by function—% of GDP (European Countries) (2019) Means-tested family/children benefits as a share of total family/children benefits, %, selected EU Countries 2010–2019

44 54 109 218 266 271 273 277 281 284 286 287 288

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CHAPTER 1

Introduction: Emerging Market Economies and Alternative Development Paths Judit Ricz

In the twenty-first century many latecomer and semi-peripheral economies, including countries from Latin America, Sub-Saharan Africa, Southeast Asia and Central and Eastern Europe are embarking on development paths that are fundamentally different from the well-known classical models and are shaped by historical and socio-political conditions peculiar to their modernization experiences. The ways these statist economic systems are organized and coordinated have recently drawn

This research was conducted in the framework of the research project “From developmental states to new protectionism: changing repertoire of state interventions to promote development in an unfolding new world order” (FK 124573) supported by the National Research, Development and Innovation Office (NRDIO) of Hungary. J. Ricz (B) Department of World Economy, Institute of Global Studies, Corvinus University of Budapest, Budapest, Hungary e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_1

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much academic interest. However, the emergence and operational logic of contemporary state capitalism still lacks a systematic exploration and explanation (Alami & Dixon, 2020). The search for alternative development paths is of course not new in modern economic history. To just focus on the most recent period, the search for alternative modernization trajectories has dominated the twentieth century, it has been present at the latest since the independence of many former colonies and the creation of independent states. This has been accompanied by the emergence of development economics (or in wider terms development studies) as a separate subdiscipline, that has considered the state as a central agent in the process of latecomer development, and has opposed the free market-oriented approach of mainstream economic thinking. By the 1970s and 1980s however the post-colonial and post-independence enthusiasm started to vane, along the discouraging development achievements of most of these developing countries. This is the time of the neoliberal counterrevolution has started to gain also ground in development studies, and led to an overall belief in free markets, deregulation and a minimal (nightwatch) state. Accordingly economic policies were paved by Washington consensus-type reforms (Williamson, 1994) dictated by International Financial Institutions (mainly by the World Bank) and the overall Zeitgeist of this period can be best described by the phrase “there is no alternative”.1 At the latest by the Millennium however new winds started to blow: with the rise of large emerging economies’ (such as China, Brazil and India) weight in the global economy more and more attention was being paid to their state-led economic development, as these latecomers at least initially seemed to succeed and in some measures—such as in terms of real GDP growth rates—started to outpace their Western counterparts. Driven by the commodity boom, and the outstanding growth rates of China,

Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary 1 The phrase originally goes back to Herbert Spence, the nineteenth-century philoso-

pher, who believed in laissez-faire government and positivism and answered to any critics of capitalism, free markets, and democracy, that “there is no alternative”. This slogan however became associated later with the British Prime Minister Margaret Thatcher and her economic policies, who first mentioned it on 21 May 1980 in a speech at the Conservative Women’s Conference.

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generating ever increasing demand for raw materials—which were main export products of many emerging and developing countries, emerging regions of the world have experienced unprecedented growth rates not only in Asia, but even Latin America and Sub-Saharan Africa. Scholars and analysts started to write about a new growth momentum and the triumph of alternative development models (such as the Beijing consensus and even the term Brasilia consensus has emerged). These changes have led to the renaissance of developmentalist thinking and the analysis of hybrid regimes and state capitalism got into the centre of academic debates. While many of these newly emerging economies have weathered the primary effects of the GFC better than the core of the world economy, their “honeymoon” period was short. The exhaustion of the commodity boom, the deceleration of China and changing global economic context (or the secondary impacts of the GFC) have led to the exhaustion of most of these “growth miracles” of the 2000s. The post-crisis period of the following decade, the 2010s seems to be again dominated by the search for alternative growth and development models, often paved and driven by social unrest and political instabilities, and complicated by the new Cold War, the global coronavirus pandemic and its consequences, as well as more recently by the myriad impacts of the Russian war in Ukraine. For the sake of being comprehensive, we must admit, that many of these challenges are not unique to emerging and semi-peripheral economies, but countries at the core of the world economy are also facing new and pressing challenges, as the modern capitalist system got under severe pressure as well. Going beyond economic growth and incorporating human and ecological aspects into development, the current capitalist trajectories are not sustainable on the global scale, and the COVID-19 pandemic and the impacts of the climate change are the most recent visible signs of these anomalies. In this edited volume however we focus on the emerging and (semi-)peripheral economies for at least two reasons: first, their fundamentally different structural characteristics and asymmetrical integration into the world economy makes them more vulnerable to current development challenges, than their Western counterparts; and second, existing theoretical frameworks constructed to analyse core economies, often neglect the specificities of the (semi-) periphery. All in all, we argue that consensus seems to emerge, that the GFC has represented a critical juncture in terms of both economic policies and

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in related mainstream economic thinking (though many signs—especially outside the core economies—predate the GFC and have been present at the latest since the Asian Financial Crisis). The previously reigning neoliberal coherence (marked by the Washington Consensus and the “one-size-fits-all” principle in economic policy-making) has been replaced with “productive incoherence” (Grabel, 2011, 2018) referring to a new era characterized by newly emerging global (regional) powers and alternative development trajectories. This trend has been reinforced by more recent changes in the global political economy, such as the US–China trade war—potentially leading to a second Cold War (see Wade in this volume), followed first by the COVID-19 pandemic and then by the prolonged Russian war in Ukraine and their drastic human, economic and political consequences.

Theoretical Framework(s) to Analyse Emerging Markets’ Varieties of Capitalism Two important tendencies have dominated the last decade(s) (at the latest since the 2008–2009 Global Financial Crisis) in the global political economy scene: state involvement in the economy has been on the rise worldwide and democracy has been backsliding globally. We are living in interesting times, where hybrid regimes and alternative development trajectories emerge and require systematic analysis, potentially even new analytical frameworks. In international political economy there are basically two distinct, yet existing theoretical approaches, upon which one can build to analyse these diverse development trajectories: either from the perspective of state involvement, or from the point of view of firms. The emergence of both theoretical perspectives predates the most recent statist cycle, yet these can be helpful to analyse and better understand contemporary (illiberal, atypical or alternative) development processes. The first, statecentric approach goes back to the East Asian miracle and emerged as one of its explanations: the developmental state (DS) school. This has argued that beyond the growth-with-equity paths of East Asian economies (especially Japan, South Korea, Taiwan and Singapore) a unique institutional construct played a central role, along some other prerequisites related to external context and internal state capacity and autonomy (see our previous volume Ger˝ ocs & Ricz, 2021; Csáki, in this volume).

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While these East Asian economies were undoubtedly the most striking success stories of economic catching up, examples of statist development are not so rare, as statist and more liberal policy cycles have iterated during the modern economic history (see Nölke, 2014). Currently we can witness the third wave of state capitalism, which started around the late 90s and early 2000s in emerging economies (such as China, Brazil and India), and differs significantly from its earlier versions. First it is a much more multifaceted institutional construct based “on a variety of formal and informal cooperative relationships between various public authorities and individual companies” (ibid, p. 3), revealing a new pattern of business–government relations. Second, by being integrated into an intensively globalized world economic system, the strategic and selective use of inward and outward foreign direct investment became an important instrument of contemporary state capitalists to foster national economic development. As a third distinctive aspect, specific public policies and more general structural issues can be mentioned that closely interlink the state and multinationals in emerging markets. These include changing forms of state ownership and exerted (indirect) state influence, financial support provided by development banks or other stateowned or parastatal institutions (such as pension funds or SWFs), as well as some regulatory measures. While specific structural issues emerge from the rising significance of (formal or informal) interpersonal networks between state officials and private firms, as well as the meddling with prices (of strategic inputs, such as energy or even labour), monetary policy issues or international trade and FDI agreements, but even the strategic use of diplomatic tools might be mentioned. From a developmental perspective, we can sum up by claiming that successful latecomers have always more heavily relied on the state in driving their modernization than the first industrializer Great Britain, or the US. The need to catch up with these more advanced liberal economies has led to a more organized and coordinated version of (state) capitalist system, with however important national varieties depending on historical, institutional and other factors, such as the timing and mode of integration into the world economy. This argumentation goes back to Gerschenkron (1962), however taking into account strong institutional path dependences it is even more strikingly valid for the last generation of state capitalists (the late-latecomers, such as Turkey, Hungary, Poland, Belarus—see the respective case studies in this volume) and the large emerging economies Brazil, India or China).

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Simultaneously with this most recent shift in economic policy practices, the economic and developmental role of the state has been brought back to the centre of economic debates and one can witness the renaissance of developmental state approach in economics (Haggard, 2019; Mazzucato, 2013; Thurbon, 2016; Wade, 2014; Williams, 2014; Wylde, 2017). The other existing theoretical perspective upon which one can rely when aiming at analysing contemporary state capitalism, is the firmcentred one, the so-called comparative capitalism research and especially the Varieties of Capitalism (VoC) school. More than twenty years have passed since the seminal work of Hall and Soskice (2001) on Varieties of Capitalism, who initially aimed at criticizing the prevailing state-centred approaches of the 1970s and 1980s for putting too much emphasis on the capacity of state actors in influencing economic outcomes and development. Their basic argument was that in the context of economic openness and globalization a firm-centred perspective is much more relevant to differentiate between different (developed) market economy models. While the DS school emerged to explain the outstanding growth (development) performance of the East Asian economies, the VoC theories emerged to explain institutional differences among the developed Western economies, and the analysis of developmental outcomes and prospects, was—at least initially—out of the scope of analysis. Within VoC school extensive literature has emerged during the last decades, which can be structured into three (possibly four) generations. The first, the classical school of VoC, mostly relates to Hall and Soskice’s work (see also Amable, 2003) and the differentiation of liberal market economies (LME) (e.g., the US, UK, Canada, Australia, New Zealand, Ireland) and coordinated market economies (CME) (e.g., Germany, Japan, Sweden, Austria). The second generation, mostly labelled as postVoC literature aimed at developing further types of capitalist models, still focusing on the core and strongly related regions or groups of countries (the semi-periphery). In this regard, the dependent market economy model (Nölke & Vliegenthart, 2009) can be highlighted, but also the works of Beáta Farkas (2016), or Dorothee Bohle and Béla Greskovits (2007, 2012), who analysed Central and Eastern European (CEE) countries within this framework. The third generation, called critical comparative capitalism (CC) research, aimed to incorporate more critical, global approaches and to reflect upon post-GFC emerging issues such as international economic integration (e.g., the Eurozone crisis) and tried to also incorporate the demand side of analysis (see e.g., Ebenau

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et al., 2015; Nölke et al., 2019). While there is no strict dividing line between this different generations, we mention the hierarchical market economy model of Ben Ross Schneider (2009, 2013) and the statepermeated market economy variant (Nölke et al., 2019) here, not on chronological or regional basis, but rather because of their extension of the classical analytical framework. Finally a fourth generation of VoC research seems currently to emerge, as more and more Authors and works indicate that comparative capitalism research has recently (during the last few years) moved towards intertemporal (instead of international) comparisons attempting to define and characterize historical phases rather than simply building valid models for certain countries or world regions. For the sake of the focus of this edited volume, the third generation of VoC research is the most relevant, as it explicitly aims at including emerging economies and extending the theoretical framework. Consequently the questions related to growth prospect and developmental outcomes (economic catching up and upgrading) became part of the analytical focus of most studies. Especially by accounting not only for positive, but also for negative institutional complementarities the topic of middle-income trap became a central problematic in this extended theoretical framework (see also Mickiewicz in this volume). Most recent works such as the Special Issue in New Political Economy (Schedelik et al., 2020) and another one, published in the Review of International Political Economy (Bruszt & Langbein, 2020) perfectly illustrate the renaissance of a (renewed) VoC research. accordingly contemporary VoC research explicitly aims to be relevant for the analysis of emerging markets and aims at extending the classical theoretical framework to be able to describe emerging markets’ varieties of capitalism, with more or less success. The latter, Bruszt and Langbein’s approach especially stands out with its intention to incorporate into their extended VoC research framework the relevant insights of the DS school. This is especially, what our edited volume also intends to emphasize: namely, in order to better reflect and analyse the specificities of emerging markets’ development (and to account both for success and failure) insights of both the statist and the firm-centric perspectives should be accounted for, as only the combination of the DS and VoC perspectives can lead to a better understanding of their unique development trajectories (see also Ger˝ ocs, 2022). Finally, our approach is multidisciplinary as we draw on different theoretical perspectives, also reflecting the scholarly diversity of the Authors

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and our different disciplinary backgrounds. This is not to say, however, that this volume lacks internal coherence or relevant contributions to ongoing academic debates. On the contrary, each chapter seeks to provide critical insights on contemporary development models and trajectories by challenging conventional thinking or superficial observations and oft-held, yet potentially misleading presumptions.

The Aim, Approach and Structure of the Volume As we have shown the scope of both the developmental state school and of comparative capitalism research has been extended recently to include the analysis of emerging economies outside the core of the world economy, and to make also intertemporal comparisons possible (such as to define and characterize historical waves of state capitalism). Still, we are convinced that to better understand the current wave of state capitalism and to explore its national varieties there is a need to critically reconsider existing theoretical approaches and methodologies, and even to search for new ones, if necessary. This volume aims to contribute to this recent research endeavour, by providing interesting theoretical and empirical analysis on emerging market’s varieties of capitalism. While the People’s Republic of China is often framed as the vanguard of the contemporary state capitalist wave, the Chinese example constitutes only one of many exciting cases in which semi-peripheral economies search their own alternative paths to steady growth and sustainable development. From the role played by national champions in emerging markets, the heightened pressure towards active industrial and social policies, the thorny questions of economic populism to the myriad changes taking place in multilateral institutions, this volume aims to bring together studies eager to showcase high quality research that explores emerging market economy practices and policies in empirically diverse and analytically exciting ways from Asia and Africa to Central and Eastern Europe. This edited volume aims to be a contribution to the analysis of emerging market economies’ alternative development trajectories. We explore the new perspectives on semi-peripheral dependent development since the Global Financial Crisis and especially amidst the new global pandemic, the COVID-19, as well as taking into account the Russian aggression in Ukraine and the global and regional consequences of the prolonged war.

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At the same time this book is the third volume in a row, as it is the continuation of our mutual research at the Institute of World Economy (Centre for Economic and Regional Studies in Budapest, Hungary) on economic and developmental policy-making in the global semi-periphery in the post-crisis cycle. See also our two recently published volumes titled ‘Market-Liberalism and Economic Patriotism in Capitalist Systems’ edited by Ger˝ ocs and Szanyi (2019) and ‘The Post-Crisis Developmental State – Perspectives from the Global Periphery’ edited by Ger˝ ocs and Ricz (2021). With all this said, the novelty of this book is twofold: on the one hand this volume aims to contribute to a better understanding of emerging markets’ varieties of capitalism from the point of view of semi-peripheral dependent development. As with the fading relevance of static equilibrium models, new scholarship is increasingly focusing on the dynamics of capitalist development and its historical conditions, while re-opening old debates about the system’s expansionary nature, specific vulnerabilities, destructive and irrational tendencies, and recurrent crises. Related, a consensus emerges that the new dynamics cannot be grasped by focusing solely on advanced capitalism (and relying on analytical frameworks and tools fabricated to analyse advanced economies), because it consists precisely in the transformation of the conflicts, compromises, and hierarchies between the centre, periphery and semi-periphery with the possible emergence of a new hegemony. On the other hand, the volume collects case studies from various (often underresearched) emerging economies aiming at enriching discussions about alternative development trajectories by expanding thematic and regional focus of both the Developmental State and Varieties of Capitalism schools. Accordingly, the chapters throughout this volume apply the critical political economy approach, while bringing together a great variety of contemporary state-led developmental experiments in order to reconsider classical approaches of comparative capitalism research in general, and especially the conventional arguments of the middle-income trap literature. For this purpose, the volume aims to contribute to a better understanding of the emerging markets’ varieties of capitalism and to open new perspectives on latecomer and dependent semi-peripheral development in the post-crisis cycle, while critically engaging with existing theories and contributing to related international debates.

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As presented in this introduction the chapters throughout this volume endorse the employment of multiple perspectives (critical political economy, comparative capitalism research, middle-income trap scholarship) and methodologies by its contributors. It considers this plurality of approaches fruitful when it comes to developing a complex research agenda in the broader field of contemporary state capitalism (the role of the State in Varieties of Capitalism—SVOC). The overall coherence of the volume is ensured by fact that each contributor addresses the questions and challenges of state-led development in latecomer emerging economies and with main focus on the post-crisis cycle. Finally, the first three chapters (following this introductory chapter) deal with topics inherently linked to the global context and theoretical framework of latecomer development. Chapter 2, written by Robert H. Wade deals with changes and challenges on the global level, namely the new Cold War between the US and China (plus Russia) and the consequences for the global economy (and hierarchy), inherently paving the way for the possibilities of alternative development trajectories. Tomasz Mickiewicz in Chapter 3 also frames emerging market’s varieties of (state) capitalism by focusing on middle-income trap (MIT) and the need to reconsider it. His main added value to this extensive literature is the argument that it is not only economic policies and institutions that matter for development, but political ones as well, and it is not only in the later stages when politics matters (contrasting conventional views of first development and then democracy), but slight differences in political institutions in the early phase of development might lead to significantly different development trajectories at the later stages. The last theory-oriented chapter (Chapter 4), written by István Benczes focuses on the populism and/or developmentalism dichotomy in the twenty-first century. It concludes that in contrast to historical examples, recent populist experiences (especially in Central Eastern Europe) are not resulting in the rise of a new alternative (economic) paradigm to neoliberalism, while at the same time these are not resembling successful historical cases of state-led developmentalism either. Consequently, in many contemporary state capitalist regimes, developmentalist discourse merely serves to hide wildlings of these illiberal regimes. The following chapters rely on this conceptual background and provide empirical evidence, yet these also enrich theoretical insights with further interesting topics, such as the role of rents, state ownership and industrial policies. Empirical evidence is based on the Global East and South. More

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concretely Chapters 5 to 9, focus on the European periphery or as we call it Emerging Europe, by looking at the role of state-owned enterprises, the manufacturing sector, various types of rents and the specificities of the Belarusian and Turkish state capitalism. The last part of the book consists of four chapters (inclusive of the concluding chapter), and enriches the volume with thematic and regional perspectives, such as educational developmentalism in East Asia, the role of public finance and social transfers (in Poland and Turkey) and the need to reconsider emergism, as an ideology in the African context (the case of Zimbabwe). The final chapter summarizes similarities and differences of emerging market economies’ alternative development trajectories, explores new perspectives on latecomer development in the post-crises cycle and concludes.

References Alami, I., & Dixon, A. D. (2020). State capitalism(s) redux? Theories, tensions, controversies. Competition & Change, 24(1), 70–94. https://doi.org/10. 1177/1024529419881949 Amable, B. (2003). The diversity of modern capitalism. Oxford University Press. Bohle, D., & Greskovits, B. (2007). Neoliberalism, embedded neoliberalism and neocorporatism: Towards transnational capitalism in Central-Eastern Europe. West European Politics, 30(3), 443–466. Bohle, D., & Greskovits, B. (2012). Capitalist diversity on Europe’s periphery. Cornell University Press. Bruszt, L., & Langbein, J. (2020). Manufacturing development: How transnational market integration shapes opportunities and capacities for development in Europe’s three peripheries. Review of International Political Economy, 27 (5), 996–1019. https://doi.org/10.1080/09692290.2020.1726790 Ebenau, M., Bruff, I., & May, C. (Eds.). (2015). New directions in comparative capitalisms research: Critical and global perspectives. International Political Economy Series. Palgrave Macmillan. Farkas, B. (2016). Models of capitalism in the European Union: Post-crisis perspectives. Palgrave Macmillan. Ger˝ ocs, T. (2022). The structural dilemma of value-chain upgrading: Hungarian suppliers’ integration into the world economy. Society and Economy, 44(1), 159–181. Ger˝ ocs, T., & Ricz, J. (Eds.). (2021). The post-crisis developmental state: Perspectives from the global periphery. Palgrave Macmillan. Ger˝ ocs, T., & Szanyi, M. (Eds.). (2019). Market liberalism and economic patriotism in the capitalist world-system. Palgrave Macmillan.

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Gerschenkron, A. (1962). Economic backwardness in historical perspective. Harvard University Press. Grabel, I. (2011). Not your grandfather’s IMF: Global crisis, ‘productive incoherence’ and developmental policy space. Cambridge Journal of Economics, 35(5), 805–830. https://doi.org/10.1093/cje/ber012 Grabel, I. (2018). When things don’t fall apart: Global financial governance and developmental finance in an age of productive incoherence. MIT Press. Haggard, S. (2019). Developmental states. Cambridge University Press. Hall, P. A., & Soskice, D. (Eds.). (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press. Mazzucato, M. (2013). The Entrepreneurial state: Debunking public vs. private sector myths. Anthem Press. Nölke, A. (Ed.). (2014). Multinational corporations from emerging markets: State capitalism 3.0. Palgrave Macmillan. Nölke, A., ten Brink, T., May, C., & Claar, S. (2019). State-permeated capitalism in large emerging economies. Routledge. Nölke, A., & Vliegenthart, A. (2009). Enlarging the varieties of capitalism: The emergence of dependent market economies in East Central Europe. World Politics, 61(4), 670–702. Ricz, J. (2021). On the emergence of developmental states in the twenty-first century: Urgency or agency? In T. Ger˝ ocs & J. Ricz (Eds.), The postcrisis developmental state: Perspectives from the global periphery (pp. 75–101). Palgrave Macmillan. Schedelik, M., Nölke, A., Mertens, D., & May, C. (2020). Comparative capitalism, growth models and emerging markets: The development of the field. New Political Economy, 26(4), 514–526. https://doi.org/10.1080/135 63467.2020.1807487 Schneider, B. R. (2009). Hierarchical market economies and varieties of capitalism in Latin America. Journal of Latin American Studies, 41(3), 553–575. Schneider, B. R. (2013). Hierarchical capitalism in Latin America: Business, labor, and the challenges of equitable development. Cambridge University Press. Thurbon, E. (2016). Developmental mindset: The revival of financial activism in South Korea. Cornell University Press. Wade, R. H. (2014). ‘Market versus state’ or ’market with state’: How to impart directional thrust. Development and Change, 45(4), 777–798. Williams, M. (Ed.). (2014). The end of developmental state? Routledge. Williamson, J. (1994). The political economy of policy reform. Columbia University Press. Wylde, C. (2017). Emerging markets and the state: Developmentalism in the 21st century. Palgrave Macmillan.

CHAPTER 2

Conflict Between Great Powers Is Back with Vengeance: The New Cold War Between the US and China Plus Russia Robert H. Wade

Russia’s invasion of Ukraine, February 2022, has prompted much talk of the dangers of a third world war. But in many ways the current situation looks more like a return of the old cold war—the long four-decade period (1947 to 1991) of geopolitical tension between the US and the Soviet Union, backed by allies in west and east. It was called ‘cold war’ because neither side declared war on the other, knowing that was the route to ‘mutual assured destruction’; they fought each other through proxy wars (for example, Korea and Vietnam) and propped up despots and insurgents. The current situation could be understood as the second stage of a single broad conflict, with a ‘globalization’ intermission of thirty years.

R. H. Wade (B) London School of Economics, London, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_2

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As in stage one, the US is once again leading a western alliance against a Russia–China axis. Again, the leaders avoid direct fighting for fear of mutual assured destruction through nuclear weapons. Again, both sides court a large bloc of ‘non-aligned states’, sometimes called ‘the global South’ (Rachman, 2022). But there are also major differences between our cold war and the first. Above all, China is clearly challenging the US’s long-established position of regional and international hegemony, in a way that Russia never did; this, even though China’s average income remains far below that of the US (a quarter to a third). From its side, the US government sees China and Russia as partners in a direct challenge to the ‘rules-based global order’ designed and upheld by the US and allies. The war in Ukraine is the current battlefield for this challenge.1 The US government and NATO see the Ukraine war as not just about the security of Europe but about the wider global order. So, the second cold war moves us towards the Thucydides Trap, a hot war when a challenger state threatens to displace an existing state as the international or regional hegemon. A second difference is that the second cold war is occurring in a situation of much greater global upheaval and tension than the first. The issues include climate chaos, artificial intelligence, pandemics, threat of major war, mass migration, food shortages, energy shortages, inflation, soaring economic insecurity and inequality, political polarization or fragmentation across western polities; and a general weakness of international solidarity in acting for the global collective good, dramatically exposed by the way that rich countries hogged COVID-19 vaccines and by the failure of debt relief proposals made by the G20 group of large economies (Ahuja, 2022; Wade, 2020a, 2020b). A third difference is that the US–Soviet cold war was between basically different types of economic systems, whereas the current one involves two kinds of capitalist systems between which are deep economic interdependencies. If the name of the game in the first cold war was ‘mutual assured destruction’ (MAD), respect for which kept it cold, the name of the game this time is ‘mutual assured disruption’ (MAD2); with the crucial qualification that the disruption threat is limited by ‘mutual assured dependence’ (MAD3), on account of the dense economic interdependencies across the divide. 1 Mitchell et al. (2022) argue that Beijing’s support for Russia in Ukraine is a lot less than the rhetoric suggests.

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The US, EU, China, and Russia are each emphasizing ‘strategic autonomy’, ‘re-shoring’ or ‘friend-shoring’ of supply chains. Companies of all sizes are looking for ways to localize more production where their customers are, and to build redundancy into their supply chains (less priority to ‘just-in-time’ and more to ‘just-in-case’). But so far this does not amount to ‘deglobalization’. Global merchandise trade as a share of GDP is currently only a little below its historic high of 26% in 2010, compared to 10% in 1980. The element of conflict is more evident in the way that some governments are ‘weaponizing’ their control of assets vital to other economies. And some governments are exploiting other economies’ digital vulnerabilities through cyberwar—in power plants, pipelines, railways, sanitation, hospitals, chemical refineries, banks, cell-phone networks, water treatment plants, election infrastructure, medical records, and much more.

Geopolitics Is Back, But It’s in the Economy Retired military officers who earlier—during the post-first-cold-war ‘globalization era’ when the world economy operated on western rules with little challenge—might have retired to a quiet life on the golf course are now employed on boards of multinational companies. If the biggest open question about this second cold war is, ‘will it tip into the third world war?’, the next biggest is, ‘can the deep integration between China, Russia and the west survive the intensification of super-power rivalries?’ Pierre-Olivier Gourinchas, chief economist of the IMF, is doubtful. He warns of the world splitting into ‘distinct blocs with different ideologies, political systems, technology standards, cross-border payments and trade systems, and reserve currencies’ (quoted in Bounds, 2022). This essay describes the current state of cold war play in several domains of economics and technology: trade, capital markets, high-tech, and cyberwar. But first, more on the main players, the US and China.

United States The US remains the global hegemon, though diminished. The biggest danger to its hegemony is as much the Republican Party as China. The US advantage starts with size, geography, and geology. It has the third largest population. It is surrounded by oceans and just two

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neighbours, both of whom are likely to remain friendly. It has abundant fossil energy in the form of shale gas, and—with renewable energy—may become self-sufficient within the next decade, while China continues to depend heavily on energy imports from the Middle East via the contested South China Sea. If we take a country’s population times its average income as a rough indicator of ‘structural’ power (as distinct from ‘instrumental’ power), the US’s structural power remains well ahead of China’s, about 1.5 times. The US dollar is another source of structural power. James Rickards says ‘America’s most powerful weapon of war does not shoot, fly or explode. It’s not a submarine, plane, tank or laser. America’s most powerful strategic weapon today is the dollar. The US uses the dollar strategically to reward friends and punish enemies’ (2022). Around 60% of the foreign reserves held by the world’s governments are in US dollars, compared with 2% in renmimbi. The US controls not only the dollar itself; it also controls the dollar payment system. A dollar payment from a bank in Shanghai to another bank in Sydney runs through one of the US-controlled payments systems. The US government can cut off these payments more or less at will. China, Russia, Iran, and others are working to escape ‘dollar hegemony’ and implement non-dollar transactional currencies and independent payments systems; so far with limited success. The US remains by several measures the most profitable and most innovative country in the world. With the world economy divided into 25 sectors (such as heavy machinery, electronics, aerospace, financial services, health care, pharma, media), US firms had the highest share of global profits in 18 out of 25 sectors (72%) in 2006 and in 2017, including in the most high-tech sectors (Starrs, forthcoming, based on Forbes Global 2000). China is the only developing country with even a toehold in the global distribution of profits in more than a few sectors (but India does relatively well in software). The US has by far the biggest share of world high-tech exports (using the OECD definition): in 2018, 32%, against China’s 21% and EU27’s 19% (Schuller & Schuler-Zhou, 2020). War remains a large part of the American identity (though less so than for Russians). The US spends almost a sixth of the federal budget on ‘defence’, keeps troops in 750 foreign military bases around the world including many within easy strike range of China and Russia, and engages in ‘counterterrorism’ missions in 85 countries. Its record of non-kinetic

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interventions to stress and extend governments it does not like is far more extensive than that of Russia or China (Askary, 2022; Dobbins et al., 2019; Wade, 2015). The US’s structural power as the centre of global capitalism is on full display as it defenestrates the world’s largest nuclear power and G20/former G8 member from global capitalism, in the wake of the latter’s invasion of Ukraine. And enables it to persuade many of the world’s most powerful corporations to withdraw from Russia, even McDonalds. Tributes to US strengths have to be qualified by several sources of rising internal weakness. One is eroding national ambition. A 2019 Eurasia Group Foundation survey found that 55% of Americans between the ages of 18 and 29 do not think the US is ‘exceptional’, compared with only 25% of Americans over 60. This finding is consistent with the many surveys that show growing popular scepticism about the need to project US military power overseas. Summarizing this evidence a recent RAND corporation study concludes, ‘public opinion polls paint a picture of a nation that is no longer sure of itself, much less of its right and duty to impose its will on the world’ (Mazarr, 2022). A second is eroding national identity. US global leadership capacity is weakened by internal divisions which fuel the most vicious, democracydestroying partisanship in the western world. Domestic politics is caught in the equivalent of a cold war, with growing militarization of society; the US share of private gun ownership worldwide is more than ten times its share of global population (Luce, 2022). There has been a failure to adopt measures that cushion adjustments to economic change and expand opportunities and security for those badly affected. Republican leaders exploit voters’ anxiety by preaching nationalism and xenophobia, focusing anger on ‘unfair’ competitors, especially China; while raising torrents of cash by adopting policies wanted by plutocrats. This combination of plutocratic goals with nativist populism and social reaction ensures that some version of Trumpism will remain the dominant ideology of the Republican party. However, the constitution separates foreign policy (‘high politics’) from domestic policy (‘low politics’); and in practice voters are so indifferent to foreign affairs that the subject almost never decides elections. Both factors together give the nation’s geopolitical class space to continue to lead the west, and the US’s military and economic strengths give it the means to do so.

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Western Democracies The US partisan trends are part of a larger pattern across the western democracies during the past quarter century. One element is a general rise of populism, or insurrection against elites, resulting from the perception— broadly correct—that the capitalist system is rigged in favour of elites. They have moved manufacturing overseas and encouraged the withering of labour unions; and have pocketed much of the gains of globalization and technology, leaving the rest to bear the insecurities and erosion of local communities—in contrast to the elites of the ‘30 glorious years’ after World War II when social democracy produced the most decent societies known to humanity. The contrast between the two periods is especially sharp in the US, where in 1946–1980 the annual average growth of real income at the 20th percentile was 2.5%, at the top percentile, 1.5%; whereas in 1980–2014 (also 34 years), the two figures are 0.5% and 6% (Leonhardt, 2017). A second common element is external overreaching, in the sense that western governments’ global leadership activities have had steadily falling support from electorates. Peter Trubowitz and Brian Burgoon (2020) provide abundant evidence for what they call ‘the retreat of the West’. They show that after the end of the (first) cold war, western governments asserted global leadership by investing in ever greater international openness and pooling more and more authority in multilateral institutions and governance arrangements (such as the WTO, the IMF, free trade agreements). But increasing numbers of western voters grew resentful of the costs to economic security and national sovereignty, as governments— legitimized by globalization ideology and by the disappearance of a common geopolitical threat—rowed back on social democratic institutions at home (‘embedded liberalism’). As elites promoted unfettered capitalism and turned their backs, they opened space for new parties of the radical left and especially radical right, promoting nationalism in one form or another, including hostility to globalization, multilateralism, and migrants. These trends were long underway when Silvio Berlusconi, ‘Bibi’ Netenyahu, Viktor Orban, Donald Trump, Boris Johnson, and several others rode to power in the west on the back of them. The populist leaders were more symptoms than causes.

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China and Russia have been quick to seize on the erosion of domestic support for western international leadership, to promote alternative illiberal visions of politics and society, and to resist western attempts to shrink their spheres of influence.

China The Pew Research Center’s global survey (2017) found that most respondents in most countries agreed that ‘China is overtaking the US as the world’s leading power’. Kishore Mahbubani, dean of the Lee Kuan Yew School, National University of Singapore, celebrated, ‘As American and European power recedes, a global resurrection of non-Western attitudes is taking place’ (2017). The RAND corporation study referred to earlier explored the fundamental qualities of a society that make for greater or lesser ‘national competitive success’, using historical and cross-country evidence. It concludes, ‘The first essential characteristic – arguably the foundation for all forms of relative national strength – is some version of driving national ambition. Externally, this trait produces a sense of national mission and greatness and a desire to influence world politics. Internally, it generates a national drive to learn, achieve, and succeed in everything from scientific research to business and industry to the arts’ (Mazarr, 2022, emphasis added). ‘Driving national ambition’ well fits Japan, South Korea, and Taiwan as they caught up with the west (Wade, 2004). China clearly has a powerful sense of ‘driving national ambition’, generated by a pervasive story of centuries-long greatness, followed by a century and a half of humiliation by western states, now to be avenged by regaining global pre-eminence. The central instrument is a long-termoriented state that is pouring resources into infrastructure, research and development, high technology, and human capital, with an ‘all-of-nation’ approach. This active state is highly trusted; in 2022 the Edelman Trust Barometer (an online survey of public opinion in 28 countries) found that China scored up near the top in terms of trust in state institutions, in sharp contrast to the US. Beijing is acutely aware of the need to avoid the mistakes of rising Germany and Japan in the twentieth century. It aims to greatly increase its influence in the world system without triggering the Thucydides Trap, a military trial of strength. So, it is placing its nationals in top

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positions in international organizations, and also creating ‘shadow’ organizations which compete with and/or supplement existing ones, in which China leads. Examples include the Asia Infrastructure Investment Bank, Regional Comprehensive Economic Partnership, Shanghai Cooperation Organization, and the New Development Bank and the Contingent Reserve Arrangement (both led by the BRICS together, with China dominant). China’s Belt Road Initiative is the biggest physical infrastructure investment programme in history. Its grants plus loans amount to more than the six major multilateral lenders combined, targeted at roads, railways, ports, electricity, telecommunications (including low-earth small satellites to supplement infrastructure investments in Africa and Latin America with ultrafast internet connectivity), and more. It involves some 70 states mostly in Eurasia, Africa, and Latin America, giving China good access to raw materials, consumer demand, and political influence, drawing 70% of the world’s population into Beijing’s orbit (Askary, 2022). Since the government established diplomatic relations with Beijing in 2019 the capital of the Solomon Islands has hosted Chinese construction companies building a new wing of the main hospital and a large sports stadium able to host the Pacific Games in 2023, and many Chinese-run businesses have set up. A five-year China-Solomon Islands cooperation agreement was signed in April 2022. An Australian politician has sounded the alarm about ‘a little Cuba off our coast’. The governments of US, Japan, Australia, and New Zealand have long more or less ignored the Solomon and other Pacific islands. The Pacific islands—like developing country governments everywhere—should be able to leverage the west’s fear of China into more substantial aid and investment from the west (Wickham, 2022). But it is striking that the new Aukus security pact between Australia, the UK, and US for the ‘IndoPacific’ (a recently coined phrase to frame the US’s China containment strategy) does not include developing countries of the region. In celebrating China’s remarkable achievements we have to beware the ‘halo’ effect, overlooking factors which weaken China’s longer-term challenge. China’s income per head remains low—about the same as Malaysia and Russia, consumption per head is similar to Iraq and Jamaica. Income inequality has surged since 2000, despite it being an ostensibly communist regime; the share of pre-tax income held by the top 10% of the population rose from 35% in 2000 to 41% in 2015 (as compared to the US figure of about 47%). Working age population is falling and will continue

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to fall, raising the prospect of China ‘becoming old before it becomes wealthy’; median age is already slightly higher than the US’s. The population is male dominated, leaving large numbers of unmarried—potentially troublesome—men. It already has large numbers of large-scale protests, despite the party’s intense surveillance based on AI, smart phones, and facial recognition.2 Consumption as a share of GDP is still low, little higher than in 2010. Investment share is still extraordinarily high at around 45%. China lacks allies abroad beyond infrastructural alliances. It borders on 14 countries, many of them poor and unstable; has territorial disputes with several and maritime disputes with several more that set limits on its ‘persuasive power’. We have to remember the warning of Bilahari Kausikan, former Singapore diplomat, now chair of the Middle East Institute at the National University of Singapore. ‘China has done a pretty good job by itself in putting together a loose, global anti-China coalition. I cannot think of any serious country – with a big economy or even some with small economies – that does not have some concerns about China and Chinese behavior’ (quoted in Buckley & Myers, 2020). Finally, China has moved away from collective leadership to a cult of personality around President Xi Jinping, to the point where ‘Xi Jinping Thought’ has been written into the Chinese constitution; billboards displaying his face, quoting his thoughts overlook city streets, as in the days of Mao. Term limits for the presidency have been abolished. A personality cult makes the adoption of bad policies more likely (Rachman, 2020). So does the intense state control of the media. When Xi Jinping made a widely publicized visit to two prominent media in 2016 he declared that the only acceptable role for the media is to ‘love the Party, protect the Party, and closely align themselves with the Party leadership in thought, word and action’. Journalists working for state media must have their political credentials certified (Inkster, 2020, p. 92). The Xi government is now not prioritizing growth as much as it did till recently. It is giving more attention to reining in unbridled capitalism. It is:

2 In late 2020 toilet paper dispensers using facial recognition were removed from public bathrooms in the city of Dongguan after public outrage.

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1. intensifying state control and ‘directional thrust’ (e.g., Made in China 2025); 2. curbing top incomes and the political power of billionaires, as in the ‘techlash’ against the entrepreneurs running the top digital companies and in the crackdown on private tutoring firms, which give advantage to the children of the rich; which has converged with Xi’s ‘common prosperity’ campaign to help more people secure a place in the middle class; 3. uneasily balancing between reducing its high-tech dependence on the west and coupling with the outside world, especially via the Belt Road Initiative. The Xi government is haunted by the fate of the Soviet Union and Russia, which—thanks to the Big Bang market liberalization enthusiastically promoted by the World Bank and IMF and other western economists— brought a collapse of GDP, a surge in the number of people in extreme poverty, a surge in the number of billionaires whose wealth was based on corruptly merged economic and political power, and the dominance of low-trust ‘rule by law’ over higher-trust ‘rule of law’. It took an efficient authoritarian, Putin, to restore some degree of societal functioning and modest mass prosperity. Xi’s government is determined to maintain competitive markets within political limits, and constrain the degree to which holders of economic power can buy political power and use it to further increase their economic power and billionaire wealth. As of mid2022, Xi’s own grip on power at the top of an efficient all-pervading authoritarian state looks set to hold for years more. To assess China’s strengths we also need to factor in Northeast Asian agglomeration effects, for example in education. In 2019 Forbes published rankings of countries by IQ and school test scores. In both rankings six of the top seven positions are held by northeast Asian countries (including Singapore). The school test rank order is Singapore, South Korea, Hong Kong, Taiwan, Japan, Russia, China. The US and Western Europe come well down on both rankings. In school test scores, US is 13th, Germany 28th, UK 30th (Madden, 2019). All told, there is no doubt that the sub-text of US and western engagement with China—somehow to ‘contain’ it within our world order in which we sit at the top—is bound to be frustrated.

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Trade Cold War From the Chinese perspective, the US has long sought to exclude China from rule-making in international trade policy in order to defend its dominant role in the global trade regime. Hence the US-led TransPacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) aimed to set rules for global trade while excluding China. Trade tensions between western countries and China plus the other BRICS (Brazil, Russia, India, South Africa) brought the WTO’s Doha Round to a standstill. The trade cold war intensified from 2017 under President Trump’s government. It raised trade protection against Chinese imports, and China reciprocated. The US raised the pre-2017 average US tariff on China of 3% to around 20%; China raised its from around 8% to around 20%. The new tariffs cover more than 50% of bilateral trade. In addition to standard tariffs, the US and China use antidumping and anti-subsidy tariffs against each other. When these are included the average US tariff on China was raised to 27% by the end of 2020 (Bown, 2021). The US has imposed export controls on products close to national security. For example, in May 2019 the government placed Huawei on the Entity list, implying that US-origin goods and services could no longer be sold to the firm without an export licence; in May 2020 it extended export controls on semiconductor manufacturing equipment to third countries (for example, to cover TSMC and Samsung), to prevent them manufacturing semiconductors for sale to Huawei. Also, Trump spoke often of denying federal contracts to US firms that outsourced jobs to China. Nevertheless, a trade agreement of sorts was negotiated and in January 2020 the ‘Phase One’ trade agreement began to be implemented. China committed to large increases in imports from the US in 2020 to 2021. In the event, China fell more than 40% short of its commitment. The US export bans against Russia in the war in Ukraine are now being seen as useful against China too. The New York Times (International) headline, July 7, 2022 says ‘Export bans are central to US plan to foil China’, and the story quotes the senior official in charge of the export ban programme, ‘We need to ensure that the US retains overmatch. In other words, China cannot build capabilities that they will then use against us…’. On the other hand, the prospect of further restrictions on

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China has raised concerns among American business executives. The executive vice-president at the US Chamber of Commerce said ‘The business community has deep concerns with China’s predatory and market distortion policies, yet we must also recognize that the two largest economies are very integrated. So the impact of broad decoupling or extensive sanctioning of China would be much more destabilizing’ (Wong & Swanson, 2022).

Capital Cold War In capital markets as in trade markets we see a dramatic inflection point in China–US relations, downwards; also in the private-state power balance within China, upwards towards the state. The Chinese government is curbing foreign (US) investor influence in China’s capital market and the US government is curbing US investment in China.3 China’s capital market is increasingly shaped by Xi’s focus on technologies considered central to competition with the west, and by a pervasive suspicion of foreign influences. The government considers China’s transformation into a high-tech centre crucial to its national defence. As Xi said in 2021, ‘only by grasping key core technologies in our own hands can we fundamentally guarantee national economic security, national defence security…’. The government treats equity markets as an assembly line to marshal private capital for its policy goals, with the aim of producing national champion firms in strategic sectors (very different to the standard view of finance in the west as a ‘leading sector’ in its own right). So foreign investors are being largely shut out of Chinese IPOs; the government

3 The European Commission announced in December 2020, after 7 years of negotiation, the Comprehensive Agreement on Investment (CAI) with China. In May 2021 the European parliament voted to suspend ratification of the agreement, following Beijing’s sanctions of five European officials. These sanctions were themselves a reaction to sanctions of Chinese officials by several western countries in response to the Chinese government’s treatment of the Uighurs in Xinjiang. IISD, 2020, ‘Outlook for the EU-China Comprehensive Agreement on Investment unclear, as EU parliament votes to suspend ratification efforts’, 1 June 2021, at https://www.iisd.org/itn/en/2021/06/24/outlook-for-the-eu-china-comprehensiveagreement-on-investment-unclear-as-eu-parliament-votes-to-suspend-ratification-efforts/.

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blocks Chinese companies from listing in New York or London; while Chinese investors know it is dangerous to invest in activities not on the government’s menu. Take the case of Volkswagen. China’s automotive success has been based heavily on Volkswagen, the first foreign manufacturer to build a presence in China almost four decades ago. VW has long relied on China for at least half of its annual net profits and retains double the market share of its nearest competitor. But as of 2022 the political tide is changing as tensions between Washington and Beijing ratchet up, as a new coalition government in Berlin says it will get tougher on authoritarian governments, as VW fears it will be pressured to reduce its engagement in China, and as Russia’s war in Ukraine has led to severing of VW’s commercial ties with Russia. In any case, several local competitors are proving much more successful than VW in sales of electric vehicles. We are seeing the Chinese government stepping up its overt and covert support (e.g. concessional credit) for wholly Chinese companies in the spirit of ‘Made in China 2025’ (Miller, 2022). The US government is preventing or strongly discouraging US investment in China’s ‘strategic emerging industries’. As one investor commented, ‘to be investing in China is almost immoral’ (Lockett, 2022).

High-Tech Cold War In 2015 the Chinese government published Made in China 2025, which set out the strategic plan to give China a commanding position in hightech industries of the Fourth Industrial Revolution, spanning hardware, software and biology. It was a central part of the larger strategy to transform China away from ‘the world’s factory’ to a tech-intensive global powerhouse: semiconductors, AI, E-vehicles, 5G, robotics, IoT, M2M, biotech, green energy, gene editing, and more. The US government called MIC 2025 ‘economic aggression’; the Council on Foreign Relations described it as a ‘threat to US technology leadership’. Trump and Biden raised tariffs specifically on manufactured goods included in MIC 2025. The EU too is alarmed. The European Chamber of Commerce said that MIC 2025 ‘distorts the market’, and instructed China that ‘market-based innovation provides a better way through middle-income status than industrial policies’. The president of the Chamber of Commerce said, ‘…these major plans, with lots of money, where government bureaucrats decide who’s the winner and who’s the loser, end up in tears’ (Wikipedia, 2022).

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Since 2018 China’s government has de-emphasized the publication Made in China 2025 because of the US and EU backlash; but the plan continues to guide investment amounting to several hundred billions of US dollars. Semiconductors are central to the tech cold war. The Chinese government uses massive amounts of targeted concessional credit and tax concessions as key policy instruments for boosting semiconductor production in quantity and quality. Yet China still spends more on importing semiconductors than on oil, and is the biggest oil importer in the world! The US sees China’s dependence on semiconductor imports as a major vulnerability it can exploit. Hence, the government has placed export controls on US semiconductor technology to China. Meanwhile the Biden administration has secured congressional approval for $ 52 bn for companies that build semiconductors in the US (a provision of the CHIPS Act); while Japan, India, South Korea, and the EU are also competing to attract chip makers with mega subsidies. Senate majority leader Chuck Schumer said, ‘If we don’t act quickly, we could lose tens of thousands of good-paying jobs to Europe’ (Edmundson & Swanson, 2022). Supercomputers are also central to the tech cold war. Of the fastest 500 supercomputers in the world (as of June 2022), China has 173, the US 128, Japan in third place has 33. The UK has 12, in seventh place (Roeder, 2022). Another striking case is high-speed trains. China has invested heavily in a high-speed rail network in the past 15 years. As of February 2020, it had around 35,000 kms in operation, about two-thirds of high-speed tracks worldwide. The US had almost none—735 km (McCarthy, 2020). The distance from New York to Chicago is about the same as the distance from Shanghai to Beijing. The fastest Amtrack train takes 19 h and 32 min (most trains take 24 h). The high-speed train from Shanghai to Beijing takes 4 h and 18 min. The high-tech cold war is playing out in parts of the periphery. For example, in December 2021, the US, Japan, and Australia (a combination of governments and privates) announced they will fund a 5G network in the South Pacific. Kyodo News reports that, ‘Japanese, US and Australian authorities have become increasingly wary of China’s growing influence in the Pacific region and the risk of information theft, which could cause disruptions to social and economic activities if the area’s telecommunication development network is led by Beijing. [A Japanese

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govt official said], “Historically, we have deep relationship with Pacific island nations, with which we share the values of democracy…. We must avoid a situation in which democracy is threatened by China’s control of our telecommunications networks”’ (2021, emphasis added).

Cyber Cold War Governments, businesses, and individuals around the world depend on digital technology and the internet, to the point where ‘software is eating the world’. But the technology has a seamy underworld populated by hackers inside and outside governments, who break into computer networks to sabotage the network or steal data for bribes or espionage; and by those who wish to buy or otherwise obtain their secrets. Security is only as good as the weakest link, and often the weakest link is a human who clicks on a phishing email or a persuasive message that contains viruses. It is said that there are two types of US companies and government agencies: those who know they have been hacked and those who have been hacked but do not know it. Google was hacked in 2009 by Chinese state-linked hackers with a specific goal: get Google’s source code so they could guarantee long-term access to any Gmail account and in particular Chinese dissidents’ Gmail accounts (Perlroth, 2021, Chapter 14). Here is an extended quote from Nicole Perlroth’s book about this underworld, This Is How They Tell Me The World Will End (2021). ‘Most laypeople assume hackers are after short-term payoffs: money, credit card information, or bribe-worthy medical information. But the most sophisticated attackers want the source code, the hieroglyphics created and admired by the engineering class. Source code is the raw matter for software and hardware. It is what tells your devices and apps how to behave, when to turn on, when to sleep, who to let in, who to keep out. Source code manipulation is the long game. Code can be stolen and manipulated today and, like an invisible hole in the wall of the Oval Office, bear fruit immediately or years into the future. Code is often the most valuable asset technology companies have – their crown jewels – and yet when China’s contracted hackers started popping up across thirty-four Silicon Valley companies in late 2009, nobody had ever thought to secure it. Customer and credit card data merited fierce protection, but the vast majority of tech companies had left their source

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code repositories wide open…. [The hackers] could surreptitiously change the code that made its way into commercial products and attack any customers who used the software.’ (p. 203)

Around the world, hackers—private, state, or in-betweens—are working to find or put access holes in widely used software, such as Windows or Apple’s iOS, that the maker does not know about. The holes are known as ‘zero-day’ holes. Once the hole is identified the hacker or a programmer can write the code to gain access to the victim’s software and exploit the hole. The result is called a ‘zero-day exploit’. Naturally a market for these zero-day exploits has arisen, with hackers, brokers (‘zero-day brokers’), spy agencies and more involved, with prices often running to more than $2 million per zero-day exploit. Spy agencies are keen to get hold of them, whether discovered by their own employees or purchased on the top secret zero-day market. They can gain leverage over companies, journalists, spies, dissidents, whole states. The spreading technology of Internet of Things provides a vast attack surface. The US is still the world’s offensive cyber superpower. It is also the most targeted in terms of frequency of attack and destructiveness of attack, especially because unfriendly states know they cannot match the US or NATO militarily but can invest more cheapy in cyber weapons to gain offensive and defensive strength. Think Iran, North Korea, UAE, Saudi Arabia, as well as China and Russia. Perlroth reports that Chinese hackers in 2014 hacked into the US Office of Personnel Management, including into its repository of everyone who has applied for a security clearance; the hack was not discovered for more than a year (230). In 2014–2015 Russian hackers gained access to the security systems of the White House, State Department, Treasury, and Department of Homeland Security. So far the only sustained and comprehensive use of cyber weapons in war has been Russia in Ukraine, starting in 2014 after the coup which ousted president Yanukovych, who was seen in the west as too friendly to the Kremlin (Wade, 2015). Perlroth relates: ‘For five long years, they [the Kremlin’s digital army] shelled Ukrainians with thousands of cyberattacks a day and scanned the country’s networks incessantly for signs of weakness – a weak password, a misplaced zero, pirated and unpatched software, a hastily erected firewall…. Anything to sow discord and undermine Ukraine’s pro-Western leadership…. Russian hackers are “like artists who wake up in the morning in a good mood and start painting”, Putin

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told a gaggle of reporters in June 2017…. “If they have patriotic leanings, they may try to add their contribution to the fight against those who speak badly about Russia”’. (xiv) Putin made these celebratory remarks just three weeks before his hackers mounted the most destructive and costly cyberattack in history. They shut down Ukraine’s government agencies, railways, ATMs, gas stations, the postal service, the radiation monitors at the Chernobyl nuclear site. Eighty per cent of Ukraine’s computers were wiped clean. Then the code seeped out of Ukraine and zoomed around the world, paralysing computers at FedEx, Maersk shipping conglomerate, Pfizer and Merck pharmaceuticals, a Cadbury factory in Tasmania, and more, all within minutes. The attack coincided with Ukraine’s National Independence Day, a message that Russia still controlled Ukraine. In June 2022 the heads of the FBI and MI5 appeared together at a conference with business leaders. The FBI director warned that Beijing was using ‘elaborate shell games’ to disguise its spying, and that ‘When you deal with a Chinese company, know you’re also dealing with the Chinese government – that is the MSS [Ministry of State Security] and the PLA [People’s Liberation Army] too, almost like silent partners’ (Sevastopulo & Rathbone, 2022). One vital lesson: we must be much more careful about connecting critical infrastructure to the internet. Imagine the damage possible from a hack of the chemical controls at a water treatment plant, to take just one example. Some critical systems have to be ‘air-gaped’, not connected to the internet, with analogue rather than digital controls.

Conclusion This essay has explored the China-US political-economy relationship over the past two decades, bringing out the rising tension between them. The single most important cause is China’s increasing challenge to the US and the west in high-tech sectors, in military capacity and in ‘infrastructure alliances’ with countries in most of the world outside of the North Atlantic and Japan. China is in the process of drawing some 70% of the world’s population towards Beijing, shifting the centre of global power from the US to Asia. Naturally, the US and the West have a powerful common interest in resisting China’s challenge to their well-crystallized position at the top of the wealth and power imbalance between nations, where they accrue

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vast resources from the rest of the world. Between 2000 and 2016 the developing countries in the G20 (including the big ones like China, India, Brazil, Indonesia) transferred a yearly average of 2.3% of their combined GDPs to the developed countries, mainly the US, Japan, Germany, and the UK (Akuz, 2021; UNCTAD, 2019; Wade, 2020a). These resource transfers have to be protected against challengers who try to change the rules. A second cause of the new cold war is that the governments of both the US and China face extreme internal tensions (the US has an internal cold war), and both invoke the other as an existential enemy—in line with the oldest generalization in social science, ‘An external enemy induces internal cooperation’. Or as Georgy Arbatov, political scientist and advisor to five General Secretaries of Communist Party of Soviet Union, said to group of US politicians in 1989, ‘We are going to do you a disservice, we are going to deprive you of an enemy’. More specifically in the case of the US and several other western states (notably the UK), governments in electoral trouble seek to boost their legitimacy by advertising their support for the ‘national security state’, which needs an enemy. A third cause is the widely shared vision of US elites that states which do not share liberal values as America and the west define them constitute a threat to the security of America, the west, and the world; and it is the job of America and the west to remake such states in their own image (Rice, 2008). Writing days after the start of the 2003 US-led invasion of Iraq, New York Times columnist David Brooks said that President Bush’s decision to depose Saddam Hussein ‘represents what the United States is on earth to achieve. Thank God we have the political leaders and the military capabilities to realize the ideals that have always been embodied in our founding documents’ (quoted in Pierce, 2014). A fourth cause is that the US and west’s defence firms and warrior corporations earn vast profits from no-competition capital-intensive projects to build armaments against Russia and China, much more than they can obtain from more labour-intensive projects against terrorists and the like. They are unmatched in their lobbying power in Washington, and in their ability to sow hawk positions on China and Russia in Western media, the better to boost their profits. What are the prospects for a major hot war? As in the first cold war, there are regional flashpoints where the second cold war could heat up. The main ones are unresolved issues from the first cold war— which underlines that the current cold war can be seen as the second

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stage of a single conflict. The status of Taiwan and the Korean peninsula are obvious flashpoints. So is Russia’s western near-abroad, particularly Ukraine. Russia’s invasion in February 2022 prompted NATO to increase its forces on high alert from 40,000 to 300,000 (late June 2022), shifting the focus from deterring an invasion of a NATO country to mounting a full defence as the likelihood of an invasion rises. Russia’s invasion of Ukraine has been a blessing-in-disguise for the US and NATO. The US now stands as the re-energized leader of the ‘free world’, with western Europe as its re-affirmed dependency, and NATO stands as the re-energized bulwark against Russian aggression, having been declared by President Macron to be ‘brain-dead’ just three years ago (Wade, 2022a). The ‘shadow NATO’ under US leadership is currently carrying out ‘the grandest of war games’ on the eastern flank of the Eurasian landmass, entailing over 200 ships and 25,000 military personnel from 26 countries (Polychroniou, 2022). Today the ‘nuclear taboo’ is much weaker than during the first cold war, when a norm of the innate wrongness of nuclear weapons put their use beyond the pale. Now, tactical battlefield nuclear weapons exist, unlike the first time, making an escalation ladder and encouraging talk of ‘winnable nuclear wars’. In February 2022 a polling study found that majorities or near-majorities in the US, Britain, France, and Israel supported using nuclear weapons in conflicts with non-nuclear nations if they were more effective than conventional ones. The Economist (2022) points out that ‘nuclear weapons may have to be used simply because they are nuclear – perhaps because the public would expect a nuclear response to a nuclear attack and find anything less unforgivable’. And another scenario can be seen in Ukraine: Russia is making veiled threats to use nuclear weapons in order to keep NATO from direct military intervention. China is presumably learning the lesson for its ‘Taiwan temptation’.4 Since coming to office in 2012 President Xi has backtracked on earlier governments’ commitment to ‘no first use’ of nuclear weapons. He repeats that nuclear weapons are crucial to China’s status as a global power, and does not mention no first use. President Xi talks of future Sino-US relations as a combination of ‘entanglement and struggle’—not of ‘de-coupling’. In contrast, many

4 But see Youtube (2021) for reasons why China is unlikely to invade Taiwan.

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in the west do want the ‘distinct blocs with different ideologies, political systems, technology standards, cross-border payments and trade systems, and reserve currencies’ that Pierre-Olivier Gourinchas, IMF chief economist, warned about. So far the data on trade and capital flows does not show much unravelling or ‘deglobalization’—but one would expect such data to take time to adjust to new incentives. Going forward, western countries have to balance two factors, at least. One is that distinct geopolitical blocs could obstruct America and Europe in Asia, the world’s most populous and dynamic region, leaving the region to China. The second is that democratic states do have grounds to form closer ‘comity’ with each other on issues where values are at stake, knowing that what they agree to in inter-state relations has to have some correspondence with the democratic values of their political systems (e.g. human rights, privacy, transparency), in a way less true of authoritarian states (Vibert, 2021); and knowing also that the states spread out across Eurasia from Belarus to North Korea, including Russia, central Asian republics, and China—most of whose territory was ruled by Mongol emperors 700 years ago—are unlikely to become democracies anytime soon. Western states have to increase their aid to compete with China’s huge infrastructure investments in much of the developing world. At the G7 summit in 2021, President Biden unveiled the Build Back Better World (B3W), claiming that ‘the United States is rallying the world’s democracies to deliver for our people, meet the world’s challenges, and demonstrate our shared values’. But B3W soon was ‘dead in the water’ thanks to Senate opposition. At the G7 summit in 2022, President Biden unveiled the Partnership for Global Infrastructure and Investment (PGII) and got the G7 to pledge $600 bn in public and private funds for infrastructure investments in developing countries. The plan offers ‘value driven, high-quality, and sustainable infrastructure’, implicitly denouncing China’s BRI; and the White House asserts it will ‘advance US national security’ (Chowdhury & Jomo, 2022). Will PGII do better than B3B? If Washington puts undue pressure on allies to comply with PGII it may end up isolating itself and harming its own national security. The broader question is, will western governments be able to sustain global leadership activities in the face of steadily falling support from electorates (‘retreat of the West’)? If the G7 was wise, it would make a new balance of power in global governance which abandons the over-representation of western states—as

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in the US veto in the IMF, with 16.5% of the votes compared to China’s 6.4%, India and Russia’s 2.7% and Brazil’s 2.3%, with Europeans having almost one-third of the voting rights. That would be a small but symbolically important step away from the western hegemon project towards stronger global cooperation (Wade, 2022b). Efforts to suppress China’s influence in international rule-making will backfire, by encouraging it to build alternatives. And if the G7 was wise, it would figure out ways to de-throne ‘finance’ (or finance, insurance, real estate, FIRE) in western economies, and make finance into more of a service sector for the real economy than a leading sector in its own right. Why? Because financial firms expect a rate of return of 10–15% from scouring the world for high short-run returns (so international rules must preclude developing country governments from using capital controls except in emergency), compared to real economy firms at 3–5%. As the FIRE sector accounts for a high and often rising share of GDP, real economy firms also begin to invest more of their profits in FIRE rather than into, say, research and development (think General Electric under Jack Welch). The effect is to make national economies more fragile, less productive, more plutocratic, with more of the population in ‘bullshit’ jobs in the real economy. Not a recipe for decent capitalism! But at this time of deep crisis in the international order one looks in vain for political leaders, or parties, that might take on any such agenda, whether nationally or multilaterally.

References Ahuja, A. (2022, June 29). Monkeypox makes Covid unity pledges look hollow. Financial Times. Akuz, Y. (2021). External balance sheets of emerging economies: Low-yielding assets high-yielding liabilities. Review of Keynesian Economics, 9(2), 232–252. Askary, H. (2022, June 28). US-backed smear campaign created ‘debt trap’ narrative to defame BRI . https://www.youtube.com/watch?v=dSEOYLDiqAc Bounds, A. (2022, June 14). The WTO’s lonely struggle. Financial Times. Bown, C. (2021). The US-China trade war & Phase One Agreement. PIIE Working Paper 21-2. Buckley, C., & Myers, S. L. (2020, October 31–November 1). “Helmsman” Xi pushes an ambitious plan. New York Times (International). Chowdhury, A., & Jomo, K. S. (2022, July 12). Aid for power in new cold war. Challenging Development.

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Dobbins, J., Cohen, R. S., Chandler, N., Frederick, B., Geist, E., DeLuca, P., Morgan, F. E., Shatz, H. J., & Williams, B. (2019). Extending Russia: Competing from advantageous ground. RAND. Economist. (2022, June 4). Thinking the unthinkable. Edmondson, C., & Swanson, A. (2022, June 21). US chip makers press congress for support. New York Times (International). Inkster, N. (2020). The great decoupling: China, America and the struggle for technological supremacy. Hurst. Kyodo News. (2021, December 13). Japan, US Australia to build 5G networks in South Pacific. Leonhardt, D. (2017). A broken US economy, in on simple chart. New York Times (International). Lockett, H. (2022, June 12). How Xi Jinping is reshaping China’s capital markets. Financial Times. https://www.ft.com/content/d5b81ea0-5955414c-b2eb-886dfed4dffe Luce, E. (2022, July 7). America’s unending horizon of mass shootings. Financial Times. Madden, D. (2019, January 11). Ranked: The 25 smartest countries in the world. Forbes. Mahbubani, K. (2017, September 13). How strongmen co-opted democracy. New York Times (International). https://www.nytimes.com/2017/09/13/ opinion/strongman-world-democracy.html Mazarr, M. (2022, July/August). What makes a power great: The real drivers of rise and fall. Council on Foreign Relations. McCarthy, N. (2020, August 18). The world’s longest high-speed rail networks. Statistica. https://www.statista.com/chart/17093/miles-of-highspeed-rail-track-in-operation-by-country/ Miller, J. (2022, March 17). VW business in China tests German foreign policy. Financial Times. Mitchell, T. et al. (2022, March 10). The rising costs of China’s friendship with Russia. Financial Times. https://on.ft.com/3PkZdGY Perlroth, N. (2021). This Is How They Tell Me The World Will End. Bloomsbury. Pew Research Center. (2017). Global indicators database. Pew Research Center. http://www.pewglobal.org/database/ Pierce, C. (2014, March 4). Our Mister Brooks and the Messianic Mr. Putin. Esquire. Polychroniou, C. J. (2022, July 6). Noam Chomsky: The “Historic” NATO summit in Madrid showed up US militarism. Truthout. Rachman, G. (2020, January 21). How I became a reluctant China sceptic. Financial Times. Rachman, G. (2022, June 7). Ukraine and the start of a second cold war. Financial Times.

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Rice, C. (2008, July/August). Rethinking the national interest. Foreign Affairs. Rickards, J. (2022, July 7). The dollar is a victim of its own success. Daily Reckoning. Roeder, O. (2022, June 10). The global race for supercomputing power gathers pace. Financial Times. Schuller, M., & Schuler-Zhou, Y. (2020). United States-China decoupling: Time for European technology sovereignty. GIGA Focus/Asia, December, German Institute of Global and Area Studies. Sevastopulo, D., & Rathbone, J. P. (2022, July 7). MI5 and FBI chiefs join forces to warn on China’s industrial spying campaign. Financial Times. Starrs, S. K. (forthcoming). American power globalized: Rethinking American power in the age of globalization. Oxford University Press. Trubowitz, P., & Burgoon, B. (2020, June). The retreat of the west. Perspectives on Politics. UNCTAD. (2019). Making private capital work for development. Chapter 5 in Trade and Development Report 2019. Vibert, F. (2021). Comity: Multilateralism in the new cold war. Edward Elgar. Wade, R. H. (2004). Governing the market: Economic theory and the role of government in East Asian industrialization. Princeton University Press. Wade, R. H. (2015, July–August). Reinterpreting the Ukraine conflict. Challenge, 58(4), 361–371. Wade, R. H. (2020a). Rethinking the world economy as a two bloc hierarchy. Real-World Economics Review, 92. Wade, R. H. (2020b). Global growth, inequality, and poverty: Power and evidence in global ‘best practice’ economic policy. Chapter 12 in John Ravenhill (ed.), Global Political Economy. Oxford University Press. Wade, R. H. (2022a). Why the US and Nato have long wanted Russia to invade the Ukraine. Global Policy. https://www.globalpolicyjournal.com/blog/30/ 03/2022a/why-us-and-nato-have-long-wanted-russia-attack-ukraine Wade, R. H. (2022b, June). Leading states in the periphery of the world economy challenge core states: Impacts of the unlikely BRICS coalition. Global Policy. https://www.globalpolicyjournal.com/sites/default/files/pdf/ Wade%20-%20Leading%20States%20in%20the%20Periphery%20of%20the% 20World%20Economy%20Challenge%20Core%20States%2C%20%20Impacts% 20of%20the%20Unlikely%20BRICS%20Coalition.pdf Wickham, D. (2022, June 29). If the US ignores the Pacific, China will step right in. New York Times (International). Wikipedia. (2022, June). Made in China 2025. https://en.wikipedia.org/wiki/ Made_in_China_2025 Wong, E., & Swanson, A. (2022, June 7). Export bans are central to US plan to foil China. New York Times (International). Youtube. (2021, December 27). 5 Reasons why China won’t invade Taiwan.

CHAPTER 3

Middle-Income Trap and the Evolving Role of Institutions Along the Development Path Tomasz Mickiewicz

Introduction Middle-income trap describes a situation of a long-term slowdown in economic growth that takes place about the time a country reaches a medium level of income. It can be seen as a moment when the potential of the initial extensive model of growth, based on utilising reserve resources, especially labour underemployed in agriculture, is exhausted. The situation requires change to the intensive model of growth, with strong emphasis on innovation; an adaptation, which nevertheless may not happen, or may not prove successful. If it is not successful, a country becomes stuck in a mode of development that implies slowdown instead of transitioning to the group of high-income countries (Gill & Kharas, 2015; Gill et al., 2007). Some economies are catching up in their level of income successfully, yet for others the process is

T. Mickiewicz (B) Aston University, Birmingham, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_3

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often interrupted, and their rate of growth deteriorates compared with that of richer countries while they stay on the middle level of development. This implies that the gap between the catching-up countries and the developed countries remains stable or even deteriorates over time. An implication of the phenomenon is that the cases of breaking through from the middle-income group towards the high-income group remain rare.1 The discussion on the middle-income trap has been focused on economic policies that facilitate the transition. These include education, strengthening research and development, openness to international trade, and internal competitive pressure and innovativeness coming from entrepreneurship. The key elements of the successful mix are relatively well understood (Gill & Kharas, 2015). Yet, with few exceptions, little attention is committed to the question why some countries adopt and switch to successful policy mix at the middle-income level, while other countries do not. Existing answers to this question focus on deeper political, social, and institutional characteristics that condition transitions to modes of development that are required for catching up with high-income countries (Doner & Schneider, 2016). In this chapter, I intend to contribute marginally to this insightful debate by re-examining the data, looking for evidence that may support the idea that middle-income trap is about political institutions. I will first start with empirical examination of middle-income trap in order to support the claim that it exists. Next, I will digress on possibly the most dramatic historical example of the middle-income trap of the twentieth century that is the Soviet block. This will help me to move smoothly to the comparison between the (Soviet-type) North Korea and the South Korea, a comparison that plays a key role in the seminal paper by Glaeser et al. (2004), with which I intend to take an issue, while moving on to the wider discussion on factors of development that enable the developmental transition beyond the middle-income level. Clarifying (hopefully) the alternative views on political institutions will enable me to present a final set of empirical tests, and to conclude.

1 I am grateful to the editors of this volume, Tamas Ger˝ ocs and Judit Ricz; to Jongkyu Lee (Korea Development Institute); and to Elodie Douarin (University College London) for insightful comments and discussion of the themes of this chapter, which helped me to clarify several ideas. Needless to say, all remaining errors are mine.

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An Empirical Illustration of the Middle-Income Trap A standard exemplification of middle impact trap, seen as episodes of fast growth of developing countries, followed by slowdown once these countries reach the middle-income level, relates to few Latin American countries, and Mexico in particular (Kehoe & Ruhl, 2010). Figure 3.1 illustrates the problem. It presents the three most populated countries in Africa (Democratic Republic of Congo—DRC, Ethiopia, and Nigeria), in South America (Brazil, Columbia, and Mexico), and in Asia (China, India). For comparison, I also include the two most successful economies worldwide,2 Republic of Korea and Taiwan, which, after 1950, achieved a transition from the least developed group of countries to the most developed ones. For each country, the left-hand side bar represents their development level at the earliest time the data is available, that is for 1953. The right-hand side bar shows their level of development for the latest point available at the time of writing that is for 2019 (both from PENN World Tables; see Feenstra et al., 2015). There has been little long-term progress in the three African countries. In terms of income per capita, their position is not very different from where they were in the middle of the twentieth century. In fact, in DRC, instead of progress, there has been regress: its current income per capita is below what it was in the early 1950s. Ethiopia and Nigeria did better, yet they remain low-income countries. The three major Latin American economies made a little more progress. But Mexico, while it was not a poor country in 1953 and is still not a poor country now, did not achieve a breakthrough into the developed countries category. There was also progress in Brazil and Colombia. China, from a lower initial income position, over the long period achieved a similar level of income as these two Latin American countries, but no more: in the long-term perspective, the current period of fast growth in China has been counterweighted by disastrous economic policies of the early Communist period in the second half of the twentieth century. Likewise, India, which is now growing fast, in 2 The two most successful countries: this claim is based on the following statistic. I

scaled GDP per capita by its mean for both 1953 (first year data is available from PENN Tables) and for 2019 (last year available). Next, I used these two data points to calculate percentage change. Ordered by magnitude, the first three countries are: Taiwan, South Korea, and Thailand. At the bottom end of the spectrum, Democratic Republic of Congo takes the lowest position, Venezuela is second lowest, and Nicaragua just above.

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the twentieth century was implementing selectively some elements of the Soviet model of development, which then produced little positive results. Yet, these two countries, in relative terms, achieved more than Latin America, converging towards the latter over time. At the same time, yet different scenarios were possible. Seventy years ago, both Republic of Korea and Taiwan counted among the poorest countries on Earth, behind some of their African counterparts, and similar to China and India. Today, they are among the most developed economies of the world. Thus, successful long-term development is possible. Nevertheless, it is very rare. The same data can also be presented adopting the relative position perspective. Utilising the latter, for each country, I divided income per

Fig. 3.1 GDP per capita in 1953 and 2019 (Source The bar on the left represents the year 1953, the bar on the right represents the year 2019. For variable description and sources, please see notes to Table 3.1)

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capita in both years by the corresponding global mean income.3 Not surprisingly, far less countries improved their position in relative terms (Fig. 3.2) than in absolute terms (Fig. 3.1). Now China stands out, as in relative terms it made significant progress. The country’s income per capita was at 17% of the global mean in 1953; it jumped to 49% of the global mean in 2019. Still, China has still some way to go, before we could declare if it would face the middle-income trap or not.4 India also achieved clear progress, from 14% of the global mean towards 23%. And interestingly, the third country is Brazil, albeit with modest relative improvement, from 47% of the world’s mean to 49%. All these three examples are of course dominated by the stunning performance of our two comparator economies, Korea and Taiwan. The latter country was at 21% of the world’s mean income in 1953. It achieved 64% premium above the global mean in 2019. All other countries in our sample experienced a deterioration in their relative position. The case that Kehoe and Ruhl (2010) picked up as their exemplification of the middle-income trap, Mexico, illustrates their narrative well. In 1953, it was at 86% of global mean income per capita. In 2019, the relative position of Mexico compared to global mean income was reduced to 65%. The economic record of Congo is particularly depressing. It was at 38% of global mean in 1953, far higher than all the Asian economies we consider here. Yet, in 2019 its income per capita has been at less than 4% of the global mean. I will finish this section with few comments on Congo (DRC), as it will help to illustrate what the middle-income trap is not. The period we just considered empirically, from mid-twentieth century till today, marks the worldwide wave of decolonisation. The partial, incomplete implosion

3 Correspondingly these global mean values were $6456 in 1953 and $29,132 in 2019;

expressed in 2017 constant prices, and based on the same sample of countries for which the datapoints were available for both years. 4 China now reached the group of high middle-income countries, as classified by the World Bank (see https://datahelpdesk.worldbank.org/knowledgebase/articles/906519world-bank-country-and-lending-groups, accessed on the 17th of August 2022). But is has not been there long enough to assess how it will perform at this level. Saying that, unquestionably, China is a case of a highly successful move from low income to medium income group. On my ranking of the long-run success stories of development (see Footnote 3), it takes 4th place (followed by Ireland and Japan). I will return to the discussion of China in “The Example of the Soviet Economic Model” Section, contrasting it with Soviet Russia.

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Fig. 3.2 GDP per capita in 1953 and 2019 divided by the corresponding global mean (Source The bar on the left represents the year 1953, the bar on the right represents the year 2019. For variable description and sources, please see notes to Table 3.1)

of the Russian colonial empire in Central Eastern Europe and Central and East Asia, around 1990 was the late act in the process that started much earlier. In Africa, the timing spans between Libya gaining independence in 1951, and Namibia in 1990. The critical change however happened in the late 1950s and early 1960s; this wave originated with Ghana gaining independence in 1957. Africa has its success stories of development; one example of that, which is often discussed is Botswana (Acemoglu & Robinson, 2012). It also has cases of failure, like again Congo (DRC), where as documented by Fig. 3.1, income per capita actually shrunk over the span of seventy years, since mid-twentieth century. In the nineteenth century, Congo was dominated by slave traders from Zanzibar and then became a private property of Belgian King, Leopold in late nineteenth century, which marked the beginning of an exceptionally oppressive, extractive regime, a

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colony, in which forced labour was used to extract natural rubber, and that came at cost of several million deaths. Under pressure of the European public opinion, this regime improved in the early twentieth century, after the administration was taken over by the Belgian state. Yet it remained an extractive colony, with little education, and with the territory, which is the largest in Sub-Saharan Africa, artificially defined by the colonisers. Upon independence gained in 1960, DRC descended into a series of devastating civil wars, which, with higher or lower intensity, continue to this day. The initial conditions for successful state building in Congo were absent. And without ‘minimally effective state’ (Hough & Grier, 2015) development did not happen. This is not the ‘middle-income trap’, this is the lowincome, failed state trap of underdevelopment. While I will come back to the question of state administrative capacity (effective state), and will juxtapose it next to the second institutional dimension of the nature of political regime, I will not consider traps at low level of development any further.

More Systematic Evidence on the Middle-Income Trap Examples of few countries even if large, as presented above, do not represent systematic evidence. Maybe, the middle-income trap is just part of a wider regularity, which is that GDP growth rates fall with level of income. This implies that catching-up process slows down when the developing countries climb up in terms of GDP per capita. Indeed, as Table 3.1 illustrates, the evidence of this effect is strong. Regardless of which estimator we apply, slowdown effect as documented by a negative and significant coefficient of income per capita is there. However, Table 3.1 shows linear models, while the idea of middleincome trap implies nonlinearity: catching up would (on average) be fast at the low level of income, yet it would slow down at the middle level of income. To verify this, I categorised the income per capita (lagged one year) using $5000 intervals and regressed rate of GDP growth on this set of dummies (and a complete set of annual dummies), using the fixed effects panel estimator. The model performs remarkably well with all dummies highly significant (at p < 0.001). The coefficients for all income per capita intervals are presented in Fig. 3.3. The negative association between the level of income per capita and the rate of growth begins to break down around the middle level of income. From that point onward,

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Table 3.1 GDP growth rate explained by lagged income per capita (1) Ordinary least squares

Lagged log of income p.c Lagged log of income p.c.: country average Constant Observations

(2) Random effects

(3) Mundlak model

(4) Fixed effect

(5) Mundlak model & random effects

−0.002*** (0.001)

−0.005*** (0.001)

−0.018*** (0.002) 0.017*** (0.002)

−0.021*** (0.003)

−0.018*** (0.003) 0.017*** (0.003)

0.081*** (0.009) 10,216

0.101*** (0.011) 10,216

0.057*** (0.010) 10,216

0.230*** (0.029) 10,216

0.058*** (0.011) 10,216

Notes Complete set of annual dummies (1952–2019) included but not reported GDP growth is calculated as logarithmic annual difference of real GDP. Real GDP comes from PENN World Table version 10 from University of Groningen. It corresponds to rgdpa variable, which is ‘Real GDP at constant 2017 national prices (in mil. 2017 US$)’ Income per capita is represented by real GDP divided by population (also from PENN World Table) All models apply robust standard errors that are reported in parentheses below the coefficients Significance level is denoted in the following way: + p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

richer countries are not growing slower than relatively poorer countries that is there is no longer a dominant tendency to catching up. Interestingly, the similar nonlinear pattern is preserved, when we replace the set of dummies by the third order polynomial of lagged GNI per capita. Both linear term and square term are significant at 0.001 probability level, and the cubic term is significant at 0.05 probability level. The marginal effects are presented in Fig. 3.4. The revealed relationship of growth rate with level of development is similar to that of Fig. 3.3, just smoother. The nonlinear approximation works well. Thus, two patterns stand out. Firstly, it seems that the catching-up mechanism breaks down around the GNI per capita level just below 30,000 US dollars (2017 prices; which is incidentally about the global mean for 2019, see above). From that point upward the coefficients oscillate around the same level that is we can no longer say that relatively poorer countries grow faster. Second, the confidence intervals around the estimated coefficients increase, compared to low-income countries range.

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Fig. 3.3 GDP growth rate explained by lagged income per capita, categorised (Source For variable description and sources, please see notes to Table 3.1. The confidence intervals are plotted at 95% level)

A simple association between level of income per capita and growth seems insufficient to explain growth in the middle to upper range of income per capita. At this higher level of income, we need some other variables, which in our simple model are captured by noise.

The Example of the Soviet Economic Model As demonstrated, growth tends to slow down with development, yet as examples of Korea and Taiwan demonstrate, this slowdown is a mean effect, which does not apply to all countries; there are exceptions and scenarios of successful catching up that are feasible. It may be that a different set of institutions and policies is needed for growth to continue at the middle level of development. Here, looking at the historical example of the Soviet economic system, based on state ownership of industrial firms and on centralised decision making, may be useful. I will

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Fig. 3.4 GDP growth rate explained by lagged income per capita expressed as third order polynomial (Source For variable description and sources, please see notes to Table 3.1)

start with two historical events that illustrate a dramatic shift in perceptions of the economic effectiveness of the Soviet system that happened over a span of twenty-five years between early 1960s and late 1980s. On the 12th of April 1961, a Russian astronaut, Yuri Gagarin became the first man to reach outer space. At that time, the country he represented, Soviet Russia has been seen as a prominent example of successful development, and accordingly, elements of the Soviet economic policies were copied in many developing countries, and Western economist were discussing when exactly Russia will catch and overcome the level of development of the United States, taking proclamations by Soviet leaders including Khrushchev at their face value. These expectations did not materialise. Almost exactly twenty-five years after the success of Gagarin, on the 26th of April 1986, the meltdown and explosion of the Soviet nuclear reactor in Chernobyl led to

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massive airborne radioactive contamination that affected many European countries. It was the worst nuclear disaster worldwide on record. The Russian Communist authorities initially staged a coverup, including an order not to cancel the 1st of May parade in nearby Kyiv, then controlled by the Russians. Only 18 days after the accident, not coping with the consequences, they reversed the policy, and officially recognised what happened. An outrage that followed led to calls for reforms, and ultimately accelerated the demise of the Soviet system (Applebaum, 2017). The factors of slowdown and ultimate collapse of the Soviet economic system are discussed by Douarin and Mickiewicz (2017). Initially, the Soviet economic system achieved a transformation from the economy based on agriculture to the one based on industry. Yet, this was a relatively simple task to coordinate by the command-and-control system that was adopted. Initial underemployment that is hidden employment in the countryside was transformed into industrial employment.5 For those that survived Stalin’s oppression, the social standing and level of income improved. But as the economy was moving towards the technological frontier, as defined by the most developed countries, innovation in place of imitation became the key issue. The centralised model failed to produce the widespread innovation that was needed to sustain growth. The centralised system did make innovations hard; it was hard for new ideas to translate into new products or into new ways of producing things (Kornai, 1992). Indeed, there were no obvious ways for innovative individuals to access funds to transform their new ideas into usable products or processes, and no clear incentives for them to do so, as the managers of state-owned firms, had no incentives to divert any of the inputs they had into testing out anything new. At the same time, central planners had limited incentives to look for innovations and even lacked

5 There was an unprecedented human cost of the industrialisation, which was to much extent concealed, and ignored by those who praised the Soviet development model. The great hunger inflicted on Russian-occupied Ukraine caused around four million of deaths in 1932–1933 (Appelbaum, 2017). Twenty years later, Chinese Communists replicated the same policies, generating far larger number of deaths, during the Great Chinese Famine of 1958–1961 (Dikötter, 2017). Moreover, as demonstrated by Cheremukhin et al. (2013) using a synthetic control model, collectivisation that restored a system of serfdom in the Soviet countryside to squeeze surplus from the farmers was not a necessary condition for rapid industrialisation. Industrialisation happened elsewhere, including Japan, without such human cost.

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the practical knowledge to identify needs, or to recognise improvements. Instead, for practical reasons and feasibility, the central economic plan was often conceived just through small changes from the previous period plan, resulting in structural inertia. The planners were able to concentrate research on few selected major projects, for example on space race, and to achieve good results there, but a wider wave of innovation never materialised. Thus, technological progress was often only possible through copying the technical advances made elsewhere, effectively condemning the Soviet command-and-control economies to the role of technological followers.6 Yet even where technology could be imported, only embodied and codified innovation could possibly be copied and adapted, and tacit knowledge was lost due to limited labour mobility across the border and limited intellectual exchange more broadly (Douarin & Mickiewicz, 2017). For this technological catch-up to take place, some foreign trade with technologically more advanced economies was required, but foreign trade created tension with the core planning requirements, as low level of trade or autarky was what made the planners’ job easier or simply feasible. The Soviet Block produced little of interest for developed markets, beyond raw materials. It compensated this to some extent by trade with developing countries, but still, the foreign trade in physical goods and services was limited.7 Thus, the amount of foreign currency available to import both goods and technology into the region was low (Douarin & Mickiewicz, 2017). Overall, this means that central planning suffered from specific systemic issues generating simultaneously shortages in final products and waste in use of resources in the short-term, and inertia and lack of innovation in the longer run (Kornai, 1992). These issues limited the prospect of economic growth once the lower middle-income level was reached 6 There was also effort to restrict transfer of advanced technology with miliary use to the Soviet Block, led by the United States. Seventeen developed countries were members of the Coordinating Committee for Multilateral Export Controls. Enforcement was problematic, albeit one well known case, when two companies were sanctioned for delivering advanced military technology to Russia is that of Japanese Toshiba and Norwegian Kongsberg in early 1980s (Fitzpatrick, 1988). 7 A comparison between Soviet Russia and China is illustrative. In 1991, the first year for which comparable data for both countries is available from World Bank, the ratio of merchandise trade to GDP in China was already 35%. In contrast for Soviet Russia it was 18%, about half lower.

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by extensive growth policies (transfer of resources from agriculture to industry), and were bound to result in stagnation. We should also emphasise that further policy choices and contextual factors made the situation worst as time passed. For example, the continued focus on heavy industrialisation supported by entrenched interests of large state firms’ managers, over other parts of the manufacturing sectors, and the service sectors8 —which partly translated the weak focus on consumer demand among planners—led to extensive ‘misallocation’. Similarly, a strong focus on military spending had led to diverting resources away from other sectors, thus slowing down growth and impacting social welfare negatively. Fluctuations in the world market prices for natural resources also added real economic pressure in these economies that produced little else of interest to international economic actors (Douarin & Mickiewicz, 2017). To conclude. The economic history of the Soviet Block is important as it illustrates an extreme case of middle-income trap. It also points to potential factors that explain the slowdown. In particular, unlike the case of Congo, these countries built effective states, and their primitive political and economic regimes of command and control were sufficient for a relatively simple task of extensive growth based on initial industrialisation. They fail however when it comes to a more complex task of intensive growth, where economies that are already closer to the technology frontier need to boost their innovation capabilities.

Theoretical Generalisation: Institutions and Development Is it that the more primitive political and economic regimes, based on centralised control in place of elaborate system of rules, are sufficient or even superior in early stages of development? This is what Glaeser et al. (2004) seem to be arguing. As the example of Congo that I discussed in “Introduction” Section, and may other historical examples show, building of ‘the minimally effective state’ is a difficult task (Hough & Grier, 2015), and simple forms of authoritarian regimes, based on commands not rules, are a dominant form of government in low development

8 There were exceptions in the Soviet Block. Hungary is an example of a reform programme, that led to some reorientation of the planning priorities.

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countries. Yes, they often do a decent job in the task of development. Glaeser et al. (2004) appear to be saying that what distinguishes successful from unsuccessful models of development are policies, which is in line with what development economist stress discussing middle-income trap (Gill & Kharas, 2015). While political and economic regimes in lowincome countries are equally primitive, with rule of man in place of rule of law, some autocratic governments are better than others in designing and implementing pro-growth policies, and investing in education is a key policy here (see also Csáki in this volume). Over time, with development, these countries transit from authoritarian regimes to rule-based democracies. What Glaeser et al. (2004) present here is not far from classic argument by Barro (1991), who argued that democracy is a ‘luxury good’: rich countries ‘consume’ more democracy, because they already satisfied more basic needs. A system based on the rule of law9 needs to be supported by impartial state administration, autonomous judicial system, and the extensive employment in legal profession that are all costly to maintain (Fukuyama, 2012, 2015). In Glaeser et al.’s (2004) perspective, such an institutional model arises with development, and therefore a switch to this rule-based and democratic political regime along the path of development is fundamentally not problematic. There is no middle-income trap. Acemoglu et al. (2006) think otherwise. Consistent with ‘the Schumpeterian growth paradigm’ they assume that innovation plays the central role in development (Aghion & Bircan, 2017). Yet, they argue that at a lower level of development, innovation plays a less important role, because the best technology can be adopted by imitation or transfer. This implies, that the model of extensive growth based on large volume of investment can be successful. Yet, closer to the world technology frontier, firms need to innovate, and for this a different set of institutions and economic policies is required. However, the most interesting aspect of their argument is that switching between the two modes of development may be difficult. Therefore, there is a long-run cost of an institutional set-up supporting the investment-based, extensive model of development: it comes with a risk that an economy will be trapped within a set of institutions that from one point onward will not support economic catching-up. This is 9 Please note, that we consider the rule of law, and a democratic political regime as closely connected, even if not the same conceptually. Please see Mickiewicz et al. (2021, esp. Section 3.3) on conceptual differences and measurement.

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because innovation requires creative destruction (Aghion & Bircon, 2017; Schumpeter, 2012[1942]) and entrepreneurs and new firms are often carriers of breakthrough innovations that shift the technological frontier (Baumol, 2010). That in turn implies that incumbent interests and firms are not entrenched preventing competition (Aghion & Bircon, 2017). The institutional order conducive to development needs to support the open economy, but the regime switch may be blocked by vested interest (Acemoglu et al., 2006). Thus, both Acemoglu et al. (2006) and Glaeser et al. (2004) agree with the view expressed much earlier by Gerschenkron (1962) that some historical episodes of successful development from a low level of income were based on extensive growth, and different modes of industrial organisation, compared to countries on the technological frontier. In particular, the economies undergoing fast development from low level are often characterised by presence of large firms, with stable, dominant position, and continuity in ownership and management. These firms act as vehicle of large-scale investment and are accompanied by arbitrary government, which nevertheless protect them. Arguably, Korea (Lee, 2022), and earlier on Japan (Morck & Nakamura, 2005), followed that pattern. However, after this common point, the perspectives of Glaeser et al. (2004) and Acemoglu et al. (2006) start to diverge. The former team of authors seem to assume that with the higher level of education, along the development path, the nature of the regime is likely to switch to the more open one, aligned with changing growth requirements. In contrast, Acemoglu et al. (2006) argue that there is nothing automatic about the switch. Countries may become locked in, in regimes that were once conducive to growth at the low level of development, but are no longer. This constitutes the middle-income trap.

Back to Empirics Which of these two perspectives is more consistent with empirical data? The smooth transition view on development will imply that the institutional quality is less relevant in the early stage of the process, and the enhanced quality of institution will become more relevant only in the more advanced stages. In contrast, if there is a middle-income trap, political institutions will matter in the early stage. This is because if there is oppression, this increases the likelihood of the oligarchic lock-in, where special interests of those with economic power supported by political

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power will prevent regulatory reforms that in turn are a pre-condition for more advanced stages of development. There is an implicit distinction on which this argument draws, that is between (i) regulations and policies (labour market, trade, competition), and (ii) higher order institutional regimes that is rule of law and basic political institutions (Estrin et al., 2013; Mickiewicz et al., 2021). My emphasis is on the latter. The intuition here is that the ‘higher order’ institutions are more important both because they prevent oligarchic lockups, and facilitate change in regulatory regimes and adjustment, especially around the middle level of income. This thesis may seem counterintuitive, as it is tyranny that is associated with arbitrary government, and this could suggest that the arbitrary government may be more efficient in adopting policies to stages of development. The critical factor however is willingness to take risks (Douarin & Mickiewicz, 2017). The risks that democratic leaders face relate to a possibility of early retirement. The tyrants face potentially far more unpleasant consequences when their mistakes lead to widespread social dissent. This issue becomes critical when a country encounters either an economic crisis or a period of fast structural change associated with social turbulence, making a margin of error narrower. Making right policy choices, when the middle level of development is reached, in order to preserve stability and to avoid violent internal conflicts that may derail development, is not simple. This is because, when reaching the middle income, the structure of returns to factors of production and to different categories of labour and skills shifts, increasing inequality (Donner & Schneider, 2016). In such a situation, democracy offers space for public dialogue (Sen, 2009), which helps to articulate both ideas and social interests, and helps in negotiating compensating schemes, ensuring more stability at the time of economic and social transitions (Douarin & Mickiewicz, 2017). Thus, higher order institutions, represented by rule of law, and civic and political rights (democracy) will help with development, both before reaching the middle income (preventing oligarchic lockups) and at middle income (so that policy choices can be negotiated and adopted without dangers to social cohesion and political stability).10 10 The classic account of the importance of the social coalitions is in Moore (1993[1966]). This theme is applied to the question of middle-income trap by Doner and Schneider (2016). They use the term ‘upgrading coalitions’.

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Based on these intuitions, I run four models reported in Table 3.2. Here, the effects of institutions and of level of development on growth rates are conditional on each other (interacted). I apply four different institutional measures: (1) an index of effective Constraints on the Executive branch of the government (Pemstein et al., 2022), which can be interpreted as a proxy for rule of law (Mickiewicz et al., 2021), (2) the Polity measure that corresponds to the continuum between autocracy and democracy (from Center for Systemic Peace; see Marshall & Jaggers, 2020), next a conceptually related index of (3) Political Freedom, from Freedom House (2021), and last but not least the index of human rights other than political rights, that is the index of Civil Liberties, from the same source.11 The results are rather striking. I obtained a uniformly negative, significant coefficient on lagged income per capita as in models of Table 3.1, indicating convergence. The coefficients on lagged institutional indicators are all positive and significant. Better institutions, and democracy in particular, are associated with growth, consistent with recent results by Acemoglu et al. (2019). The most interesting however is the result on the interactive effect: it is consistently negative and significant. Variation in institutions matters for growth, yet it matters more in the early stage not in the advanced stage of development. This is consistent with the middle-income trap view of development: institutional set-up plays a critical role in the early stage, because it implies a difference between the regimes that are able to reform endogenously and regimes that are so entrenched that they fall into a lock-in that prevents them to develop beyond the middle-income stage.

Discussion Glaeser et al. (2004) open their seminal paper with the example of Korea, a country that was split into two in 1948, after the Second World War. North Korea became a Communist dictatorship, but South Korea was

11 A question to consider is endogeneity. The dependent variable, annual rate of growth

is a highly volatile contemporary one. It may have a slight trend-build in, but the latter should be to some extent captured by a complete set of annual dummies. Also, timeinvariant heterogeneity is absorbed by fixed effects. Income per capita and institutional indicators are lagged one year, and there are both characterised by strong inertia and path dependence, accumulating past developments.

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Table 3.2 GDP growth rate explained by lagged income per capita and institutional indicators (1) L.log of income p.c L.Judicial constraints on the executive index L.Income p.c. × Judicial constraints on the executive L.Polity score

−0.009+ (0.005) 0.172*** (0.048) −0.021*** (0.006)

(2) −0.020*** (0.004)

L.Political rights

−0.018* (0.007)

0.028** (0.008) −0.003** (0.001)

L.Income p.c. × L.Political rights L.Civil liberties

Observations

−0.021** (0.007)

(4)

0.007** (0.002) −0.001** (0.000)

L.Incom p.c. × L.Polity score

L.lncome p.c. × L.Civil liberties Constant

(3)

0.132** (0.044) 9294

0.218*** (0.034) 8475

0.219*** (0.063) 7004

0.034*** (0.008) −0.004*** (0.001) 0.199** (0.061) 7004

Notes Complete set of annual dummies (1952–2019) included but not reported GDP growth is calculated as logarithmic annual difference of real GDP. Real GDP comes from PENN World Table version 10 from University of Groningen. It corresponds to rgdpa variable, which is ‘Real GDP at constant 2017 national prices (in mil. 2017 US$)’ Income per capita is represented by real GDP divided by population (also from PENN World Table) All institutional variables come from V-Dem database, version 12 (University of Gothenburg). On the judicial constraints on the executive index see Pemstein et al. (2022). Polity score is from Center of Systemic Peace, it denotes a linear scale between autocracy and democracy (Marshall & Jaggers, 2020). Political Rights and Civil Liberties indicators are from Freedom House (Freedom House, 2021). For both indicators the original coding was reversed, to make it consistent with the two other institutional indicators (so here, higher scores imply more political rights, or more extensive civil liberties) All models apply robust standard errors that are reported in parentheses below the coefficients Significance level is denoted in the following way: + p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

also a dictatorship, albeit not of a totalitarian nature.12 Unlike North 12 For the classic distinction between the totalitarian dictatorship and the autocracy, see Friedrich and Brzezinski (1965).

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Korea, South Korea later transitioned to democracy in 1987. Glaeser et al. (2004) point out that the difference between the two countries on the Polity’s ‘Effective Constraints on the Executive’ average score was relatively small between 1950 and 1980, 1.17 for the North, versus 2.16 for the South. Their interpretation is that this difference did not matter much, and South Korea became the second most successful development story in the world (after Taiwan) thanks to the policy choice by its dictator in the early stage. In particular, they argue, it was investment in education that brought both the development and later on the wave of social activism that led to establishment of democracy during the 1980s.13 These policies were there, but is it the whole story? Glaeser et al. (2004) assume that human capital accumulation plays a critical role in development, which is hard to deny. But what is exogeneous and what is endogenous here? Historically, it is not difficult to find examples of oligarchic regimes that left the large sections of their population without much education, in order to protect their entrenched position (Acemoglu & Robinson, 2012). Human capital matters, but contrary to their argument, it may be endogenous and its built-up may follow from the nature of political regime, not the other way round. And was it really investment in human capital that distinguished South Korea from North Korea? The oppressive nature of Communist regimes is now well documented, but one positive side of the Communist ideology was its emphasis on education. I am not even certain which part of Korea was ahead in terms of education in the 1950s. The differences in the nature of political regimes may look small in the initial period after the partition of Korea, as Glaeser et al. (2004) argue. Nevertheless, these apparently small differences could push both countries onto gradually diverging development paths. Over time, the North Korean regime constructed a highly effective state-sponsored violence industry, that is a very efficient apparatus of terror and control. In South Korea, the margin of freedom, the margin for autonomous social selforganisation was narrow, yet it was there. The key issue here, which leads me back towards the middle-income trap is the combination of

13 A complete discussion of the factors of growth in Korea is beyond the scope of this chapter. One should also add engagement in international trade, in contrast with North Korean policies of import substitution. For a more complete discussion, see: Lee (2022), who, among others, also points to exceptionally long working hours in South Korea, which were associated with tight labour market and opportunities for career development.

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two dimensions: the oppressiveness of the political regime, and the effectiveness of the state.14 Tyrannies at the low level of development may have oppressive intentions but they lack means to implement these in full.15 It is more difficult for local oligarchies to build stable structures of oppression and become entrenched. Such countries may be plagued by open conflict, as Congo (discussed above) exemplifies, but there are also capable of institutional change. It is only when they approach the middle level of development, the local ruling oligarchies have not only intentions but also means to construct the entrenched structures of oppression.16 In this perspective, the middle-income trap has two aspects: the level of development may necessitate a transition to a more open system supporting innovation, but it also provides the ruling oligarchy with the means to create an effective system of oppression, and to lead their country into an authoritarian lock-in.17 There is one final practical implication of this discussion. If my interpretation of development in Korea, and more generally of middle-income trap is correct, then small institutional differences matter too. We should steer away from simple and dichotomous view of institutions, especially combined with a concept of transhistorical permanency, as unfortunately implied in some of the classic discussions of institutions (Hall & Soskice,

14 This is not to say that political institutions are exogenous, but rather that once adopted they create strong path-dependency. In the case of Korea, the ultimate exogenous factor was political geography that is proximity to neighbouring China. The Chinese and Russians helped to install and stabilise the Communist regime in the North, pouring resources over the border, albeit they failed in their effort to overrun the whole country during the Korean War. 15 Historical examples abound. I will point to one well-documented study. Beauvois (2003) presents political, economic, and social reality of Ukraine in early nineteenth century, then under control of the Tzarist regime in Moscow. The latter was not shy of planning mass-scale ethnic cleansing, but lack of effective state implied these imperialist, nationalist fantasies were only implemented one hundred years later, when Soviet Russia built effective state structure and turned Ukraine into a colonial heart of darkness (see Appelbaum, 2017). 16 The strategies adopted by Communists to consolidate and entrench the totalitarian regimes shared a lot in common with Fascists. Burleigh (2000) emphasises the central role of the systematic destruction of the rule of law. 17 I leave aside the question of resource curse. Resource-abundant countries may provide a local oligarchy with means to support organised violence against their population at much earlier stage of development. Congo, again, may be an example (on the role of natural resources in Congo, see Kenyon, 2018).

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2001; North, 1990; Williamson, 2000). Let me consider these two issues jointly, starting with permanency. Glaeser et al. (2004) observe that commonly used institutional indicators change over time and conclude that they cannot measure institutions because the latter should have permanent nature. This is again consistent with North (1990) and Williamson (2000) who see institutions as changing only over very long historical periods. But while institutions are indeed characterised by inertia and path dependence (Persson & Tabellini, 2009), gradual change and evolution is common (Mahoney & Thelen, 2009; Mickiewicz et al., 2021). The reason why we should pay attention to these gradual changes is again that small differences may be amplified over time, and gradually lead to divergent institutional and development paths. A good example of that is the group of countries that were once part of the Soviet Block, and now exhibit divergent paths of institutional and economic development (Douarin & Mickiewicz, 2017). Let me illustrate what I have in mind by two historical examples from the same period and group of countries. In 1970, the predominant focus was on the difference between the countries of the Communist block and the Western democracies. That left little scope for attention to detail and to nuanced policies. It was for example easy to overlook market experiments in Hungary, even if those experiments turned out to form the key lessons for Chinese Communists when they embarked on their gradual economic reforms, which ultimately pushed China on a different development path, which outcome we do not know yet. Thus, what looked like a limited scale, local institutional variation within a dominant model, in fact had major consequences. Likewise, in the second half of the 1970s, US President, Jimmie Carter, paid attention to subtle cracks that appeared within the Communist system in Poland. He deliberately pushed the Polish Communist regime to contain political repression (in exchange to be lenient on debt service). Yet this incremental minor change was what helped to create a breathing space for emerging ‘Solidarity’ movement, and it turned out to have major consequences for institutional change not just in Poland, but in the neighbouring countries. The institutional differences matter a lot at the time the countries reach the middle level of income, as it is at this stage, they need to transform from extensive to intensive mode of growth, with accompanying social turbulences (Doner & Schneider, 2016). Yet, because there is the path dependence in institutional development, earlier institutional differences, even if apparently small when measured on the continuum

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between oppressive oligarchies and open regimes, may have major consequences pushing countries into divergent development trajectories. They may either end in lock-ins at the middle level of income, or proceed to breakthrough towards successful development.

References Acemoglu, D., Aghion, P., & Zilibotti, F. (2006). Distance to frontier, selection, and economic growth. Journal of the European Economic Association, 4(1), 37–74. Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127 (1), 47–100. Acemoglu, D., & Robinson, J. (2012). Why nations fail. Profile Books. Aghion, P., & Bircan, C. (2017). The middle-income trap from a Schumpeterian perspective. ADB Economics Working Paper Series, No. 521. Applebaum, A. (2017). Red famine: Stalin’s war on Ukraine. Penguin Books. Barro, R. J. (1991). Economic growth in a cross section of countries. The Quarterly Journal of Economics, 106(2), 407–443. Baumol, W. (2010). The microtheory of innovative entrepreneurship. Princeton. Beauvois, D. (2003). Pouvoir russe et noblesse polonaise en Ukraine 1793–1830. CNRS-éditions. Burleigh, M. (2000). The third Reich. Macmillan. Cheremukhin, A., Golosov, M., Guriev, S., & Tsyvinski, A. (2013). Was Stalin necessary for Russia’s economic development? Working Paper No. 19425. National Bureau of Economic Research. Dikötter, F. (2017). Mao’s great famine. Bloomsbury. Doner, R. F., & Schneider, B. R. (2016). The middle-income trap: More politics than economics. World Politics, 68(4), 608–644. Douarin, E., & Mickiewicz, T. (2017). Economics of institutional change. Palgrave Macmillan. Estrin, S., Korosteleva, J., & Mickiewicz, T. (2013). Which institutions encourage entrepreneurial growth aspirations? Journal of Business Venturing, 28(4), 564–580. Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105(10), 3150–3182. Fitzpatrick, D. J. (1988). Of ropes, buttons, and four-by-fours: Import sanctions for violations of the COCOM agreement. Virginia Journal of International Law, 29, 249–288. Freedom House. (2021). Freedom in the world. https://freedomhouse.org/rep ort/freedom-world Friedrich, C. J., & Brzezinski, Z. (1965). Totalitarian dictatorship and autocracy. Harvard University Press.

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Fukuyama, F. (2012). The origins of political order: From prehuman times to the French revolution. Profile Books. Fukuyama, F. (2015). Political order and political decay: From the industrial revolution to the globalization of democracy. Profile Books. Gerschenkron, A. (1962). Economic backwardness in historical perspective. Harvard University Press. Gill, I. S., & Kharas, H. (2015). The middle-income trap turns ten. World Bank Policy Research Working Paper, No. 7403. Gill, I. S., Kharas, H. J., & Bhattasali, D. (2007). An East Asian renaissance: Ideas for economic growth. World Bank Publications. Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9(3), 271–303. Hall, P., & Soskice, D. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press. Hough, J., & Grier, R. (2015). The long process of development. Cambridge University Press. Kehoe, T. J., & Ruhl, K. J. (2010). Why have economic reforms in Mexico not generated growth? Journal of Economic Literature, 48(4), 1005–1027. Kenyon, P. (2018). Dictatorland. Head of Zeus. Kornai, J. (1992). The socialist system: The political economy of communism. Clarendon Press. Lee, Y. S. (2022). State capitalism and the law. In Wright, M., Wood, G. T., Cuervo-Cazurra, A., Sun, P., Okhmatovskiy, I., & Grosman, A. (Eds.). (2022). The Oxford handbook of state capitalism and the firm (pp. 346–364). Oxford University Press. Mahoney, J., & Thelen, K. (Eds.). (2009). Explaining institutional change: Ambiguity, agency, and power. Cambridge. Marshall, M. G., & Jaggers, K. (2020). Polity5 project: Political regime characteristics and transitions, 1800–2018. http://www.systemicpeace.org/inscrd ata.html Mickiewicz, T., Stephan, U., & Shami, M. (2021). The consequences of shortterm institutional change in the rule of law for entrepreneurship. Global Strategy Journal, 11(4), 709–739. Moore, B. (1993[1966]). Social origins of dictatorship and democracy: Lord and peasant in the making of the modern world. Beacon Press. Morck, R., & Nakamura, M. (2005). A frog in a well knows nothing of the ocean: A history of corporate ownership in Japan. In R. K. Morck (Ed.), A history of corporate governance around the world: Family business groups to professional managers (pp. 367–466). University of Chicago Press. North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.

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Pemstein, D., Marquardt, K. L., Tzelgov, E., Wang, Y., Medzihorsky, J., Krusell, J., Miri, F., & von Römer, J. (2022). The V-Dem measurement model: Latent variable analysis for cross-national and cross-temporal expert-coded data. VDem Working Paper Series 2022(21). https://www.v-dem.net/media/public ations/Working_Paper_21.pdf Persson, T., & Tabellini, G. (2009). Democratic capital: The nexus of political and economic change. American Economic Journal: Macroeconomics, 1(2), 88– 126. Schumpeter, J. (2021[1942]). Capitalism, socialism, democracy. Wilder Publications. Sen, A. (2009). The idea of justice. Penguin. Williamson, O. E. (2000). The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature, 38(3), 595–613.

CHAPTER 4

Populism and/or Developmentalism: Past and Present Experiences István Benczes

Introduction Originally, populism was born in close association with developmentalism in Latin America (Grinberg, 2016). In fact, the very essence of populism was to deeply engage in the initiation of wide-scale economic and social transformation of those countries which had happened to leave behind

A study prepared in the research project “From developmental states to new protectionism: changing repertoire of state interventions to promote development in an unfolding new world order” (NKFI FK_124573)”. I. Benczes (B) Department of World Economy, Corvinus University of Budapest, Budapest, Hungary e-mail: [email protected] Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_4

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and forget about a large segment of their societies both in the cities and at rural areas and had preserved privileges only for a narrow minority, the ruling elite. Populism, therefore, was not just about the promise of guaranteeing the political rights of the majority but also about narrowing the gap between the rich and the poor. The state was considered as the main actor in supporting the change and elevating the marginalised classes. The need for putting an end to the rule of the minority (the landowner elites) and allowing the majority to get access to a better life in agriculture, in the informal sector, in industrial centres, or even in public offices have made populism a frequently endorsed political agenda in Latin America from time to time. But developmentalism has never been simply a historical relic. It has seen its rebirth even in Latin America in the new millennium under the title of “new developmentalism.” This concept has been understood both as a historical-deductive theory and as a real-world variety of capitalism (Bresser-Pereira, 2015). Quoting Bresser-Pereira himself, who claimed to invent the term itself, new developmentalism “seeks to explain how countries, which are late to the industrial and capitalist revolution, experience economic development and increase the material well-being of their population, as well as why many countries fail to achieve progress or human development, that is, the gradual achievement of political objectives defined by modern societies: national autonomy, social order, economic growth, individual freedom, social justice and protection of the environment” (ibid. 2.). Contemporary populism has become a worldwide phenomenon, expanding well beyond Latin America and reaching out to the advanced part of the world too such as Europe or the US. While populists in these affluent societies did markedly reflected upon the perceived cruelties of market liberalism and economic globalisation in general along with economic and financial shocks in particular and promised to lend a protective arm for the losers of globalisations (see Algan et al., 2017; Autor et al., 2017), developmentalism itself has not seen its reimposition in Western societies. Rather, a combination of authoritarianism, anti-elitism, and nativism was born (Eichengreen, 2018). Yet, most recently, some authors convincingly claim that in the backyard of the European Union, in Central and Eastern Europe (CEE), a new cluster of right-wing populism has emerged, where populists overtly flirt with the very idea of (new) developmentalism (see Bluhm & Varga, 2020; Orenstein & Bugaric, 2020; Wilkin, 2016).

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The paper critically reflects upon such claims and argues for a different interpretation of the perceived change by focusing on the supply side, i.e., what populists actually do once get elected into office. Identifying populism as a political strategy, on the one hand, the article shows what the marriage of developmentalism and populism actually meant in Latin America. On the other hand, it addresses the claim of CEE populists being engaged in developmentalism by comparing the most recent experiences of populists in power to the original elements of the populist developmental package. It is important to note that such comparison between the two regions is nothing new. A most notable example is the monograph-wide work of Greskovits (1998). In that book, Greskovits showed why and how populism did not evolve in CEE in the 1990s. Most importantly, he also demonstrated that in spite of the lack of the consolidation of populism (s) at that time, different structural and institutional factors hampered these economies to develop into either full-fledged market economies or democracies. He was painfully right in (for)seeing the future. Following the introduction, Sect. 4.2 provides a detailed overview of the twentieth-century Latin America and especially the classical version of economic populism. Section 4.3 introduces the political strategy interpretation of populism. Section 4.4 turns to the most recent populist wave In Latin America, the pink tide. Section 4.5 elaborates on developmental statism in CEE critically claiming that this is not more than a rhetorical twist in these countries. Section 4.6 shortly concludes.

Populism and Developmentalism: The Latin American Experience There has always been a real or alleged positive association between developmentalism on the one hand and populism on the other hand. In the social sciences, scholars paid distinctive attention to the experience of Latin America, keeping a critical eye on understanding how populism was (un)able to reinforce the modernisation of these relatively backward economies. In the context of Latin America, however, modernisation referred to a more complex challenge than just technological upgrading or productivity increase. It was more about the need for deep structural changes in and outside of the economy. The term modernisation was meant to refer to the transformation of the society along with the creation and consolidation of democratic institutions and democratisation.

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Economic development starting from the late nineteenth century was based on the export of primary goods that provided opportunity and wealth only for a narrow minority (the elite), leaving the masses without land property and, in turn, in deep poverty. Urbanisation along with the acceleration of import substitution industrialisation from the 1930s turned the new urban populace against the original landowner elite. The social origins of populism can be traced back therefore to the acceleration of industrialisation at the periphery (Hawkins, 2009). Democratisation along with universality of suffrage induced dissent voices to directly target urban population, employees in the manufacturing industry, the public sector, and the informal sector with their rhetoric. These groups were the social basis of populist movements. Democratisation, however, was not accompanied by the emergence of all those institutions in the first half of the twentieth century which could have reconciled the diverging interests of the wealthy landowner elite on the one hand and the urban population on the other hand. In consequence, economic policy was conceived in permanent distributional conflicts amongst classes, sectors, regions, and even ethnicities (Sachs, 1989). Coalitions amongst classes were created to support import substitution industrialisation with the general aim of a comprehensive social and economic reform. As a corollary, countries of Latin America were dramatically divided along the lines of class- and sector-specific conflicts at the time (Kaufman & Stallings, 1991). The Latin American development trajectory was however different from successful development stories around the world. In contrast with Europe, development did not mean the consolidation of a stable and capable state with a more or less generous welfare state in the region which, through its distributional and compensation mechanisms and schemes, could have provided shelter for employees working in manufacturing industries. In fact, there was a persistent shortage of adequate financing to establish a well-functioning welfare state. Populist governments might have a positive vision on the elevation of the poor, but they were unable to impose taxes on the landowner elite. Therefore, incumbents turned towards import substitution industrialisation in order to shield urban employees from the changes in international economy (Rodrik, 2018a). Dissimilarly to East Asia, the elite successfully defended its positions in Latin America, therefore, universal suffrage was not accompanied by the distribution of land amongst fellow citizens in the country. In consequence, the emerging political economy of Latin America became rather unique: the otherwise

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heterogenous urban population did not have to compete with and fight against small farmers and the petty bourgeoise producing for export. The classical version of populism managed to construct the “alliances linking the working class to the industrial bourgeoisie and minimized interclass antagonisms through the propagation of a broadly nationalist ideology” (Cardoso & Helwege, 1991: 46).1 Populist incumbents took a highly interventionist position declaring the protection of working-class people and their industries. Policies were designed so that this ultimate aim could be attained. Executives were not afraid of nationalising property or establishing state-owned enterprises or adopting caps on prices and centrally administering access to credit. Not only the state sector increased dramatically in size but also budget deficit and public debt ran away making these countries highly exposed to external financing. Economic development was hoped to be achieved by restricting foreign trade in manufacturing and by endorsing import substitution industrialisation on a massive scale. The idea was to dynamically change the basis of comparative advantage, making these economies competitive enough in the manufacturing sector too. Scholars in the heterodox camp willingly helped out politicians to provide the theoretical underpinnings of the regime by arguing for instance that the terms of trade deteriorated and worked against Latin America, therefore, countries had to consciously revert such negative tendencies (Prebisch, 1962).2 However, ISI failed as infant industries never grew up and never became the engine

1 The classical era of populism thrived in Latin America between the 1930s and the 1960/1970s, started by Cardenas in Mexico (1934–1940), followed by Vargas (1930– 1945) in Brazil and especially Peron in Argentina (1946–1949) and Velasco (1968–1975) in Peru. 2 The literature on dependency was burgeoning that time. Reflecting upon the division of labour between developed and developing countries in the nineteenth century, Bairoch (1998: 11) argued that “the industrialisation of the former led to the de-industrialisation of the latter.” From the 1950s onwards, structuralist explanations for the underdeveloped status of Latin America was at its peak, a typical claim being that “North and South are in a structural relationship one to another; that is that both areas are part of a structure that determines the pattern of relationships that emerges” (Brown, 2001: 197). For the world-systems theorists, capitalism was “a historical social system” Wallerstein (1983: 13). Accordingly, underdevelopment (i.e., a persistent lack of economic growth and development along with impoverishment and even malnutrition) was not the initial stage of a historical and evolutionary uni-linear development process (as predicted by Rostow, 1960), but a consequence of colonialism and imperialism.

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of an all-encompassing modernisation of the economy and society. In fact, protection fuelled corruption and cronyism. Exchange rates became soon overvalued, depleting international reserves and accelerating inflation while strongly increasing the exposure of these economies to foreign financing. Manufacturing was not able to become the source of competitive advantage for Latin American countries; even worse, the sector was not capable of absorbing the labour force leaving the urban informal sector to flourish and poverty in rural areas to survive. Social changes did occur but were not able to arrive at a full transformation of the society along with eradicating massive levels of poverty. The populist turn in Latin America was supposed to modernise the subcontinent by endorsing a double movement of advancing industrialisation and consolidating democratic institutions. The dissatisfaction of the former elite and the middle class swept away these typically leftist governments and saw the emergence of so-called bureaucratic-authoritarian regimes instead (O’Donnell, 1973). The military takeovers from the midsixties onwards (see especially Brazil in 1964 and Argentina in 1966), implied the brutal curtailment of democratic rights, yet these military regimes did not give up on consolidating their economies and making them attractive enough for foreign capital providers. Industrialisation under military leadership, therefore, continued but in a highly repressed political environment, where elections were suspended or controlled, and labour organisations were dissolved. Austerity was adopted along with a drastic wage control on labourers. The cost of stabilisation was pushed down the throats of the urban populace mercilessly, significantly eroding social justice and income equality (Collier, 1991). But populism did not stop to exist either. It came back in different forms in Latin America later on. It was mainly the Peruvian case under Alan Garcia (1985–1989) which prompted Dornbusch and Edwards (1990) to reconceptualise the phenomenon in a way to (over)emphasise the economic dimension of populism, hence the name “macroeconomic populism.” The authors argued that in spite of the high degree of heterogeneity of political regimes and their ideologies, the adopted policies showed similarities to a large extent. Accordingly, “economic populism is an approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive nonmarket policies” (Dornbusch & Edwards, 1991: 10). The phenomenon was labelled as paradigm, economic approach, perspective, macroeconomic

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programme, etc., by Dornbusch and Edwards (1990, 1991), using these expressions as synonyms. But economic populism was evidently not exclusive to Peru. Besides Garcia, the performance of Chile, Nicaragua, Mexico, Argentine, and Brazil were analysed in a detailed way. By carefully analysing these episodes, Dornsbusch and Edwards (1991: 7) claimed that “Latin America’s economic history seems to repeat itself endlessly, following irregular and dramatic cycles. This sense of circularity is particularly striking with respect to the use of populist macroeconomic policies for distributive purposes.” The so-called “populist policy cycle” was a common feature of these countries (Dovis et al., 2016; Sachs, 1989). Both Sachs (1989) and Dornbusch and Edwards (1990) tried to fit a model on Latin American macroeconomic management by identifying four phases of a policy cycle.3 In the first phase economic growth along with real wages increased, employment was on the rise too; no bottlenecks in the economy seemed to get manifested. Inflation was kept under tight control and import was even endorsed. Demand could be boosted without hurting fiscal sustainability of the macroeconomy. In the second phase, though, the inner contradictions of the paradigm came into sight too. Bottlenecks became more perceptible and enduring due to strong acceleration in aggregate demand. The position of the general government started to worsen as incumbents insisted on keeping wages stable. International reserves were used up quickly by intense demand for import, while inflation started to accelerate, and, in turn, more and more intense demand for administrative regulation emerged. Prices needed to be aligned from time to time, and the exchange rate was devaluated as well. The third phase witnessed the come-about of a shortage economy, inflation increased without limits, the dramatic imbalances in the current account was accompanied by capital flight which culminated in partial or total demonetisation of the economy.4 One of the central elements of the welfare provisions, real wages started to decline as well since the general government deficit turned into non-financeable and the national currency got devaluated on 3 Yet, as opposed to Dornbusch and Edwards (1990), Sachs (1989) did not try to develop a new definition or a new paradigm on economic populism; he simply portrayed it as a mode of macroeconomic (mis)management. 4 The combination of a fixed exchange rate regime and the massive wage increases triggered substantial appreciation of the real exchange rate both in phases 1 and 2. In turn, export declined and the access to hard currency became problematic too.

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a frequent basis. In the last stage, economic collapse became inevitable as neither foreign credit nor international reserves were able to finance expansionist policies any further. The current account crisis culminated in a full-fledged economic crisis eventually often followed by violent riots and coups. Stabilisation was undertaken by a new government often inviting international financial institutions to help out the country in trouble. It is this dramatic consequence that inspired Rodrik (2018a, 2018b: 196), for instance, to define populism as those “irresponsible, unsustainable policies that often end in disaster and hurt most the ordinary people they purportedly aim to help.” But if this was really the case and populist developmentalism always culminated in chaos and collapse hurting especially the poor, why people did vote these forces into power over and over again? For Dornbsuch and Edwards (1991: 12), Latin American nations seemed to be lacking of the capacity and willingness to learn from past mistakes. Every time a new populist government came into power, it did not miss to declare the uniqueness of its situation and promised to guarantee a shelter from the same dreadful results. In doing so, some of these new populists flirted even with creating socialism as the solution to the many decade-long problem of populist cycles.5 On the other hand, Sachs (1989) combined his economic explanation with other socio-political factors as well that were supposed to shape the development path of Latin America and argued accordingly that it was the highly uneven income distribution which reproduced economic populism time and again in the region. Latin American economies were simply not able to leave behind the trap of deep social and economic cleavages. The “high income inequality in Latin America contributes to intense political pressures for macroeconomic policies to raise the incomes of lower income groups, which in turn contributes to bad policy choices and weak economic performance” (Sachs, 1989: 7). In a more formal discussion, Acemoglu et al. (2013) 5 Drake (1982) warned that such a vision on socialism was the case only in Chile under Allende, where seemingly Keynesian recipes went well beyond the intent of making the capitalist system to function better. Drake emphasises that Allande’s government should not perhaps be labelled as populist as it was rather socialist-communist with a MarxistLeninist ideology showing no willingness for compromise with the wealthy elite. The latest wave of Latin American populism does show similar tendencies, especially in Venezuela under the late Chavez and Maduro (de la Torre 2017).

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argued instead that Latin American populists tended to define their positions so that policies were to the left of the median voter. The aim of populists was to signal their firm detachment from the corrupt elite. Voters preferred the punishment of corruption and especially the old establishment itself even to unreasonable policies.

Populism as a (Purely) Political Strategy Until the early 1990s, abrupt shifts in the economic doctrine came together with (or actually after) a military coup in Latin America. Austerity along with marketisation was paired with an overt attack on democratic institutions and civil rights. From the late 1980s onwards, however, political repression proved no longer to be a pre-condition for austerity. A number of populist executives subscribed to the neoliberal programme points of the Washington consensus by engaging with relatively disciplined public finances, by initiating trade and financial liberalisation, by propagating deregulation, and by welcoming the inflow of FDI. Private property enjoyed priority to state ownership. Latin American governments broke (away) with the fatalist character of their earlier macroeconomic policies without, however, abandoning the populist character of their political leadership (Roberts, 1995). The pro-market attitude combined with strict monetary and fiscal policy adopted by Carlos Menem in Argentine (1989–1990), Fernando Collor in Brazil (1990– 1992), or Alberto Fujimori in Peru (1990–2000) put an end to the populist macroeconomic cycles in the region. Populism seemed to get rid of both its economic context (late development and modernisation) and its economic substance (economic populism). “A purely political concept of populism opens up the possibility of finding populism and economic liberalism compatible” instead (Weyland, 1996: 6). The unexpected affinities between (most) likely opposites, i.e., neoliberalism and (neo)populism, were based upon the sharing of three basic features: (1) the source of social support (i.e., the poor masses of the unorganised informal sector and their revolt against both the elite and the organised civil sphere); (2) a top–bottom approach as the main strategy; and (3) the distribution of costs and benefits (i.e., the burden of reforms was placed on organised communities).

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Weyland (1996) blamed the Zeitgeist for the earlier (mis)categorisation of populism as having been mainly an economic phenomenon. The classical phase of populism coincided with the hegemony of the modernisation and dependency theories in Latin America, which explained macroeconomic policies (and populism) as the consequence of the prevailing social and economic structures. The idea of late development through import substitution industrialisation along with the demand for eliminating income inequality brought the different political regimes onto a common denominator in the region and made the latter (i.e., the political system as a variable) apparently irrelevant in explaining populism. Weyland (2001) also criticised the concept of economic populism for its seemingly irresponsible character. Yet, as he argued, it could easily be the result of either design or political-institutional constraints. Expansionary fiscal policy might be a choice of policy-makers but it might be the consequence of the inability of the country to collect taxes. To him, a political definition of populism was, therefore, not just preferable but more plausible as well. In consequence, Weyland gave up on assuming that politics was determined by economic (and ownership) structures. Instead, economic policy was understood as only an instrument in the hands of populist leaders, aspiring for taking office at elections. While modernisation theory in general and inward-looking economic strategy in particular became highly discredited amongst Latin American economies by the early 1990s, the demand for personalistic leadership remained almost intact. “Thus, this reconceptualization is most attuned to the opportunism of populist leaders and their weak commitment to substantive policies, ideas, and ideologies” (Weyland, 2001: 11). With such a claim, Weyland deliberately criticised or even pre-empted the ideational definition of populism developed by Mudde (2004). For the latter, populism is a thin-centred ideology that cannot be equated with opportunistic behaviour (or policies) in order to simply please the voters. Weyland, on the other hand, argued that “only where personalistic leaders put vote maximisation ahead of ideological purity can we speak of populism” (Weyland, 2017: 51). By combining pragmatism and opportunism, a populist leader prefers to avoid being identified with a concrete world view or ideology. S/he can change her/his political stance and views discretionally and without reservations. By relying on rational calculus, s/he is ready to use the combination of different worldviews with the hope of attaining the highest payoff

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in terms of popularity and votes (Weyland, 2017).6 Charisma is not a necessary condition of this specific articulation of populism, although it can evidently strengthen the direct and personalistic relationship between the leader and the masses. The idea of personalistic leadership popped up already in the work of Drake (1982) who defined populism—amongst other things—with its paternalistic and personalistic leadership character.7 The importance of leadership was also emphasised by Collier and Collier (1991), but, for them, political leadership came hand in hand with nationalist ideology and with a concrete political programme. As opposed to these approaches, Weyland (2001: 14) defined populism “as a political strategy through which a personalistic leader seeks or exercises government power based on direct, unmediated, uninstitutionalised support from large numbers of mostly unorganised followers.” That is, populism as a political strategy has a single focus on its horizon: to grasp and maintain power. Similarly to other approaches to populism in social sciences, the political-strategic understanding of populism emphasises its anti-elite feature along with its eagerness for ignoring and turning down special interest. Just like the ideational approach, the political strategy explanation takes the conflictual or even antagonistic relationship between the populist leader on the one hand and certain actors and groups such as parties or elites on the other hand as given. Personalistic leadership is, therefore, about gaining autonomy from and dominance over others—while these “others” are often identified as adversaries to the followers of the leader. Based on the Latin American experience, Weyland (2001) identified two major interest groups which had actual (or potential) conflicts with the masses: the business elite and the military elite. Both groups possessed the capacity and ability to convert their power into political influence and dominance. In order to bypass the establishment, the personalistic leader tries to reach out to his/her followers directly by neglecting institutionalised channels and mechanisms. In fact, personalistic leadership considers established political institutions, including parties, as mere constraints against which the populist leader has to stand up and fight. All sorts of organised 6 There are two different forms of personalistic leadership: in case of ideocracy, ideology is a determining factor, whereas in case of populism, personalistic leadership is interpreted flexibly and in an opportunistic way (Weyland, 2001). 7 See also Drake (2012: 71).

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forces and institutions can thus be potential targets of the populist leader. This strategy underlines the importance of constantly keeping followers in motion, especially in the form of public referenda, mass movements and protests, etc. Furthermore, the presence of the leader in mass media, defining him/herself as the saviour of the nation, is also a salient feature. In stark contrast with the ideological interpretation of populism of Mudde (2004), the political strategy approach not just acknowledges the heterogeneity of the people (their interests and motivations), but it explicitly claims that it is the (populist) leader himself who can effectively integrate the diverging interests of his fellow citizens and can embody popular will. “This conceptualization focuses not on what populists say, but on what they actually do, especially how they pursue and sustain political power” (Weyland, 2017: 50). Accordingly, one of the fallacies of the ideology (and the discursive) approach is that populist leaders do in fact use the people as a reference in their discourse, but once in government, they immediately try to monopolise power. If the ultimate aim of populists is only to get voted into office, modernisation and especially developmentalism might be high on the agenda of a populist incumbent, but they definitely do not constitute indispensable parts of the populist programme—as opposed to the logic of Dornsbusch and Edwards (1991). If a populist feels that the economic strategy of developmentalism meets indeed the expectations of the people, he would react so and would campaign with the slogans of social mobilisation and economic and social transformation and would possibly embark on policies that endorse development. Developmentalism is, however, not a concrete mission of populists; it is, instead, just a means that can be dropped at any time if it does not seem to serve the interest of the populist. Although Weyland vehemently criticised the concept of economic populism (see especially Weyland, 1996, 2017), this is the point where it is worth noting that economic populism, in its original form, was also identified as a political strategy in the political economy literature of populism. Kaufman and Stallings (1991: 16) underlined, for instance, that populism was after all a unique mixture of economic policies that served purely political objectives, i.e., vote maximisation. In concrete terms, economic populism was described as a strategy that helped the mobilisation of urban labour and the lower middle classes, it also conveyed the support of domestic petty bourgeoise producing exclusively for the domestic market, and it promoted the isolation of the enemies of the former groups, especially the oligarchs and the business elite.

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The Resurgence of Populism and Developmentalism in Latin America: The Pink Tide Neoliberal populism might have implied a detachment of both economic context and economic substance from populism, yet it was not able to fix the biggest challenge Latin America had been facing for the whole century: the enormous gap between the rich and the poor and the unequal income distribution. No surprise that the most recent wave of populism has got a left-wing character in the region once again. Latin America was portrayed as the poster boy of market reforms mastering the points of the Washington consensus in the 1990s (Williamson, 1994), yet, reforms touched upon the surface only without digging down to the roots of the deep structural problems of the subcontinent (Edwards, 2010). Modernisation of the economy was half-done only, labour productivity did not improve, while price competitiveness— due to the fixed exchange rate regimes—deteriorated. The judiciary system was not effective enough, therefore, the security of property rights was inappropriate, contract enforcement was vulnerable, and the state-owned sector remained oversized. More importantly, the benefits of economic growth of the 1990s did not trickle down to the poor this time either, distribution of income did not become fairer. The year 1998 saw Latin America to face yet another financial crisis which, in turn, paved the way for a new wave of populism, this time coming again from the left. Populist leaders pitted the people against multinationals, financial institutions, and especially the IMF. Economic globalisation in general and multilateralism in particular have become the targets to blame in their rhetoric. Incumbents initiated tighter market regulation, even nationalisation, and imposed extra taxes on foreign corporations. Yet, even Edwards, being one of the godfathers of the term “economic populism,” acknowledged that while the pink tide was evidently born with a strong left-wing, egalitarian character, it did not show the immediate sign of totally unrealistic and misconceived policies, not mentioning economic collapse or chaos (Edwards, 2010). With a benefit of hindsight, it is a well-known fact that Venezuela did finally collapse bringing back the memories of the classical economic populism but, at least in its first wave, thanks to petrodollars, it managed to avoid the stigma of irresponsibility. And more importantly, other experiments did not necessarily follow suit such as Rafael Correa (2005–2015) in Ecuador, Evo Morales (2006– 2018) in Bolivia, Lula da Silva (2003–2011) in Brazil, or the Kirchners (2003–2015) in Argentina (Edwards, 2019).

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In fact, the new wave of populism in Latin America proved to be dissimilar to its classical predecessor in many fronts. Most importantly, this time incumbents moved away from a purely macroeconomic agenda and engaged instead in a more nuanced “microeconomic populism, with a focus on blanket regulations, deep protectionist policies, large expansions of the public sector, and mandated minimum wage increases to redistribute income” (Edwards, 2019: 3). Curing dramatic income inequality, populists did not rely on measures that could have caused runaway inflation, instead, they imposed harsh control on the economy. Controlling exchange, nationalising foreign companies, violating contracts with foreigners, and increasing import taxes were high on the agenda of these new populists. Minimum wages were increased massively in state-owned enterprises while the prices of basic staples and energy prices were kept at bay thereby protecting the poor and the lower middle-class people (Edwards, 2019). These changes were carried out by strong executives who often gained their authority from a new constitution, endorsed by the people in public referenda. The pink tide might have not brought back the classical paradigm of economic populism (except for the evident case of Venezuela), yet, it vehemently cracked down on institutions of liberal democracy, attacked on the checks and balances of their political regimes, resulting in wide-scale de-institutionalisation with the sole aim of strengthening the personal dominance of the leader. Populism as a political strategy has, in fact, a highly ambivalent if not hostile relationship with institutions, making these countries highly vulnerable to illiberalism. Competitive authoritarian regimes emerged, where electoral competition did take place but was rather unfair (Levitsky & Way, 2010). Competitive authoritarianism thrived in all countries that witnessed the pink tide from Venezuela (Hugo Chavez, Maduro), to Bolivia (Evo Morales) and Ecuador (Rafarel Correia), joined by Honduras (Manuel Zelaya) and Nicaragua (Daniel Ortegara). Populism being a political strategy is, eventually, about grasping power and making authoritative decisions in power (Weyland, 2017: 55). If the political strategy approach is taken at its face value, these populists could relatively easily transform their countries into competitive authoritarianism. Levitsky and Loxton (2013) showed that newly elected incumbents had negative feelings towards democracy and democratic institutions right from the very beginning of their takeovers since these institutions represented the old establishment in their eyes. The incoming “outsiders” easily mobilised

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people against democratic institutions. Popular vote has become a typical means to weaken the liberal settings of relatively young and immature democracies. Populist leaders were keen on cementing their positions as executives while dissolving checks and balances. Rules and laws were changed deliberately and used for their own personal purposes. The logic of populism as a political strategy dictates “populist politicians to widen their powers and discretion. Because these leaders sustain their influence via personal appeals rather than intermediary organizations, they see any institutions outside their control as obstacles to be bypassed or overcome… They undermine institutional protections against the abuse of power and seek political hegemony… Once these populists of the left established predominance, they used their unfettered control over all branches of government to limit debate, strike at opponents, and drastically tilt the electoral playing field. These manoeuvres dismantled democratic accountability and eliminated safeguards against arbitrariness” (Weyland, 2013: 21).

Inclusive Versus Exclusive Populism: The Case of CEE From a historical perspective, Latin American populism has been associated with left-wing ideologies, even with socialism, for most of the times. Yet, it was able to keep its marriage with neoliberalism alive too for a while in the 1990s. In advanced economies such as the US and the member states of the European Union, with a few exceptions such as Greece, or Spain, populism has mainly come together with right-wing ideologies. It was exactly the right-wing experience of North American and European countries which prompted Eichengreen (2018) to define populism as a movement of the combination of anti-elitism, authoritarianism, and especially nativism. As it has been shown above, anti-elitism and even authoritarianism were both salient features of the Latin American populist experience as well. What distinguishes evidently the European (right-wing) cases from their Latin American counterpart is, therefore, the third constitutive element of populism, i.e., nativism. Populism has a chameleonic character (Taggart, 2000), and it can arrive in many different concrete forms. Based upon the distinctive characteristics of the Latin American and European

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experiences, Mudde and Rovira Kaltwasser (2013) introduced the distinction between inclusive versus exclusive populism.8 As the ultimate cause of all frustration and grievances has been the highly unequal distribution of income (Acemoglu et al., 2013; Sachs, 1989), the Latin American inclusive regimes tended to rely on redistributive measures targeting the poor, and especially the indigenous populace. Elevating the living conditions of marginalised groups of the society implied a wide range of policy actions from subsidising food and housing to the expansion of health care and education and old age pension. All these measures were about to make the earlier, alienating system more accessible for the “true people.” On the other hand, European right-wing populism has always had a highly exclusive character. Mudde and Rovira Kaltwasser (2013) claimed that these affluent societies ran relatively generous welfare states which successfully prevented their people from becoming hopelessly marginalised. In consequence, populists in Europe do not necessarily offer (or should promise) better living conditions or higher wages. Instead, they sell protection against the challenges posed by the outer world and its representatives, the immigrants. In fact, offering protection has become a defining feature of (right-wing) populism even in the economics-centred literature—see Guiso et al. (2017). This claim shows a close resemblance to one of the most popular claims in economics literature, the losers of globalisation thesis (Dippel et al., 2015; Rodrik, 2018a, 2018b). Globalisation is identified as a potential threat to the well-being of citizens which undermines the personal well-being of those who are more exposed to globalisation, that is, people working in the manufacturing sector (see especially Algan et al., 2017; Autor et al., 2017). Economic anxiety is then translated into the rise of popularity of populist movements. However, as Mudde and Rovira Kaltwasser (2018) demonstrated it, the losers of globalization thesis are ultimately a combination of the economic anxiety explanations on the one hand and the cultural backlash approach (such as Inglehart & Norris, 2016) on the other hand, by creating a culturally defined framing for an economic phenomenon. Crisis-driven economic insecurity can in fact be a substantial driver of political distrust in general and populism in particular. But the exclusiveness of populism implies more than this. According to right-wing populists, immigrants can largely endanger the welfare positions of the 8 Based on Filc (2010), Mudde and Rovira Kaltwasser (2013) distinguishes three dimensions of exclusiveness/inclusiveness: material, political, and symbolic.

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domestic populace (especially those who have also been the losers of economic globalisation). The end result is welfare chauvinism which antagonises these two groups (domestic population versus immigrants or any other disfavoured group in a society) against each other. From 1930 onwards, the inclusive Latin American populist regimes often combined their readiness to help the poor with large-scale reforms in order to change the structural causes of the antagonistic relationship between the people and the old and corrupt elite. Inclusivity meant much more than welfare policies, it was more about structural transformation and modernisation of the economy (and the society). In fact, developmentalism was always an integrated element of the Latin American experience in the last one hundred years or so. No such character can, however, be detected in the (Western) European cases, simply because there was no need for embarking on such wide-scale structural reforms and development policies. At least, not in rich Western European countries. The situation, however, has been rather different in most of the new democracies of Central and Eastern Europe. These economies might have been more successful in terms of wealth accumulation and income distribution than their Latin American peers following the systemic change from socialism to capitalism, yet, these countries have naturally faced a laggard position vis-á-vis their Western European counterparts. No surprise that most cluster analyses identified a more or less homogenous CEE group within the EU (see especially Farkas, 2011). In CEE, therefore, populism might have emerged as a critical response to the disillusionment of the long and costly process of economic transformation and integration. This process has been engineered by Western advisers along with neoliberal prescriptions, making these countries highly dependent on external financing, especially in the form of foreign direct investment (Nölke & Vliegenhart, 2009; Bohle & Greskovits, 2012; Sass, 2017). Differences did exist, but these countries adopted economic policies that were conceived, by and large, in the spirit of the programme points of the Washington consensus. EU accession (and then membership) made these economies highly reliant on foreign direct investments. The very success of their integration process was conditional upon their capacity to absorb such investments (Medve-Bálint, 2014). The global financial crisis evidently demonstrated how vulnerable these models were to changes in the conditions of the

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“outer” world. Following the relatively long era of neoliberal dominance, the incoming populists started to build back a strong (or even centralised) state which was hoped to manage to exert solid control over their economies, including both the financial sector and the real economy. In the scholarly literature, some even went as far as arguing that the exclusivist characteristic of these CEE populist countries, especially nativism and welfare chauvinism, has been translated into a new, alternative development paradigm. Appel and Orenstein (2018: 166) called it “a nationalist-populist strategy of economic development” which still relied on neoliberal policies to some extent but placed heavy emphasis on (neo)developmental statism. Studying Russia, Poland, and Hungary, Bluhm and Varga (2020) argued that these countries have adopted a conservative developmental statism, bringing together economic nationalism and conservatism. For Orenstein and Bugaric (2020), Hungary, Poland, and Serbia served as examples for finding the programmatic core of these countries in workforce activation, natalism, and sovereignty. Wilkin (2016) found the analogies between Hungary on the one hand and the East Asian countries on the other hand so compelling that he labelled even the former as a developmental state—a narrative widely echoed by Hungarian policy-makers, too (see György, 2017; Matolcsy, 2020): Successful developmental state experiences induced Hungarian PM Viktor Orbán to argue for the importance of “understanding those systems which are not Western, not liberal, nor liberal democracies or possibly even not democracies at all but which have been, nevertheless, successful…” (Orbán, 2014).9 These authors also underline the relevance and importance of the adjective of CEE developmental statism, i.e., conservative. The term has different parallel meanings in their vocabulary. First, it is supposed to refer to welfarism. Similarly to their Western counterparts, the main objective of welfare policies in CEE is to shelter the population from the negative consequences of external economic shocks (Appel & Orenstein, 2018). Second, the ideal developmental policy package might not only underpin

9 According to Bresser-Pereira (2015), the term “new developmentalism” was his own invention back in 2003. The term was supposed to refer to both a historical-deductive theory and an existing form of capitalism. As a theory, it was deducted from the successful experiences of East Asian economies. As a real-case form of capitalism, it can have different forms, including both authoritarian and democratic versions.

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national interest but it can also serve the people by undoing the devastating and unjust legacy of the neoliberal and reformist predecessors, especially the privatisation which has in fact become a synonym for theft (see Bluhm & Varga, 2020). Third, it also refers to the need to defend the traditional values of family (Orenstein & Bugaric, 2020). New or conservative developmental statism has been, therefore, portrayed as a relevant alternative to the previous neoliberal modernisation paradigm with the definite aim of regaining national sovereignty and uniting domestic people along certain traditional values and norms.10 If, however, the CEE populist experience is being contrasted with the very idea and meaning of developmental states, the comparison can reveal serious shortcomings on their side. Generally speaking, developmental states have a long-term perspective to serve national interest and can actively control the economy especially by forming often-times selective ocs–Ricz, 2021). The state industrial policies (Fainshmidt et al., 2018; Ger˝ and especially its executive is strong and has the adequate capacity to exert tight control over the economy. The elite is backed by a relatively autonomous and well-trained bureaucracy (see Amsden, 1989; Wade, 1990). More specifically, in a developmental state, a capable government ministry is dedicated to the planning of the economy. Its plans and policies are not “disrupted by either corporate-class or working-class short-term or narrow interests” (Carney & Witt, 2014: 548–549). That is, developmentalism, by definition, must have a bold long-term vision of development (and industrialisation in particular), guided by different sorts of agencies which coordinate both industrial policies and finances keeping a critical eye on international competitiveness (Naczyk, 2021). While national interest is strongly emphasised in both cases, the CEE experience is different from the general account of developmental statism as its main defining characteristic is nativism. As such, it has nothing to do with efficiency considerations or competitiveness (Benczes & Ricz, 2020). In the field of the economy, nativism has been reproduced as economic nationalism, where the economy has a second ranking importance only as its main purpose is to protect national identity (Guiso et al., 2017).

10 Orenstein and Bugaric (2020) underlined that the turn away from the neoliberal agenda implied also a shift in interest towards Eastern authoritarian states with the explicit aim of changeling external sources from these illiberal economies to Hungary and Poland.

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In CEE, nativism strongly trumps over developmentalism, these two are not valued the same by populists. State capitalism is, therefore, can be a much better fit than developmentalism or developmental statism to conceptualise populist regimes in CEE. State capitalism subordinates the market and its actors to the state which plays the lead role in the economy, making the latter a function of political will only (Bremmer, 2009). Or in the words of Ricz (2021:1261): state capitalism implies “a robust, rising and complex role of the state in the economy with the ultimate aim to consolidate political power of the ruling elite. In this interpretation state capitalism goes beyond state ownership, and shall be regarded as a distinct type of politico-economic organizational form, in which the state aims to take the leading role in the economic and political sphere, while maintaining (at least not fully eliminating) basic tenets of capitalism, such as a certain degree of market coordination and private property.” In consequence, development policy might indeed significantly change in a state capitalist regime, but such alterations do not necessarily imply better resource allocation or accelerated growth. State capitalism just like developmental statism can be a nationalist and conservative project too. In fact, Hungary and Poland can be portrayed as “a conservative-nationalist project using a populist discourse, stripping away checks and balances, concentrating power to exert partisan control over public institutions” (Sata & Karolewski, 2020: 206). But this is not only liberal democratic institutions that face decay under populist rule in a state capitalist regime; democratic backsliding is often-times complemented by a tendency for economic backsliding too (Sallai & Schnyder, 2021). Populism is typically short-sighted (Benczes, 2022; Guiso et al., 2017) and populists tend to identify politics as the manifestation of the general will of their societies, whatever the costs are (Mudde & Rovira Kaltwasser, 2018). The political strategy approach to populism makes this narrative rather plausible as populists wish to maximise votes and their power rather than economic growth or national income.

Conclusion A hundred years ago or so, the emergence of populism in Latin America, a subcontinent with wide gaps between the elite and the rest of the society, was strongly and undeniably associated with developmentalism. Populists aimed at elevating the living conditions of the poor by pushing these countries ahead of the development ladder and by initiating wide-scale

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modernisation of the economies via import substitution industrialisation. In stark contrast to these experiences at the periphery, the most recent trend of populist takeovers in CEE is not about the rise of a new alternative (economic) paradigm to neoliberalism and this is hardly about developmentalism either (see for instance Scheiring, 2020). The applied heterodox strategy with strong inclination to neoliberalism as well, has not implied a decisive shift to an alternative development trajectory in the region, therefore, it does not deserve to be called developmental state. In fact, the regional growth regime based on Western FDI has remained mostly intact (Bohle & Regan, 2021). What one can find therefore is a “half-turn in development policy and ‘u-turn’ in development rhetoric” (Bohle & Greskovits, 2019: 1070). There has been indeed a strong demand for economic nationalism and financial sovereignty in CEE countries under the populist rule, yet, all their actions have been massively embedded in the Western-type integrationist growth model. Anything which might have an “Eastern” flavour is more about rent-seeking and clientelism (Szanyi, 2019; Voszka, 2018, see also Szanyi and Sedighi this volume). These right-wing populist regimes are better conceptualised as conservative nationalists than conservative developmentalists (Bohle, 2019). Instead of post-neoliberalism, populist incumbents tend to nurture a regime of national-neoliberalism, where “neoliberal orthodoxy [has been] embedded into a protective cocoon of orthodox and unorthodox economic policy instruments and institutions” (Ban et al., 2021).

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CHAPTER 5

Surviving and Competing Successfully? Internationalisation of State-Owned Companies in Central and Eastern Europe Magdolna Sass

Introduction Through state-owned enterprises (SOEs), governments can directly intervene in the economy on economic and non-economic grounds. Such companies were expected to disappear after the socialist economies of Central and Eastern Europe started embracing capitalism through massive privatisation. However, certain SOEs have survived and have been playing

Research for this chapter was supported by the Hungarian research fund NKFIH (no. 132442). The chapter is an updated and extended version of a paper written for a book in honour of Satoshi Mizobata. M. Sass (B) Institute of World Economics, Center for Economic and Regional Studies, Budapest, Hungary e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_5

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an increasingly important role in the national economies—and some of them even internationally. In many countries, their role has even increased over time, especially after the 2008–9 financial crisis, in order to alleviate the negative effects of the crisis (Götz & Jankowska, 2016; PWC, 2015; Voszka, 2018). During the COVID pandemic-related crisis, governments consider, as a crisis-handling tool, to take equity stakes in distressed firms (OECD, 2020) and thus further increase their involvement in the economies. Furthermore, many SOEs are directly or indirectly involved in the fight against COVID, provide jobs in distressed times, bring relief to the population, support economies in distress (Manuilova et al., 2022), provide essential services, or state-owned banks provide loans to firms getting in problematic situations (Gaspar et al., 2020). These all have and will lead to a further increase in the role of SOEs in the economies. SOEs are among the most important, nationally owned leading firms in the Visegrad economies, some of them can be considered as being “national champions”, helped in many ways by the state. The present chapter takes stock through showing their main characteristics, including the process of their internationalisation. Relying on the approaches in the literature, we present their hybrid nature. We also show how their characteristics and specificities of the internationalisation process put them in between the groups of developed country SOEs and emerging SOEs. The chapter is organised as follows. First, a short review of the literature is provided to highlight certain research results, important from the point of view of the analysis. This section is followed by a brief look at the definitions of SOEs and state-owned multinationals applied in the literature. The next section describes briefly the SOEs of the Visegrad countries, then SOEs among Visegrad multinationals will be analysed and the results discussed. The last section concludes.

Review of the Literature The analysis of the internationalisation of SOEs has been relatively neglected in the economics and international business literature (Bruton et al., 2015; Cuervo-Cazzura et al., 2014; UNCTAD, 2017; Rygh, 2019), in spite of their importance in certain economies and increasing importance over time. That is true in spite of the fact that there is an increase in the internationalisation of SOEs from emerging economies (Cuervo-Cazzura et al., 2014; OECD, 2017; Cuervo-Cazurra & Li, 2021) and an increase in the importance of state-owned enterprises after

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the 2008–9 and during the present COVID- and war-related crises—in line with growing state involvement in handling the crises consequences. However, this increased importance of SOEs is usually not going together with their increased internationalisation (Götz & Jankowska, 2016) as they try to alleviate the negative consequences of the crisis at home. In Central and Eastern European former transition economies, in spite of the increasing role of the state after the financial and pandemic-related crisis and the inherited from the planned economy stock of minority or majority state-owned companies, the topic is even less explored. (See as exceptions for Poland Baltowski and Kozarzewski (2016) and Kozarzewski (2021), for Hungary Szanyi (2014), and for a Hungarian state-owned company Antalóczy and Sass (2018). Voszka (2018) is another exception, who underlines the specialties of the Hungarian case in terms of the embeddedness of Hungarian nationalisation in a complex system of political and economic changes as opposed to other countries, where nationalisation is rather a short-term crisis management tool. Szarzec et al. (2022) analysed the Polish case, showing the political state capture, whereby changes of managers and supervisory board members in SOEs are more frequent than in private companies and are related to political elections. However, in spite of the strong political factors shaping SOEs, here we will concentrate on the economic factors.) SOEs were expected to disappear after the socialist economies of Central and Eastern Europe and Asia started to change their system to a capitalist one and to privatise massively. However, certain SOEs have survived, others were established and have been playing a bigger and bigger role in the national economies and internationally. One reason for this is that they evolved into a hybrid organisation (Bruton et al., 2015; Diefenbach & Sillence, 2011), which is different to a large extent from their predecessors in the eighties to the beginning of the nineties. One important distinguishing feature historically is that in today’s SOEs, the state has much smaller and private entities much larger ownership shares than previously. Furthermore, a new mixture of SOEs has emerged: in certain cases, even majority state ownership goes together with smaller state control and a high level of independence in the operation for a large number of state-owned firms. On the other hand, low or minority state ownership can go hand-in-hand with high government control in other cases (Bruton et al., 2015; for Poland Baltowski & Kozarzewski, 2016, or Szarzec et al., 2022). Thus, while historically the literature handled SOEs as a uniform group, most recent developments induce scholars to

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approach these companies in a more nuanced way, using a framework, where the share of government and private ownership as well as the extent of government and private control are all taken into account (Bruton et al., 2015; Cuervo-Cazzura et al., 2014; Inoue et al., 2013). At the same time, the numerical analyses of state-owned companies and the definition of state control has become very problematic, as we will see in the next section. In the analysed countries, though their overall number and economic weight are low, certain SOEs have been playing an increasingly important role in the national economies—and some of them even internationally (Kowalski et al., 2013; Sass, 2017). The internationalisation of SOEs has been helped by a set of factors. Increasing private ownership shares widened the international horizons of SOEs. Globalisation processes, resulting in decreased barriers to trade and investment flows also played a role in the process (Cuervo-Cazurra et al., 2014). In the Central and Eastern European, formerly planned economies, opening up to the world economy and privatisation of stateowned companies (Bruton et al., 2015) brought new opportunities. In this latter process, some “avantgarde” regional SOEs had a competitive advantage in terms of accumulated knowledge about transforming a stateowned company into a market economy one (Sass et al., 2012) and could start their internationalisation process in the region quite early on, already in the nineties. Another strand of the literature addressed the issue of the specialities of the internationalisation of SOEs compared to privately owned firms. Estrin et al. (2012) showed that the propensity of SOEs to internationalise is lower than that of private firms. Institutional and political factors are important in explaining that difference. However, SOEs in autocratic countries may be an exception (Clegg et al., 2018). Musacchio et al. (2015) showed that the internationalisation of these firms is on one hand easier, compared to other companies, due to “state levers”, and on the other hand, it is more difficult, given the “liabilities of stateness”. An important finding in the recent literature is that there can be little difference between the performance of privately owned and stateowned multinationals (Musacchio et al., 2019). There can obviously be a link between the latter statement and the more and more widespread presence of hybrid SOEs. We can assume that the Visegrad countries are no exceptions. Another important recent phenomenon, influencing the internationalisation inclination of SOEs is the emergence of internationalised SOEs from emerging economies, especially China and to some

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extent from India and Russia (Panibratov & Klishevich, 2018). These seem to be more inclined to internationalised and special—in many cases non-economic—factors determine or influence their internationalisation process. Other areas of analysis concerning the internationalisation of SOEs include foreign market entry, location decisions, international performance and home and host country effects, where we can find analyses—though in certain areas in a very low number. There are still many unexplored and underexplored areas in this field (Rygh, 2019). According to Panibratov and Klishevich (2021), the two most promising paths of research concerning the internationalisation of emerging market SOEs are the government’s role in this process and the diversity of firms in question. Indeed, an interesting differentiation concerning the role of governments in the internationalisation of SOEs can be found in the literature. First, governments may be supporters of the internationalisation of SOEs, which is true mainly for emerging economies, in line what Panibratov and Kilshevich (2021) stated. Second, governments can hinder the internationalisation of SOEs for various social and political reasons, such as in certain developed economies. Third, governments may be indifferent, neutral towards the internationalisation of SOEs, whereby again certain developed economies may be mentioned (e.g. Sweden). However, in these latter cases, the development impact of the internationalisation is usually monitored (UNCTAD, 2011). It is interesting to note, that most recently some convergence in policy is present internationally (Ufimtseva et al., 2022). Furthermore, already internationalised SOEs may also differ in terms of their governance: in developed countries, SOEs operate largely on a market basis and the state intervenes only in a few political or development-related matters. At the other extreme, in the case of Chinese and Russian SOEs, where the SOE is a strategic instrument and a policy tool of the state—governance is understandably different. In these countries, not only SOEs can be under state influence but also private companies (e.g. Lukoil, Huawei) can also operate as extended “hands” of the state, in the context of state capitalism. It is very difficult to describe quantitatively and to prove this statement. However, company case studies provide details about this relationship in the case of Russian and Chinese firms (Deng, 2004; Panibratov & Klishevich, 2018). Of course, between the

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two extremes, we can find many cases, which may differ by governments and even by companies in the same country.

Defining SOEs and State-Owned Multinationals There are different definitions used in the literature for determining whether a company can be considered state-owned or not. Thus no uniform definition is present for SOEs, because definitions differ according to the actual owner (only central or central plus local government), according to ownership share (just majority or minority with controlling stake), and mode of ownership (only direct or direct plus indirect). This can partly be explained by the limited availability of data and information and partly by the complex nature of state ownership and control. According to the OECD, SOEs are enterprises where the state has significant control through full (100%), majority, or significant minority ownership. This ownership can be realised by the central or federal government, as well as by regional and local governments. For analytical purposes, other definitions may be used. The OECD uses a 50% threshold, distinguishing majority and minority state-owned companies and including both groups of companies in the analysis (Christiansen, 2011). Furthermore, Büge et al. (2013) show that a more nuanced analysis may take into account both direct and indirect state ownership. They also use the 50% threshold of (combined direct and indirect) ownership share. In IMF (2019), SOEs are defined as companies with 25% or more share of the state or government. Similarly, Szarzec et al. (2021) set up a database, in which not just majority state-owned enterprises (with state ownership exceeding 50%) but also minority state-owned enterprises with a controlling share of the state (i.e. state ownership between 25 and 50%) are included. As for the “broadest” approach: Cuervo-Cazurra et al. (2014) define SOEs as legally independent companies with direct state ownership. As for state-owned multinational companies, they are not defined in detail in the literature, with one exception. The most complex approach in terms of defining state-owned multinational companies is taken by UNCTAD (2017). According to Kalotay (2018, p. 14), the following criteria must be met by a firm in order to be defined as a state-owned multinational: it must be

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– A separate legal entity; – Established by governments (or by entities with state functions) to engage in commercial activities; – Conducting foreign direct investment (FDI) operations by way of having affiliates abroad or by engaging in non-equity modes of international production; – Controlled by the government or a governmental entity not including a pension fund, such as a central bank, a state property agency, or a national investment fund such as a sovereign wealth fund, through at least 10% ownership, otherwise the state or public entity must be the largest shareholder or have a “golden share”. As we can see, unfortunately, no universally applied definition exists and thus information from various sources are not directly comparable with each other. In this paper, we rely on the broadest definition presented above: that of Cuervo-Cazurra et al. (2014), which identifies SOEs as legally independent companies with direct state ownership, regardless of the level of the latter. This definition is applied due to its operationability and due to the availability of data.

SOEs in the Visegrad Economies While the number of state-owned enterprises per million people is among the largest in the Visegrad countries, compared to their heritage the importance of SOEs can be considered relatively low. According to Musacchio et al. (2019),1 the Czech Republic, Poland, and the Slovak Republic are among the top emerging economies in terms of the number of SOEs. However, if we have a look at other data, the share of SOEs in the Visegrad economies is relatively low—especially compared to their recent histories as socialist economies (UNCTAD, 2017). Similarly, based on an analysis of the largest companies Kowalski et al. (2013) found that the share of SOEs in sales, profits, assets, and market values as % of GNI is not exceptional in Poland and Czechia in OECD comparison and is lower than in the BRIICS2 countries.3 In the OECD, in terms of the 1 Table 23.1 on p. 573. 2 Brazil, Russia, India, Indonesia, China, and South Africa. 3 Tables 3 and 4 on pp. 21 and 22 in Kowalski et al. (2013)

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“economic weight” of SOEs, the Visegrad countries are similar to Scandinavian countries—with a declining trend since 2005 (Christiansen, 2011). In the European Union, Hungary ranked sixth, Czechia 7th, Slovakia 8th, and Poland 13th based on the share of government participation in the own capital of corporations in % of GDP in 2014. Their shares were not substantially higher than those of the Netherlands, Austria, or Ireland from the EU-15 (EC, 2016) Graph I.2.1, p. 12). The most comprehensive dataset is provided by Szarzec et al. (2021), which supports the statement that in international (European) comparison, the role of SOEs in total assets in 2016 was low in Hungary (below 10%), medium in Czechia (below 25%) and Poland (slightly more than 30%), while relatively high in Slovakia (close to 40%). The case was similar for operating revenues: Hungary and Czechia below 10%, Slovakia slightly more than 10%, and Poland more than 20%. These relatively low levels are in line with privatisation trends. Pre2010 privatisation, carried out using different methods, led to a decline in the number of non-listed SOEs in Czechia, Poland, and Hungary by 2010.4 At that time, SOEs were basically those enterprises that had not been privatised. Furthermore, the state had a minority stake in a number of companies (Christiansen, 2013). The number of SOEs dropped further in Poland after 2010, but increased in Hungary, with the result that Hungary, by 2012, had the highest number of SOEs compared to the other two countries—but their economic significance was still not high in OECD comparison, as many of these companies were quite small and economically insignificant (Christiansen, 2013; and in line with the data presented by Szarzec et al., 2021). Looking at their market value, they are negligible compared to, for example, the GDP of the analysed countries. In the case of Hungary, the one majority-owned, listed enterprise represented not more than 0.04% of 2012 GDP. In the case of Czechia and Poland, understandably, these shares were even lower: 0.014% and 0.005%, respectively. Declining between 2009 and 2012, the economic “weight” of the SOEs was negligible with regard to the number of employees, especially in Czechia and Hungary. However, there has been a slightly increasing trend in state ownership after the 2008–9 crisis (Götz & Jankowska, 2016; IMF, 2019; PWC, 2015), in spite of the fact that there have recently been cases of privatisation of state-owned assets

4 Slovakia did not provide data.

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as well, resulting in a decrease of state ownership (OECD, 2018). Indeed, Deloitte (2016) points to a continuing decrease in the number of SOEs among the top 500 firms in 18 countries in Central Europe.5 In 2015, the number of SOEs among the top firms was nine in Czechia, nine in Hungary, 34 in Poland, and five in Slovakia—altogether 57 enterprises, representing more than two-thirds of the total 85 SOEs in the 18 analysed Central, Eastern, and South East European countries, pointing to a relatively high inclination of the Visegrad economies (and especially Poland) to maintain state ownership compared to other countries of the Central and Eastern European region. In Hungary after 2010, their increase was the most pronounced in certain sectors (banking and public utilities); with explicit political aims targeting the “re-nationalisation” of these industries (Sass, 2017). While usually not covered by the previously presented analyses, the role of SOEs is suspected to be similar to or even higher in Slovakia than in the other three countries. This statement is supported by the data presented by Szarzec et al. (2021) for 2016. The non-transparent nature of SOEs in this country is however underlined in various publications.6 According to Transparency International, five of the ten biggest employers in Slovakia are SOEs, while the 80 most important SOEs manage assets totalling EUR 9.5 billion, equal to about half of state budget expenditure. Overall, with the possible exception of Slovakia, the number and especially the economic significance of SOEs tend to be low in the Visegrad countries, even in international comparison. Are Visegrad SOEs Hybrid? The various databases use the traditional definition of SOEs (majority central government ownership) as presented above. Almost all of them 5 The 18 analysed countries are: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czechia, Estonia, Hungary, Kosovo, Latvia, Lithuania, Moldova, Montenegro, Poland, Macedonia, Romania, Serbia, Slovakia, Slovenia, and Ukraine. 6 See, e.g. the report of the Transparency International Slovakia http://www.transp arency.sk/en/slovenske-statne-firmy-su-netransparentne-a-spolitizovane/ or Nechala et al. (2015), which concentrated on the operational transparency of publicly-owned companies in Slovakia. In the various fields related to transparency the score was lowest for Slovak SOEs compared to Czech, Slovak private and foreign companies. 81 state-, city- or countyowned companies were analysed. State-owned ones dominate (a total of 43), followed by city-owned (34) and county-owned (4).

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define SOEs as having more than 50% state ownership, with the exception of Szarzec et al. (2021), where above 25% ownership share threshold is used.7 However, as we saw, an important feature of today’s SOEs is that the state has a much smaller share of ownership and private entities a much larger share than was previously the case. Furthermore, a new type of SOE has emerged, where state ownership does not necessarily go together with state control, and where the latter may be exercised without significant state ownership (Bruton et al., 2015; Diefenbach & Sillence, 2011). These changes are also to be seen in the Visegrad countries (see, e.g. for Poland Baltowski and Kozarzewski (2016), Kozarzewski (2021) for Hungary Szanyi (2016) or, for one Hungarian state-owned company, Antalóczy and Sass (2018). Why is this distinction important? SOEs were previously established for certain social or economic purposes (employment creation in general or for certain groups of people, carrying out R&D of strategic importance, providing public services etc.). Nowadays, with the higher share of private ownership, certain SOEs operate as if they were completely private, with a focus on profit maximisation. Overall, SOEs often combine commercial and non-commercial objectives (European Commission, 2016). The mix of these two objectives can change or even fluctuate over time, depending on changes in government strategy. These recent changes justify why SOEs are defined on the basis of state control rather than state ownership. According to European Commission (2016), direct state control over business enterprises has decreased significantly in Czechia and Hungary among the analysed countries up till the mid-2010s. We can thus assume that at least part of Visegrad SOEs are operating on lines more similar to private enterprises. On the other hand, we have anecdotal evidence that Visegrad governments have strengthened their influence on the governance structure in mixed ownership companies (Szanyi, 2016). Hybrid SOEs—in circumstances of changing regulations and policy stances—consequently provide, in countries with less strong protection of minority ownership rights, an opportunity to increase government influence in the SOE sector and the role of the state as proprietor. The analysis of IMF (2019) points at this phenomenon (i.e. weak protection of minority ownership rights) as being one of the main

7 However, according to Szarzec et al. (2021), state ownership of between 25 and 50% was negligible in terms of the share in total assets in the Visegrad countries, with the exception of Poland.

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weaknesses of the state sector of former transition economies and among them in the Visegrad economies. Concentration of SOEs in Sectors - Industries SOEs are generally active in certain sectors providing public services, including health and social insurance, and in “natural monopolies” such as railways and electricity transmission. Similarly, according to Szarzec et al. (2021), state ownership traditionally concentrates in three particular industries in Europe: manufacturing, energy (more precisely: electricity, gas, steam and air conditioning supply), and transportation & storage. Visegrad countries are no exceptions to this rule. In 2015, the overwhelming majority of the 85 largest Visegrad SOEs were active in the energy and resources sector (59 firms) and consumer business and transportation (15 firms) (Deloitte, 2016). Besides that, in the Visegrad economies, in a few industries and sectors, the role of SOEs is important, in certain cases dominant—this can be in line with government policy and strategy. SOEs are significant in Czech mining and energy, in Polish manufacturing, services, mining, water supply, energy and transportation, in Hungarian services, water supply and transportation, and Slovakian energy and water supply as in these industries they have a significant share in value added and in employment (IMF, 2019). An outstanding role of SOEs can be found in Polish mining, where SOEs represent more than 80% of value added and almost 80% of employees. A similarly exceptionally high share of SOEs characterises the Polish and Hungarian water supply: their share exceeds 70% in both areas and in both countries. Besides that, Polish and Hungarian SOEs are dominant in transportation with an above 40% share in value added and employment (IMF, 2019). This is the result of lack or postponement of privatisation in Poland. On the other hand, in Hungary, this is the result of an increase in the number of SOEs in a few sectors, such as banking and public services, which are renationalised based on the political will of the government (Sass, 2017). Other information sources further highlight the dominance of these sectors. Looking at data on listed entities, we find for example that CEZ, a Czech company in which the state has a 63% stake, operates in the generation, trading and distribution of power and heat, as well as coal

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mining.8 CEZ has significant foreign assets, thus being a state-owned multinational company. Furthermore, according to the Czech Ministry of Finance,9 Eximbank and the Export Guarantee Agency, CEZ, the Congress Centre Prague, CEPRO (fuel trade), Czech Airlines and MERO (crude oil pipelines) are by far the largest Czech SOEs based on their base capital. All these companies, with the exception of CEZ, are focussed on the domestic market, with negligible exports or foreign investment. In Hungary, two important listed minority SOEs are significant exporters and foreign investors: MOL (oil and gas) and Richter Gedeon (pharmaceutical industry). The other companies mainly serve the domestic market. One exception is Rába Holding, a company with 74.34% state ownership and producing (parts for) commercial vehicles, agricultural machinery and earthmovers as well as automotive components and specialty vehicles, derives more than 90% of its revenues from export10 , but it has no foreign direct investments. There are 370 majorityowned, non-listed SOEs with negligible market values, except those in finance (mainly EXIMBank-MEHIB), electricity and gas (mainly the Paks nuclear plant and other power stations) and transportation (Hungarian Railways, bus companies) (OECD, 2014), again mainly serving the domestic market. An interesting case is OTP Bank, where there has been state ownership, which by 2020 have decreased to 0.08% only.11 In the case of Poland, according to the OECD database (2014), among the six majority state-owned listed entities in 2012, three operated in the primary sector, one in manufacturing and two in electricity and gas. Among the ten minority-owned and listed firms, two were active in mining, three in manufacturing, three in finance, one in electricity and gas and one in other utilities. Companies in the primary sector and in finance have the highest market value. At the same time, in mining, employment issues are of special importance, which explains state ownership. According to Bałtowski and Kozarzewski (2016) and Kozarzewski (2021) we can find numerous Polish enterprises, which are not in state ownership but under state control, underlining the existence of hybrid SOEs in

8 https://www.cez.cz/en/cez-group/cez-group.html. 9 http://www.mfcr.cz/en/themes/state-property-management/2016/the-sharehold

ings-of-the-czech-republic-26340. 10 http://www.raba.hu/english/our_profile.html; 11 https://www.otpbank.hu/portal/en/IR/Shares/OwnershipStructure.

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Poland. According to their data, at the end of 2018 the Polish government had corporate control over 12 out of the 20 largest Polish public companies listed on Warsaw Stock Exchange flagship index. Among these 12 listed firms, in four the state share is above 50% and in eight its share is 25–50%. This indicates an increase compared to the pre-crisis period. In Slovakia, it is mainly public services, which are operated by the state. We have detailed information on the energy sector, where combined state and private ownership is common. The state owns 100% of the shares of the national gas supplier Slovak Gas Industry, 51% in all electricity distribution companies, and 49% in the gas transmission system operator.12 As stated by Nechala et al. (2015), the “usual” public services (transport, forests, water and electricity management, power plants, post, the Eximand Development Bank, radio and television, the national lottery, airports etc.) can be found among state-owned companies in Slovakia.13 Overall, SOEs in the Visegrad countries are active in certain public services and utilities, with a few exceptions, especially in Poland and Hungary, reflecting policy stances and government strategy. Furthermore, their role seems to be significant and increasing in Poland and Hungary. Performance of Visegrad SOEs Performance indicators are rarely compared for SOEs and private firms in the Visegrad countries in a systematic way. Looking at country-level data for the Visegrad economies (EC, 2016), SOEs perform considerably worse than their private counterparts. This is expected on the basis of the raison-d’être of SOEs, as a part of them have other than profit motives. In the period between 2004 and 2013, the return on equity in private firms was in most cases substantially higher than in SOEs, though the difference narrowed during the crisis years, due to a severe decline in private company profits. Furthermore, the average return on equity for SOEs turned negative during the crisis years in Hungary and Poland.

12 Furthermore, in December 2015 the Italian (actually state-owned) utility company Enel signed an agreement with the Ministry of Economy granting the state an option to increase its stake in Slovenske Elektrarne, which controls 73% of the domestic electricity generation market, by an additional 17% (thus reaching a 51% majority), see https:// www.export.gov/article?id=Slovakia-Competition-from-State-Owned-Enterprises. 13 http://www.transparency.sk/wp-content/uploads/2015/12/statne_firmy_web_a5_ eng.pdf.

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For the same period, another sectoral analysis14 (EC, 2016) showed that the return on equity for SOEs was significantly lower in all industries, except for transport and storage. Underlining political influence, an interesting finding is that the profitability of state-owned enterprises in energy and public utilities was significantly lower in election years. Using TFP15 , SOEs performed worse than private companies in certain industries, where their presence is not common: in consumer staples, chemicals and metal processing, i.e. mainly in manufacturing industries. However, in other industries the difference was either small or basically disappeared during the crisis. At the country level, Visegrad SOEs underperform private ones in consumer staples in Hungary, and in public utilities in Czechia. This is backed by the result of an analysis of Hungary, where in 2015, the majority of SOEs were still loss-making.16 In Czechia, CEZ Group is the most profitable and the least indebted power company.17 Looking at labour productivity, the situation was similar to TFP. EC (2016) also showed that improved governance has a positive effect on both SOE productivity and profitability. SOEs negatively impact allocative efficiency in the industries where they are present, especially in Hungary and Slovakia. According to one analysis, similar to those of the other three Visegrad countries, Slovakian SOEs perform weakly18 . Other analyses reinforce the worse performance of SOEs compared to private firms. IMF (2019) makes a comparison based on 2016 data and found that in SOEs costs of employment compared to operation revenues were significantly higher than in private firms. The main reason is that wages are usually higher than in private firms (though compared to other post-transition economies in CEE, this difference was the smallest in the Visegrad countries). Furthermore, profitability indicators were also lower,

14 This analysis is carried out on eight countries, the Visegrad countries + Bulgaria, Croatia, Romania and Slovenia. 15 TFP: total factor productivity, measures the efficiency of the contribution of the inputs (labour and capital) to production. 16 https://www.opten.hu/kozlemenyek/javuloban-az-allami-cegek-eredmenyessege-dedonto-tobbseguk-meg-mindig-veszteseges. 17 https://www.cez.cz/en/cez-group/cez-group.html. 18 However, it is important to note that according to Mizobata and Iwasaki (2016),

there can be numerous methodological problems in the various analyses of the relationship between ownership structure and performance in the case of privatised companies.

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though here again, the difference was smaller than in other post-transition countries. Similar results are obtained by Matuszak and Szarzec (2019).19 As for their impact on exporting, the industry breakdown of SOEs and their limited presence among manufacturing companies in the Visegrad countries indicate that their share in total exports is quite low, except for certain industries, especially in Hungary. However, it is not really the relative presence or performance of SOEs, which matters. One must also mention the results of an analysis on European SOEs, where Visegrad economies are not exceptions. Szarzec et al. (2021) found that it is not the share of state ownership in itself, which matters from the point of view of economic growth. The impact is conditional on the quality of (governmental) institutions as better institutions entail a more favourable growth effect of SOEs. Similarly, Iwasaki et al. (2022) found a weak link in the case of emerging markets, including the Visegrad countries, between ownership and firm performance, pointing to other factors at play. The Regulatory Role of SOEs in the Visegrad Countries As stated by Christiansen (2013) in an interesting analysis, the main purpose of state ownership in Hungary is to act as an alternative to overregulation, and in certain sectors this assures sufficient investment. This contrasts substantially with other, more developed countries analysed in the cited paper (Israel, Netherlands, New Zealand and Norway), but may be similar in other Visegrad countries. This points to the hybrid nature of Hungarian SOEs, allowing them to be classified as for-profit and non-profit organisations. For–profit organisations are expected to perform well compared to comparable private firms, while non-profit companies can supplement their market earnings with various sources, including subsidies and levies. “Hungary is very transparent about non-commercial objectives in designated public interest companies, but much less so in the case of for-profit SOEs with certain non-profit assignments” (Christiansen, 2013, p. 15). We can suspect this increased state involvement to be found in the other three Visegrad countries as well, leading us to the next “role” played by government: as a regulator. 19 Here again, Mizobata and Iwasaki (2016) underline significant methodological problems in the various analyses of the relationship between ownership structure and performance in the case of privatised companies.

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The state is active as a regulator, which shapes and influences the business environment of the individual Visegrad economies to a great extent. The higher state activity in this area can partly be attributed to the heritage from the socialist era. Measuring and comparing the extent of the role of the state as regulator are even more problematic, given the lack of aggregated data. However, the OECD Indicators of Product Market Regulation provide a comprehensive and internationally comparable set of indicators,20 measuring the degree to which government policies hinder or promote competition in various product markets. We compare the indicators for 2008 and 2018 (latest year available). We look specifically at the indicator on Public ownership (Fig. 5.1), an index based on four subindicators: scope of SOEs, government involvement in network sectors, direct control over enterprises, and governance of SOEs. It thus partly reflects on the role of SOEs in the economies in question, and partly the role of the state in the economies. In terms of trends between 2008 (pre-crisis) and 2018, all four countries significantly increased state control in product markets. In Czechia and Poland, in all areas; in Hungary, in three of the four analysed areas, while in Slovakia in two of the four, there has been an increase in the index and thus in state intervention. It is apparent, that there were significant changes between 2008 and 2018: Czechia is now in 3 areas above the OECD average (as opposed to 1 in 2008), Poland remained above the OECD average in all areas, Hungary in 1 (as opposed to 2), and Slovakia still in 2. Thus in an OECD comparison, the “level” of state control can be assessed as average (Hungary and Slovakia) or higher (Czechia and Poland), but in showing a clear increasing tendency between 2008 and 2018. We can assume that this increasing tendency has been maintained among the circumstances of the COVID-pandemic as well. State Intervention in Foreign Investments of Visegrad Firms There are very few studies about government policies on outward FDI in the Visegrad countries. A comparative study of the four countries by Éltet˝ o et al. (2015) found that Visegrad governments were not active 20 See http://www.oecd.org/economy/growth/indicatorsofproductmarketregulationh omepage.htm.

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6

5

4

3

2

1

0 Czechia

Poland

Hungary

Slovakia

OECD average

Scope of SOEs 2008

Scope of SOEs 2018

Government Involvement in Network Services 2008

Government Involvement in Network Services 2018

Direct control 2008

Direct control 2018

Governance of SOEs 2008

Governance of SOEs 2018

Fig. 5.1 Product market regulation: Indicator of state control (Source Own constructed based on OECD data. Note Index scale 0 to 6 from least to most restrictive)

in trying to influence companies’ foreign investment decisions. (It is mainly (private) SMEs, which receive help. Furthermore, in Poland and Hungary, internationalisation of domestic firms on “perspective” (quickly growing, outside EU) markets are supported. In Poland and in Hungary, an explicit aim is to build larger multinational companies, with the aim of strengthening and diversifying the domestic economies. In that respect, ownership (private or state) does not seem to be an important factor. On the other hand, in the case of Czechia and Slovakia, export is the form of internationalisation, which is preferred by the government, vis-á-vis FDI. Overall, there does not seem to be that SOEs are in a preferred position from the point of view of state support for internationalisation.

Visegrad Multinationals Visegrad multinationals are not very numerous, though by now we can find many internationally competitive firms in the four countries. Among the top foreign investing firms, we can find a few state-owned companies.

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Czechia We already mentioned in the cases of certain SOEs, that they have significant foreign investments. In Czechia, CEZ constitutes a state-owned regional multinational company, with subsidiaries in 2017 in Bulgaria (4 acquisitions in 2005 and 2006), Romania (since 2005), Poland (since 2006), Hungary (close to 8% ownership share in MOL, the petrol company), Slovakia, Turkey and Albania (Sass, 2017). The list of foreign subsidiaries is changing as by now, CEZ has foreign business in Germany, France, Poland, Romania, Bulgaria, Slovakia, and Turkey, and subsidiaries in the Netherlands, which provide financing for the CEZ Group21 representing a turn towards Western European activities. Other important foreign investors include Zentiva in the pharmaceutical industry and Skoda in the automotive industry, both of which were originally Czech state-owned companies, but were privatised and are now respectively owned by the French Sanofi and the German Volkswagen, i.e. they are no longer Czech-controlled companies (Zemplinerova, 2012). Further such indirect foreign investor company cases are those of Iveco, Unipetrol, or Foxconn, i.e. these foreign companies invest in third through their subsidiaries in Czechia. Besides these, in Sass and Vlˇcková (2019) we showed, that in 2019, there were almost 13 thousand Czech firms controlled by owners from tax havens with total assets reaching more than 12 billion EUR, and these also include firms owned by Czech residents, who—mainly for tax reasons—transferred the headquarter of their holding companies abroad. These companies are owned and controlled by Czech citizens and we can assume that the actual foreign assets of these, ultimately Czech-owned multinationals can be very high. So overall, besides CEZ, we cannot really find now state-owned multinationals in Czechia, while there are many privately owned ones. At the same time, as it was mentioned above, foreign direct investment is not the main path to internationalisation of SOEs, they rather export. Hungary Turning to Hungary, the OTP bank, the petrol company MOL, the pharma company Richter Gedeon and electrical manufacturer Videoton are locally controlled multinational companies with substantial foreign 21 https://www.cez.cz/en/cez-group/cez-group/foreign-equity-shares.

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assets (more than 100 million USD) (Sass et al., 2012; Sass, Kovács, 2015). OTP is a regional bank, with substantial market shares in Central and Eastern Europe. MOL and Richter are more global, MOL mainly due to resource seeking FDI in faraway countries, while its market-seeking investments are realised in geographically close countries. Richter Gedeon is present in many countries, it has 34 affiliates in 25 host countries, among them production units in Poland, Romania, Russia, India, and most recently in Germany (Antalóczy & Sass, 2018). However, it can be assumed that the majority of Hungarian outward FDI is realised not by these firms, but by local subsidiaries of foreign multinationals (such as General Electric, Foxconn, Deutsche Telekom, Samsung etc.). Furthermore, three of the above-mentioned top Hungarian foreign investor firms (MOL, OTP and Richter Gedeon) can be categorised as “virtual indirect” foreign investors. This means, that while they are in majority foreign ownership, they are under domestic (i.e. Hungarian) control, because their foreign ownership is dispersed, there is no major foreign controlling owner (Sass et al., 2012). Additionally, these three firms are minority state-owned as well. However, the share of state ownership has decreased significantly in the last few years. At present it is 0.08% (plus Treasury shares of 1.57%) in OTP22 ; in MOL 5.24%23 , and in Richter Gedeon is below 5%24 . A few years ago, the share of state ownership exceeded 25% in both MOL and Richter, but in 2020, 10% of the state-owned shares of MOL have been transferred to Maecenas Universitatis Corvinus Foundation and another 10% to Mathias Corvinus Collegium Foundation. The same transfer was realised in the case of Richter Gedeon25 . Thus a significant, though minority (25%) state ownership has been reduced recently to insignificant levels in these two leading Hungarian multinationals, while in the case of OTP, state ownership has already been low. Due to the closeness of the above-mentioned two foundations to the government, which can be proved by the composition of their board of trustees, these changes can be perceived as a factor strengthening the hybrid nature of these SOEs.

22 https://www.otpbank.hu/portal/en/IR/Shares/OwnershipStructure. 23 https://molgroup.info/en/about-mol-group/company-overview. 24 https://www.bse.hu/pages/company_profile/$security/RICHTER. 25 See, e.g. https://bbj.hu/business/industry/pharma/hungarian-state-transfers-ric

hter-shares-to-corvinus-foundation.

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Poland In Poland, multinational companies are on average larger than in the other three countries. There are 13 non-financial companies with more than 95 million USD foreign assets (Kaliszuk & Wancio, 2013). The two largest and the fifth are active in oil and gas exploration and distribution. The third, Asseco, provides software and IT services. The rest are two chemical and one pharmaceutical companies, two machinery manufacturers, two building materials producers, one metal and one wholesale trade and IT services company. As for state ownership, in 2012, PKN Orlen (oil), Polskie Górnictwo Naftowe I Gazownictwo (gas), Lotos (oil), Ciech (chemicals) and KGHM Polska Mied´z (metal) had the state as share owner—all these were listed companies on the Warsaw Stock Exchange. Two had majority state ownership: Polskie Górnictwo Naftowe I Gazownictwo (72%) and Lotos (53%) (Kaliszuk & Wancio, 2013). According to the latest data, the state is still a minority owner (27.5%) in PKN Orlen26 , and in KGHM Polska Mied´z (32%)27 and a majority (72%) owner of Polskie Górnictwo Naftowe I Gazownictwo28 and Lotos (53%)29 However, Ciech was acquired by a private investment group, thus it has no state ownership any more30 . All the still state-owned multinationals have substantial foreign assets, PKN Orlen mainly in Czechia, Lithuania and Germany, while KGHM Polska Mied´z in US, Chile, Canada, and under development in China. The majority-owned Polskie Górnictwo Naftowe I Gazownictwo has affiliates in Russia, Pakistan, Belarus, Ukraine, Norway, Lybia, Sweden, and Germany and Lotos in Norway and Lithuania. Furthermore, in PKO Bank Polski, which is also listed on the Warsaw stock exchange, the state directly and indirectly holds 31.39% of shares, and this bank has 100% -owned subsidiaries in Sweden and Ukraine31 .

26 https://www.orlen.pl/EN/Company/ShareHoldersStructures/Pages/default.aspx. 27 https://kghm.com/en/investors/shares-and-bonds/share-graph. 28 https://en.pgnig.pl/investor-relations/stock-informations/shareholder-structure. 29 https://inwestor.lotos.pl/en/965/lotos_group/share_capital_structure. 30 https://ciechgroup.com/en/relacje-inwestorskie/o-ciech/shareholders/ 31 http://www.raportroczny2019.pkobp.pl/en/o-nas/struktura-grupy/

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Slovakia Data are quite sporadic about Slovakia. Ferencikova and Ferencikova (2012) present a detailed study of outward FDI from Slovakia and list the major Slovak multinationals. Among these, J&T Group, Penta Investments, and Istrokapital32 are all privately owned investment companies, active mainly in the Central and Eastern European region. Other companies include manufacturing companies, such as Grafobal Skalica, Matador, IDC Holding and information technology firms ESET, Gratex, and Asseco Slovakia (Ferencikova & Ferencikova, 2012). These are all privately owned firms, according to publicly available information. (There are though some changes: part of Matador has been acquired by the German Continental AG and after a merger with a Czech company and Asseco Slovakia become Asseco CE.) As for more recent data on stateowned companies, the Finance Ministry of Slovakia (Ministerstvo financií Slovenskej republiky, 2021) presents a list of these, with 51 entries. Out of these, only the 100% state-owned Transpetrol has considerable foreign assets in four countries: Belgium, Norway, Switzerland and Bermuda. The other majority or minority state-owned companies and organisations concentrate their activities on the Slovak republic.

Discussion While before 1990, almost all properties were state-owned in the Visegrad countries as they were operating as socialist planned economies, by now, state-owned firms are rather rare in these economies. Basically, the subsequent governments of these countries have reduced the number and significance of SOEs to the level of developed market economies, and among them especially to the level of Scandinavian economies. SOEs are present mainly in those sectors (public services), in which they are abundant in market economies as well and in some country-specific other sectors (such as, e.g. mining in Poland). Special privatisation technique in Hungary led to having minority state ownership in a few “national champions”. However, recently this minority state ownership has become really minor (below 6%) due to the transfer of ownership shares to certain foundations, universities, or government-related institutions. This underlines 32 Istrokapital was acquired and renamed: http://www.istrokapital.eu/en/istrokapitalgroup/history.html.

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that the main reason for maintaining state ownership in certain companies is the aim of fulfilling certain non-economic (and in some cases economic) or political tasks in the domestic economies. We summarise the data presented in detail in Sect. 5.5 in Table 5.1. Thus, given the relatively low number of SOEs, their concentration in certain industries and sectors and their activities aimed at the domestic economy, there is actually little chance for finding important state-owned multinationals in the Visegrad countries. No wonder, they are not substantial homes to state-owned multinationals (Kalotay, 2018). We could identify nine state-owned multinationals in the Visegrad countries (Table 5.1). One of them is in 100% state ownership (Slovakia), three are majority (Czech plus two Polish) and five minority (all Hungarians and two Polish) owned. This low number may be in line with the finding of Estrin et al. (2012), according to whom in general, the propensity of SOEs to internationalise is lower than that of private firms— with the exception of China. In many cases, SOEs internationalise if the ambitions and goals of the state include foreign expansion (Götz & Jankowska, 2016). However, in the case of the Hungarian firms, we showed in Sass et al. (2012), that it is mainly the ambitions and priorities of the Hungarian management of the respective firms, which makes these companies to internationalise. Thus, here we can find an increased internationalisation parallel in time with decreased state ownership, because of the specificities of the transition of former planned economies. The main reason for internationalisation and foreign expansion here is to strengthen the position of the management by internationalisation visá-vis the government as well as vis-á-vis hostile foreign takeover. We can assume such priorities in the case of other state-owned Visegrad multinationals as well, especially in the case of those, whose shares are traded on the stock exchange and in which the state is a minority owner. In these cases, the manoeuvring room of the management is relatively large and state influence is relatively low. Besides Hungary, this can be the case for certain Polish firms. Based on Table 5.1, we can see a relative heterogeneity and diversity of state-owned multinationals in the Visegrad countries, in line with the statement of Götz and Jankowska (2017) for Poland. However, we can find certain similarities as well, as we show in the following section. Visegrad state-owned multinationals are among the leading investor firms in their home countries, but at the same time, they are usually not large in international comparison: for example, their foreign assets are not

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Table 5.1 State-owned multinationals in the Visegrad countries Name of company

Home country

Share of state ownership in total (2020)

Industry/sector /activity

Host countries of foreign investments

CEZ Group

Czechia

70%

energy

OTP Bank

Hungary

0.08 + 1.57%

banking services

MOL

Hungary

5.24%

oil, energy

Richter Gedeon

Hungary

< 5%

Slovakia, Germany, France, Poland, Romania, Bulgaria, Turkey, Netherlands, Israel, Great Britain, Bosnia-Herzegovina, Hungary, Russia, Ukraine, Luxemburg Russia, Ukraine, Moldova, Romania, Bulgaria, Serbia, Montenegro, Albania, Slovenia, Croatia exploration: Russia, Kazakhstan, Norway, United Kingdom, Croatia, Romania, Azerbaijan, Pakistan, Oman, Iraq, Syria, Egypt, Angola; downstream: Croatia, Slovakia, Italy, Czechia, Romania, Austria, Serbia, United Kingdom, Poland, Bosnia-Herzegovina, Germany, Slovenia, Switzerland, Iraq + production: Poland, Romania, Russia, India, Germany; sales affiliates or rep offices in 47 countries

pharmaceutical

(continued)

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Table 5.1 (continued) Name of company

Home country

Share of state ownership in total (2020)

Industry/sector /activity

Host countries of foreign investments

PKN Orlen

Poland

28%

oil, energy

KGHM Polska Mied´z Polskie Górnictwo Naftowe I Gazownictwo

Poland

32%

metal

Poland

72%

gas

Lotos

Poland

53%

oil

Transpetrol

Slovakia

87%

Oil (transportation and storage)

Czechia, Lithuania, Germany, US, Chile, Canada, China, Germany Russia, Pakistan, Belarus, Belgium, United Arab Emirates, Norway, Netherlands, Germany Norway, Lithuania, United Kingdom, Curacao, Cyprus Belgium, Norway, Switzerland, Bermuda

Source own compilation based on the publicly available information (see the references above)

large enough to be present on the list of top 100 non-financial MNEs33 . However, some of them (e.g. the Polish PKN Orlen and the Hungarian MOL) would qualify to be put on the list of top 100 non-financial MNEs from developing and transition economies (Sass, 2018)—but all four Visegrad countries are classified now as developed economies by UNCTAD. The size of the two above-mentioned oil companies is in line with UNCTAD (2014), which showed that among all MNEs, SOEs represent a small share, but at the same time, the number of the foreign affiliates and the size of foreign assets of these SOEs are significant. Indeed, the Hungarian and Polish oil companies are the leading foreign investors in terms of their foreign assets in their own respective economies and as we can see in Table 5.1, they have a wide range of foreign subsidiaries in a geographic sense.

33 The latest Tables 19 and 20.

tables:

https://worldinvestmentreport.unctad.org/annex-tables/

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We can observe the sector/industry specificities: Visegrad state-owned multinationals are concentrated in the oil/gas/energy sector. The companies in question have a long history: they were already operational in the pre-1989 period and went through partial privatisation (with the exception of Transpetrol of Slovakia), usually their shares were introduced on the stock exchange. Successful internationalisation through FDI may be in connection with their ownership advantages, which enabled them to internationalise in former transition economies based on their experience with and knowledge about restructuring privatised companies (Sass et al., 2012 for Hungary and Radlo (2012) for Poland). On the other hand, having the state behind them may also play a role in internationalising in an industry of such high political and security importance. Indeed, the case of the Hungarian MOL in treating hostile takeovers (Kalotay, 2010) underline that observation. Furthermore, sector specificity is important from another point of view. Sectors and industries covered make Visegrad state-owned multinationals an unlikely case for their increased role in global value chains, indicated by OECD (2017), which would give rise to their further foreign expansion in different ways and with different motives. It is not easy to assess whether these companies are of hybrid nature (Bruton et al., 2015): direct state ownership in many of them is not full, in certain cases minority, and in other cases negligible (Hungary). But we cannot really assess if the state interferes intensely with their operation, in spite of being just a minority—in some cases a “very” minority owner. Previously we have hinted at sporadic evidence of their hybrid nature. Furthermore, in the case of Hungary, we had some evidence of relatively active help from the government in the case of the pharma firm, Richter Gedeon, during its privatisation process. But later on, after around 2006, the state has not continued to put Richter into a preferred position on the domestic market, which was one factor that induced the firm to internationalise and invest abroad further (Antalóczy & Sass, 2018). Furthermore, in Hungary, OTP and MOL were helped to retain their sovereignty and avoid a hostile takeover by special government regulations on their golden shares, which were later abolished. One can also note the constant changes among these Visegrad stateowned multinationals: on one hand in the state share in them (especially in Hungary), on the other hand, the fact that there are still privatisation transactions, which result in the loss of state ownership in these companies—as, for example, in the case of the Polish Ciech.

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An interesting area of analysis can be whether Visegrad multinationals are closer to developed country multinationals or emerging multinationals in terms of their relationship with the government and the intervention of governments in their internationalisation processes and governance. Sporadic and anecdotic evidence presented in the previous sections leads us to presume that Visegrad multinationals in these respects may be placed somewhere between a developed country and emerging multinationals. We could observe a few traits similar to emerging MNCs but also less active government intervention, though in which there can be significant changes over time. This latter may be related to the European Union membership of these countries—going deeper into this analysis may be the subject of future research.

Conclusions While both state-owned companies and multinationals are relatively numerous in the Visegrad countries, their “common subset”, Visegrad state-owned multinationals, do not contain many firms. After identifying some of the most substantial of them, one can note their heterogeneity, in terms of their number per country (Poland and Hungary leading), or the share of state ownership in them (in Hungary just negligible state ownership in them as opposed to the other three countries). However, certain similarities could also be identified, such as their relatively small size in terms of foreign assets compared to a developed country or emerging multinationals, with the exception of the oil companies: the Polish PKN Orlen and the Hungarian MOL or their concentration in certain industries, especially energy-oil–gas. We also assumed, based on sporadic evidence that many of these multinationals can be in hybrid state ownership, where the share of state ownership does not necessarily reflect the extent of state control. We have also noted the changes among stateowned multinationals in the Visegrad countries, on one hand, in terms of their numbers (privatisation and nationalisation steps result in changing numbers as, for example, in the case of Poland) and on the other hand, changes in state shares in them (for example, the significant decrease in the case of MOL and Richter Gedeon in Hungary). The present chapter had many limitations, stemming mainly from the limited number of companies it could analyse. More systematic research and review of state-owned multinationals in the Visegrad countries relying on numeric analysis as well as on detailed case studies would be needed.

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While Visegrad state-owned multinationals are not numerous, their analysis may still pose interesting questions for future research. They seem to be in between developed countries and emerging state-owned multinationals, whereby state involvement is somehow average, in between the two extremes, though it may have some very active periods. It will be interesting to see whether in the period of post-pandemic recovery, how the fate of these firms will evolve when state involvement in trying to restart the economies and remedy the negative consequences of the pandemic as well as responding to changes in the world economy will, without doubt, increase further.

References Antalóczy, K., & Sass, M. (2018). The internationalisation of Richter Gedeon, the Hungarian pharmaceutical company, and entrepreneurship in Hungary. In M. Tõnis, S. Arnis, & P. Danica (Eds.), Entrepreneurship in Central and Eastern Europe: Development through Internationalization London (pp. 159– 176). Routledge. Baltowski, M., & Kozarzewski, P. (2016). Formal and real ownership structure of the polish economy: State-owned versus state-controlled enterprises. PostCommunist Economies, 28(3), 405–419. Bruton, G. D., Peng, M. W., Ahlstrom, D., Stan, C., & Xu, K. (2015). Stateowned enterprises around the world as hybrid organisations. The Academy of Management Perspectives., 29(1), 92–114. Büge, M., Egeland, M., Kowalski, P., & Sztajerowska, M. (2013, May 2). Stateowned enterprises in the global economy: Reason for concern? Voxeu. http:// voxeu.org/article/state-owned-enterprises-global-economy-reason-concern Christiansen, H. (2011). The size and composition of the SOE sector in OECD countries, OECD Corporate Governance Working Papers, No. 5, OECD Publishing. https://doi.org/10.1787/5kg54cwps0s3-en Christiansen, H. (2013). Balancing commercial and non-commercial priorities of state-owned enterprises, OECD Corporate Governance Working Papers, No. 6, OECD Publishing. https://doi.org/10.1787/5k4dkhztkp9r-en Clegg, L. J., Voss, H., & Tardios, J. A. (2018). The autocratic advantage: Internationalization of state-owned multinationals. Journal of World Business. https://doi.org/10.1016/j.jwb.2018.03.009 Cuervo-Cazurra, A., Inkpen, A., Musacchio, A., & Ramaswamy, K. (2014, October-November). Governments as owners: State-Owned multinational companies. Journal of International Business Studies 45(8), 919–942.

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CHAPTER 6

The Role of Manufacturing in the Central and Eastern European Countries in the Various Periods from Transition to Mature EU Membership Anita Pelle and Gabriella Tabajdi

Introduction and Chronology The role of manufacturing in Europe and, within that, Central and Eastern Europe (CEE) is unquestionable. Manufacturing in these countries has ensured a considerable contribution to GDP, has employed millions of people, has played an important role in trade, and a series of innovation has been originating from industrial actors. Nevertheless, the

A. Pelle (B) · G. Tabajdi Faculty of Economics and Business Administration, University of Szeged, Szeged, Hungary e-mail: [email protected] G. Tabajdi e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_6

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manufacturing sector has substantially transformed in the past decades— in CEE and globally. In this chapter, we overview this transformation in a chronological approach, with our focus placed on the CEE region. By Central and Eastern Europe, we cover all post-socialist new EU member states ranging from the Baltics and the Visegrad countries to the Balkans. Thus, the countries subject of our analysis are Estonia, Latvia, Lithuania, Poland, Czechia, Slovakia, Hungary, Slovenia, Croatia, Romania, and Bulgaria. As regards our chronology, we have identified the following periods up to our days: . transition from socialism to capitalism (early 1990s) . privatisation and massive foreign direct investment (FDI) influx (late 1990s, millennium) . pre-EU-accession (until 2004) . early years of EU membership (2004–2008) . the global financial crisis and its aftermath (2009–2013) . mature EU membership (2014–2019) . the COVID-19 pandemic and its effects (2020–2021) Manufacturing has had an influential role all throughout the various periods although the characteristics of this role have undergone modifications. We review these in the Varieties of Capitalism (VoC) context. In our chronological overview, we observe that, among the CEE countries, manufacturing has had a relatively stronger influence in the Visegrad group than elsewhere—these countries have evolved to become members of the central European manufacturing core (Landesmann & Schröder, 2020; Stehrer & Stöllinger, 2015). Nevertheless, in the 2020s, all CEE countries are considered so-called factory economies vis-à-vis the more developed headquarter economies (Baldwin & Lopez-Gonzales, 2015), of which Germany is by far the most important (Kuruczleki, 2019; Pelle & Tabajdi, 2021). The distinction between ‘headquarter economies’ and ‘factory economies’ is rather oversimplifying though, claiming that headquarter economies are the ones that ‘arrange the production networks’ while factory economies ‘provide the labour’ (Baldwin & Lopez-Gonzales, 2015: 1696). However, industrial realities are more complex therefore the categories may not be so distinct. The original concepts are not particularly elaborated any further either although whether a country is more of a headquarter economy or a

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factory economy is connected with its capitalism model, the elements of the model, as well as its internal and external linkages. Consequently, we consider these factory economies—headquarter economies concepts as relevant in terms of the VoC and the role of manufacturing in certain models.

VoC and CEE in a Chronological Approach The Varieties of Capitalism (VoC) literature originates from the classification of developed economies by Hall and Soskice (2001) into the two large categories of liberal market economies (LME) and coordinated market economies (CME). Since then, a complete branch of economic science has evolved in the VoC context. We hereby concentrate on the implications of post-socialist Central and Eastern Europe. Within the EU, the applied capitalism models are influenced by European integration itself (Deeg & Jackson, 2007). Hall (2018) adds that the 2008–2013 crisis only emphasised the importance of the interaction between EU membership and the capitalism models further, especially in the Southern and Eastern peripheries. In the latter country group, the EU already affected the macroeconomic system in the accession phase (Landesmann & Rosati, 2004). The transition from socialism to capitalism in CEE was an unprecedented event in economic history (Kornai, 2006). A fundamental system change occurred that affected all realms of life, not only involving the economy but also the legal system (including the constitution), the political system, and the everyday life of citizens. In economic terms, the most influential legacy of socialism was a chronic lack of capital in these economies (Hofbauer & Komlosy, 2000). Furthermore, this shortcoming was combined with outdated technologies, a lack of entrepreneurial and managerial skills and experience, and low-level relations with the advanced economies (Farkas, 2011). At the macro level, post-socialist transition happened mostly in parallel with Europeanisation (Börzel & Panke, 2019; Schimmelfennig, 2001; Wach, 2014, 2015), which implied intensive institution-building starting right upon the system change and largely determining the 1990s (Csaba, 2007). The missing capital had to be somehow replaced. The overall solution was privatisation (Voszka, 1996), with national specificities though (Roland, 2000; Szanyi, 2016). As domestic actors were short of capital

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and the financial system was underdeveloped as yet another element of the socialist legacy, foreign owners appeared in the post-socialist CEE economies in a short time and at larges scales (Sass, 2017). Very soon the massively inflowing FDI, paired with the relatively low-wage, relatively high-skilled domestic labour force became the main driver of transformation and growth, resulting in the evolution of the CEE’s particular growth model coined dependent market economy (DME) by Nölke and Vliegenthart (2009). The ‘dependent’ feature of the model derives from the strong dependence on FDI and, consequently, on decisions made at the multinationals headquarters and/or in the headquarter economies. Nölke (2018) later warned about the risks of such dependence while Myant and Drahokoupil (2011, 2012) point out the second-rank feature of this model that derives from the fact that the real economic actors from these economies are placed in the mid-range of value chains and are likely to be stuck there. This corresponds to the concept of the middle-income trap, especially in the age of Industry 4.0 (Acheampong, 2020). The CEE capitalism model may nevertheless relate more to the concept of asymmetric interdependence (Moravcsik, 1998) as the capital-provider economic actors and headquarter economies have been dependent on this setup (and thus on the European DMEs) although their dependence is of a different nature, hence ‘asymmetric’. They are dependent through their investments in the first place but the opening up of new markets has also played an important role for them (Pelle et al., 2020). The concept of asymmetric interdependence is mainly used to describe the EU’s and its member states’ relations with Russia and the Eastern Partnership Countries (Delcour et al., 2018) while Schimmelfennig et al. (2015) talk about asymmetric politicisation in the EU context as a means applied and resulting in differentiated integration. In contrast to these sources, we refer to the asymmetric dependence in the real economy, in the framework of the rules and interactions in the EU internal market as the platform, and the European Union and its institutions as the actors writing and shaping the rules.1 In our view, this asymmetricity adds flavour not only to the relations between the headquarter and the factory economies but also to EU decision-making in the field of economic policy coordination and economic governance.

1 The way how this works for the energy markets is presented by Somosi (2013).

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Around the turn of the millennium, the CEE countries concentrated on their EU accession. For them, the screenplay of this period was drafted by the European Union and the tasks to achieve were articulated in the course of the accession negotiations. Thus the pre-accession period was coined by a top-down Europeanisation of the concerned countries (Börzel & Panke, 2019). The early years of EU membership for the newly acceding Eastern member states was a period of upswing and development, to the satisfaction of all stakeholders inside and outside these countries. Regarding the continuation of the Europeanisation processes, already as members of the club, own voices of these new member states started to be heard and less adaptivity was observed on their behalf (Koller, 2011). In the VoC context, the DME/asymmetric interdependence model was solidified inside the EU, and its benefits were exploited by all stakeholders: growth and upgrading in the newly acceding countries, while impressive returns on investments and massive expansion in the newly opening markets for the actors from the headquarter economies. The outburst of the global financial crisis in 2008 and its aftermath in the EU lasting until 2014 was definitely a turning point. For CEE, the crisis implied an early and dramatic shock effect however these countries manifested a quick rebound, especially in relation to other EU countries (Éltet˝ o, 2014; Tabajdi & Végh, 2021), even if firms in the region were concentrating on managing the short-term challenges mainly (Megyeri, 2018). Between 2010 and 2013, the EU was mainly occupied with handling the sovereign debt crisis in the Eurozone periphery, by which the CEE countries were not particularly affected. As a matter of fact, the Baltic states fulfilled the Maastricht criteria and joined the currency union in these very years (Estonia in 2011, Latvia in 2014, and Lithuania in 2015) (Pelle, 2021). In the post-financial crisis period, by entering a mature phase of EU membership in which the real economic embeddedness of the CEE countries can be considered as completed, the advantages of the DME model appear to have started melting. Up to the COVID-19-induced economic crisis, the CEE countries had undergone an intensive real wage growth resulting in a decrease of their relative wage competitiveness (Sass, 2017), while the technological and real economic upgrading yields benefits to the actors both in the factory economies and in the headquarter economies (Szalavetz, 2017; Megyeri & Somosi, 2019; Szalavetz & Somosi, 2019).

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In the 2020s, the question may be asked whether the DME model is still applicable or whether a new model for CEE shall be identified. During the COVID-19 pandemic, the CEE region exhibited features similar to those with respect to the financial crisis a decade earlier, especially the early signs of resilience following the shock (analysing the management of the health crisis in CEE in a comparative perspective points beyond the scope of our study).

Analysing the Role of Manufacturing in CEE In the last half-century, significant changes have taken place in Europe in terms of industry, the understanding of which is of fundamental importance regarding processes taking place in CEE. Various shifts between economic sectors affect the geographical distribution of economic activities. In Western Europe, the 1970s are considered the heyday of industry. After that, however, developed Western European countries entered the post-industrial phase and deindustrialisation began (Hudec & Sinˇcáková, 2021; Rodrik, 2016). Since the start of the twentieth century, industry in Europe has therefore shown an overall structural shift towards services. Yet, this does not imply in any case that industry would be dead for Europe. There are still regions in the EU that are highly dependent on certain industries (Johansson, 2008), indicating that deindustrialisation processes do not affect all regions equally (Hudec & Sinˇcáková, 2021), and that industry (or at least some industries) continue(s) to play a significant role in the economy of some regions, so much so that extensive industry, and especially manufacturing, is no longer a symbol of economic backwardness in the EU. In part, the 2008 global crisis showed that industry can even be the engine of growth (Stöllinger et al., 2013). One such region where industry plays a crucial role is the CEE region partly as these countries inherited an extensive industrial sector from the period of central planning but, due to significant structural distortions and lack of production efficiency, a high degree of industrialisation was initially considered more of a disadvantage than an advantage, as it also meant the underdevelopment of other sectors, especially of services (Havlik, 2005). Nevertheless, the transformation of the economic structure in CEE began already in the 1990s although it was different from that in Western Europe (Hudec & Sinˇcáková, 2021). Industry used to be the engine of the economy in the socialist times (Bachtler et al., 2001), while the transition to advanced market economies after 1990 brought about serious

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changes not only to these economies themselves but also to industry in particular. One of the most serious industry-related challenges for these countries was that, at the time of the system change, the proportion of people employed in agriculture and industry was still outstandingly high. By the 2020s, although the gradual sectoral transformation has been going on for decades, industry continues to be one of the driving forces of the economies in CEE (Hudec & Prochadzková, 2018; Hudec & Sinˇcáková, 2021), which is observable in gross value added, employment, or international trade. A characteristic of European economies (and developed economies in general) has recently been the structural shift towards the services sector. This shift can be observed both in value added and employment. As a result, the relative importance of industry in Europe is decreasing. The structural transformation concerns essentially all industries, implying that the decreasing importance results from broad and general trends and is not solely attributable to a few industries in a difficult situation (Landesmann & Leitner, 2015). Examining the period between 1995 and 2020 (Fig. 6.1), we can see that although industry’s share of GVA decreased, there are considerable differences. While a stronger decrease is observable in the Baltic states and the EU14, looking at Central Europe (especially the Visegrad countries and Slovenia), milder trends emerge, signalling the importance of industry for the region. The industry of the Eastern new member states on average accounts for a significantly higher proportion of the GVA produced (19.99%) than that of the old member states (16.96%). On the other hand, the CEE region cannot be considered as a homogeneous group since in Latvia, Estonia, and Bulgaria, the share of industry in GVA barely exceeds the EU average while in Czechia, for example, it is considerably higher. So, large dispersion is identifiable all throughout the reference period (Fig. 6.2). Moreover, regarding the impact of the 2008 crisis in relation to the new and old member states, the crisis reduced industrial GVA in both CEE and the EU14 but the post-crisis trends differ between the two country groups. In the CEE region, industrial GVA grew faster than in the EU as a whole as a continuation of the previous trends while in the EU14 the rate fell short of the EU average (Nagy et al., 2020). In the EU industry, the relevance of the CEE region has continuously increased since 1995 (in 1995, the CEE countries’ manufacturing industry accounted for 1.3% of the EU’s GVA, the same indicator in 2020 already reached 2.5%). Contrariwise, the weight of the old member states

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Fig. 6.1 Share of industry GVA in total national GVA, %, 1995–2020 (Source Own calculations based on Eurostat data)

decreased (from the level of 22.2% in 1995) although the manufacturing industry of the old member states still accounts for 17% of the GVA of the EU (due especially to Germany). In fact, Europe’s industrial activity is increasingly concentrated in Central Europe. The European industrial core is constituted of the following countries: Germany, Austria, Czechia, Hungary, Poland, and Slovakia. This new European production core partially replaces and partially complements (Stehrer & Stöllinger, 2015) the traditional metropolitan axis of the at-that-time European single market known as the ‘blue banana’ in Europe, which runs from London to Milan (Hospers, 2003). According to the IMF (2013), a German–Central European supply chain has emerged, supplying manufacturing products to the entire world. The Central and Eastern European industry is not only of special importance for the countries of the region but also plays a major role in the economy and international trade of the whole of the EU. Overall, the CEE countries’ share in the EU27 industry GVA has increased over the reference period. The most impressive growth is observable in Poland, Czechia, Romania, and Slovakia. Nevertheless,

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Fig. 6.2 Share of CEE countries’ industry GVA in total EU27* industry GVA, %, 1995–2020 (Source Own calculations based on Eurostat data)

there are periods discernible on the 1995–2020 timeline; especially the 2004 EU enlargement appears to have been a booster to industry GVA in several of the concerned countries. The odd one out is Hungary where most of the growth occurred prior to accession to the EU. Sectoral Composition of Economies As mentioned above, in the last decades of the twentieth century, the old EU member states (EU14) underwent a deindustrialisation process while the CEE countries were in their transition from socialism to capitalism, described in more detail above. These changes can be grasped by analysing the sectoral composition of the old (EU14) and new (CEE) EU member states’ economies in 1995 (earliest available data in Eurostat) and

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2020 (latest available data in Eurostat). As the value added creation capacities determine competitiveness and wealth, we look at GVA composition according to the sectors below (Fig. 6.3). When analysing the sectoral composition of GVA in the EU14 and the CEE region, there are some considerable differences. In 1995, we can generally see that the relevance of the agricultural (2.96%) and industrial (27.07%) sectors for the EU14 was much lower and the majority of their GVA already originated from services (69.97%) while, for the CEE countries, both the primary (9.25%) and the secondary (30.69%) sectors contributed to their GVA to a higher degree, signalling their underdevelopment in services and the heritage of socialism. Although in the past decades there has been a shift towards the services sector both in the EU14 and the CEE region, the trends are not identical. While by 2020 in the EU14 the share of industry in GVA decreased further (to 24.23%) and the increased significance of services could mainly be explained by the shift from industry to services, in the CEE region disparate trends emerged. By 2020, the share of industry even increased compared to 1995 (from 30.69% to 31.04%) and only a moderate increase is observable for services due to the halved contribution of the primary sector. These trends are visible even if we only concentrate on the manufacturing industry (NACE code: C) implying the continued importance of industry for the region. However, the quality and the nature of manufacturing are the determinants of future potential. The growing complexity of modern manufacturing, innovation, and higher value creation all require a higher service content within manufactured final goods (Miozzo & Soete, 2001). Many knowledge-intensive activities arose and are embedded in final goods, by now considered as service. The other outcome of this process is the difficulty to make a sharp distinction between the industry and services sectors. If we are able to split the sectoral contributions, we may reveal that the changes in the service content of manufactured goods are far from uniform (Pelle & Somosi, 2018). Among the reasons of the less developed services sectors in the CEE region, we identify, among others, the relative differences in productivity growth in manufacturing and services, wage drift across sectors, scale effects, FDI patterns, the evolution of production linkages, industrial and economic history, the availability of a more substantial base of domestically supplied services, a less developed small- and medium-sized enterprises sector that is traditionally providing service-related activities

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Fig. 6.3 Share of NACE sectors2 in GVA in EU14* and CEE in 1995 and 2020** (Source own construction based on Eurostat data)

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and, last but not least, the better exploitation potentials of benefits arising from the integrated internal market of the EU (Pelle & Somosi, 2018). Employment Employment is another fundamental aspect of sectoral performance. The share of people employed in industry decreased between 1995 and 2021 in all Central and Eastern European countries (Fig. 6.4), which is in line with the processes taking place in the EU and developed countries. However, between 2010 and 2021, the trend seems to have reversed in some CEE countries. In Poland, Lithuania, Hungary, Romania, and Slovenia, people employed in industry accounted for a higher proportion of total employment in 2021 than in 2010. Furthermore, the proportion of people employed in industry in the region is still significantly above EU average. 33 31 29 27 25 23 21 19 17 15

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Fig. 6.4 Share of industry employment in total employment, %, 1995–2020 (Source Own calculations based on Eurostat data) 2 The sectors and their codes are the following: A: Agriculture, Forestry and Fishing; B: Mining and Quarrying; C: Manufacturing; D: Electricity, Gas, Steam and Air Conditioning Supply; E: Water Supply; Sewerage, Waste Management and Remediation Activities; F:

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In 2016, on average, 20% of all employees worked in the manufacturing industry in CEE countries, which was one and a half times higher than the same figure for the old member states (Nagy et al., 2020). In terms of employment, the region has a significant weight and industry is still considered a significant employer, especially in Czechia, Poland, Romania, Slovenia, and Slovakia. Overall, we again observe a large dispersion throughout the reference period, and an overall downward trend, in some countries massively, with few exceptions in a few years. The 2008 financial crisis had a great impact on industrial employment throughout the EU and, in this respect, no overall recovery has occurred. Nevertheless, productivity questions shall also be raised (Fig. 6.5). For the EU as a whole, the new member states account for a quarter of employment in the manufacturing industry, but only 2% of the total EU GVA, and 12.7% of industrial GVA. This highlights labour productivity concerns, which we can measure by the industrial gross value added per worker. CEE is lagging behind the old member states (EU14 in the figure), but also in relation to the EU average, even despite a clear improvement in labour productivity over time. Between 1995 and 2019, labour productivity in CEE improved by 140%, and the same figure for the EU14 was 71%. Focusing only on the period after EU accession, between 2004 and 2019, the industrial GVA per worker increased by 44% in the CEE region and by 30% in the EU14. Therefore, the increase in labour productivity in the CEE region occurred mainly in the 1990s but the region started from an outstandingly low level after leaving the outdated socialist system behind so achieving a strong improvement from this low level was less challenging than reducing the gap compared to the EU average in the more mature phase. The region is not succeeding in the latter; in fact, while some kind of rapprochement is observable until 2008, after the crisis the gap in terms of industrial labour productivity between the old and new member Construction; G: Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles; H: Transportation and Storage; I: Accommodation and Food Service Activities; J: Information and Communication; K: Financial and Insurance Activities; L: Real Estate Activities; M–N: Professional, Scientific and Technical Activities and Administrative and Support Service Activities; O-Q: Public Administration and Defence; Compulsory Social Security and Education and Human Health and Social Work Activities; R-U: Arts, Entertainment and Recreation and Other services. According to this categorisation A-B makes up the primary sector; C-F contains secondary sector elements and G-U are services.

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100000

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Fig. 6.5 Industry value added per worker, EUR/y, 1995–2019 (Source own construction based on WorldBank data)

states was widening. Along with the evolution of industry value added per worker, the 2008–2009 crisis put a temporary halt to development everywhere; however, the post-crisis trends differ for the EU14 and the CEE countries. One explanation for the higher share of industrial employment and lower level of labour productivity in the CEE countries might derive from wage differences, another distinctive feature of dependent market economy (DME) model. Wages in the CEE region are significantly lower than in the EU14, especially in Western and Northern Europe, which had actually made the CEE countries attractive for foreign investments. Compared to Germany, the average monthly salaries in the CEE region are considerably poorer, ranging from 31% to 58% lower wages. These countries are in fact at the bottom of wage rankings. Yet, the wage gaps are not universal across all sectors; however, manufacturing or construction are among the undervalued ones where the differences

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between Western and Eastern Europe are relatively the largest. Generally, these sectors are the ones receiving the majority of FDI implying that the CEE countries have established a low-cost and low-wage model (Drahokoupil & Piasna, 2019). One Important Aspect of the CEE Capitalism Model: Export-Orientation Based on industrial FDI, the DME model is genuinely export-oriented and, consequently, its main income is generated by selling the semifinished and finished goods produced by the facilities established through foreign investment along the international trade links of the investing parent companies (the role of local suppliers is also important but their analysis points beyond the scope of our study). In the last section of the chapter, we take a look at the trends in international trade (export-import, goods, and services) of the countries forming the subject of our analyses: the CEE countries (Figs. 6.6–6.9).

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Fig. 6.6 The role of exports in CEE, goods, 2012–2021, 2011 = 100 (Source Own calculations based on Eurostat data)

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Fig. 6.7 The role of imports in CEE, goods, 2012–2021, 2011 = 100 (Source Own calculations based on Eurostat data) 330

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Fig. 6.8 The role of exports in CEE, services, 2012–2021, 2011 = 100* (Source Own calculations based on BoP data provided by Eurostat)

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Exports and imports play a crucial role in CEE both for the economy as a whole and for the secondary sector. Already in the pre-accession years exports were the engines of growth and contributed to the relevance of industries to a high extent. Then, the crisis of 2008 had its mark on the region’s international trade performance as exports in CEE were hit severely (yet the fallback was more substantial in the EU14). Nevertheless, the region proved to be resilient and could recover from the crisis shocks considerably faster than the EU14 or the EU27, and exports became the driver of recovery (Tabajdi & Végh, 2021). Since the end of the crisis, the export growth of the CEE region has been notably higher than that of the EU14. One important aspect of this growth in the region is the continuous increase in intra-EU trade, which highlights the interdependence of EU countries. This trend was only slightly hit by the COVID-19 pandemic—even in these times, the CEE region proved to be more resilient in terms of international trade in goods, in line with their overall better macroeconomic resilience to shocks. Since the 2008 crisis, both exports and imports have been on a growing path, specifically exports which could only partially be halted by the COVID-19 pandemic. In the 2010s international trade growth of CEE countries exceeded that of the EU14 though this is mainly due to intra-EU trade. While in 10 years’ time, from 2011 to 2021, export grew by 34% in the EU14, in certain CEE countries this increase was close to or even more than 100%. The concerned countries are Slovenia, Poland, and Croatia. Croatia marks a special case as it became an EU member state in 2013 and its accession clearly had a positive impact on its international trade figures. Yet, even countries such as Hungary or Slovakia (which showed the smallest increase in CEE), outperformed the EU27 and EU14 in terms of export growth. In 2020, the pandemic caused a drop in international trade for all the countries; the fallback was larger for the majority of the CEE countries than the EU14, nevertheless the rebound in 2021 was more significant as well. At the same time, trade in services was growing more dynamically in the reference period though individual variations are observable in this respect as well. The most dynamic growth occurred in Latvia (323% of services exports and 277% of services imports, compared to 2011 being 100%). However, many CEE countries have underperformed the EU14 in this respect, indicating that the dynamics of the services trade growth was more moderate in these countries. The COVID-19 pandemic obviously caused a serious harm to trade in services; in fact, the fallback was

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Bulgaria Poland

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Fig. 6.9 The role of imports in CEE, services, 2012–2021, 2011 = 100* (Source Own calculations based on BoP data provided by Eurostat)

relatively larger than for trade in goods. During the pandemic times, the services sectors of the EU27 as a whole suffered a great shock overall.

Conclusions Manufacturing continues to be an important element of CEE economies. Based on the reviewed data, processes of opposite directions are observable within Europe. While in the EU14, the share of industrial GVA is clearly decreasing, as well as the proportion of people employed in industry, the contrary is occurring in CEE countries where the share of industrial GVA in national GVA at least stagnates if not increases, and industrial employment is again on an increasing path after years of reduction. While in the old member states the deindustrialisation processes continue, in Central and Eastern Europe signs of reindustrialisation can be identified. This is indicated by the growing role of the region in the EU’s industrial employment, as well as in industrial GVA. On the other hand, the low labour productivity is worrisome, especially from the point of view of the region’s competitiveness, and the success and sustainability of

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the DME/asymmetric interdependent capitalism model that these countries have been applying, in close cooperation with their industrial and investment partners from the headquarter economies. The main reason behind the observed trends, in particular, the repeatedly increasing relevance of industry in CEE, is the relocation of production to the region, both from EU countries and from outside the EU (Labrianidis, 2016; Totev & Sariisk, 2010). In the period between 2005 and 2013, the stock of inward FDI per capita continued to grow in the countries of Central and Eastern Europe, although at a slower pace after the 2008 crisis (Ricci, 2019; Voicu et al., 2018). As a result of this trend, the added value produced by foreign-controlled enterprises is notably higher in the new member states (especially in the V4 countries) than in the rest of the EU (Myant, 2018; Ricci, 2019). The industrial weight of foreign-owned companies also reveals that the economies of the CEE region are dependent market economies, where their competitive advantage stems primarily from the combination of relatively low labour costs combined with sufficiently qualified labour (Nölke & Vliegenthart, 2009; Myant & Drahokoupil, 2012). At the same time, the heavy share of foreign ownership points out the dependence of the headquarter economies from ‘old Europe’ (EU14 in our descriptive statistical analyses) on the performance of the CEE economies as well that is why we consider this dependence two-way and therefore talk about interdependence. However, the nature of the dependence is different for the two parties so we claim that asymmetric interdependence is the appropriate expression to describe this strong and intertwined relationship between the headquarter economies and factory economies of the EU. The relative performance of industrial production in the CEE region, particularly the industrial GVA per worker, indicates the existence of a cost-price competitive advantage in the sector. Although technological and institutional competitiveness are other important non-price elements (Benkovskis & Wörz, 2012; Bierut & Kuziemska-Pawlak, 2017), cost advantages remain important in global competition (Ricci, 2019), and within Europe the CEE region is at the forefront. In all examined aspects, the effects of the crises (in 2008–2009 due to the global financial crisis, in 2020 due to the COVID-19 pandemic) have been significant. Nevertheless, in both crisis periods, the relative resilience of the CEE countries is identifiable. Most lately, signs of departure from the (by now) classical DME model have appeared, especially as the relative wage-cost competitive advantage is squeezing. Towards what capitalism

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model are the CEE countries heading? Towards a DME2.0, yet to be explored in its new normal? Or, rather, do we see a mixture of the DME model and a new version of intra-EU asymmetric interdependence? Even so, the DME model was demonstrably competitive until 2020 so a postpandemic return to the previous setup shall not be excluded among the possible options either.

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CHAPTER 7

The Belarusian Development Path: From Command Economy to State Capitalism? Piotr Kozarzewski and Aliaksandr Papko

Introduction After the fall of communism, Belarusian authorities built a very peculiar economic system that preserved many of the features of the Soviet period (e.g. the domination of state property and central planning) and combined them with the features of a market economy (e.g. the existence of private entrepreneurship and free prices in some areas). Until the global economic crisis of 2008–2009, the “Belarusian economic model” proved to be quite successful, allowing the country’s gross domestic

P. Kozarzewski (B) Faculty of Economics, Maria Curie-Skłodowska University, Lublin, Poland e-mail: [email protected] A. Papko Eurasian States in Transition Research Center, Warsaw, Poland Centre for East European Studies, University of Warsaw and Eurasian States in Transition Research Center (EAST Center), Warsaw, Poland

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_7

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product (GDP) to grow by 8%–10% each year. Belarusian enterprises, that, like in Soviet times, remained predominantly state-owned, actively exported advanced industrial products such as trucks, tractors, engines, and electronic appliances, as well as fuel processed from Russian crude oil. However, since the end of the 2000s, the Belarusian economy has slowed down significantly, demonstrating the limits of the economic model chosen in the 1990s. The aim of this chapter is to analyze the characteristic features of the Belarusian economy after 1990 and their evolution from the perspective of both economic policy-making and real economic processes with developmental outcomes. We pay special attention to the role of the government in the economy, especially in the business sector dominated by private enterprises. The Belarusian case is studied from the perspective of the state capitalism approach which has recently gained popularity in studying post-communist transition economies, because it focuses on state’s involvement in the economy. We come to the conclusion that in this period the Belarusian economy has evolved from a quasi-Soviet system based on state property, state planning, support to inefficient enterprises, and the massive redistribution of funds to a more flexible hybrid model where the public sector still remains the core of the economy. However due to its duality, this system can only partially be explained from the perspective of the state capitalism approach (with its current framework); therefore, a new perspective based on an already existing but updated multidisciplinary approach that incorporates the duality of the Belarusian economy is addressed here. The structure of the chapter is the following: Sect. 7.2 is devoted to the literature review and conceptualization of the study. Section 7.3 presents a historical overview of the evolution of the Belarusian economy and economic policy-making. Section 7.4 discusses the main features of the Belarusian economic system. Section 7.5 concludes.

Literature Overview and Conceptualization In studies on post-communist transition economies, the Belarusian postSoviet development path is widely called “Belarusian economic model.” However, its genesis, main features, evolution, and effects are largely neglected in the literature, especially when taking into account publications written in English, i.e. those present in global academic debates. In the mainstream academic literature, there are only sporadic attempts

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to explain the logic of the functioning of the Belarusian economic system (Korosteleva, 2007; Nuti, 2005). Western-based researchers (e.g. 2015; Ioffe, 2014; Korosteleva, 2013) have mainly Dyner & Wanczyk, ´ analyzed the economic policy of the Belarusian government, concentrating on the sustainability of the Belarusian economic system without fully examining its genesis or fundamental principles. In Belarusian literature as well, till recently most publications (e.g. Bibik, 2011; Grechneva, 2014; Kizima, 2010; Krishtapovich & Lepeshko, 2010) have focused on performance (achievements) and not the mechanisms or costs of the economic system. The domestic studies were largely attempts by statesponsored experts to justify the economic policy of the government. There have been a few local authors (e.g. Akulich, 2013; Dashkevich, 2005; Yegorov, 2013) that attempted to dig deeper and try to explain the logic of the Belarusian economic model, but their studies were still only a partial examination. Only in 2020 a Belarus-based researcher published the first comprehensive study on the Belarusian economic system (Rudy, 2020a) concentrating on its origins, main features, and reforms which are needed to address its dysfunctionalities. The same author (Rudy, 2020b) also published an article devoted to the main traps from the perspective of the Belarusian economic model. The hybrid and quite unique character of the Belarusian economic system creates problems with finding a relevant research perspective— and this issue was also mostly neglected by researchers. Among the rare attempts an article by Korosteleva (2007) must be mentioned that was devoted specifically to the conceptualization of the Belarusian economic system. The author discusses the possibilities for its analysis from the “classical” (Amable, 2003; Hall & Soskice, 2001) perspective of the varieties of capitalism (VoC) approach and concludes that such analysis is impossible because the Belarusian economy does not fit the definitions of market economy varieties. Papko and Kozarzewski (2020) discussed different possible research perspectives as well. Apart from the VoC approach, they examined the perspectives of state capitalism, economic dualism, patrimonial capitalism, and largely unknown to international academic circles theories of resource-based and redistributive economies (Bessonova, 2006; Kordonsky, 2016). They found the state capitalism approach to be the most adequate, especially in the light of the recent growing interest among researchers toward the state capitalism concept— which reflects on wider use of state interventionist policies than before, including developed market economies, where in many cases the state

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played an active role in combating the global financial crisis of 2008– 2009. Recently, transition countries have enjoyed more attention in SC studies because, in some of them, the tendency toward state interventionism has increased, even to the point of inducing changes in their development paradigms (Bałtowski, Kozarzewski, & Mickiewicz, 2022; Szanyi, 2016). It should be noted that this approach toward the Belarusian economy was also suggested by Korosteleva (2007) as an alternative to the VoC perspective; however, she hasn’t explored this possibility in detail. In his research, Rudy (2020a, 2020b) also refers to state capitalism making it his main research perspective. However it is crucial to identify, what state capitalism exactly means. There is no commonly accepted definition of this term and it has many different interpretations, researchers applying it in a number of different perspectives (Allen et al., 2022). According to Bałtowski et al. (2022), all these approaches (although not always consistently applied and sometimes not formulated explicitly by researchers) may be divided into two categories: a broad one and a narrow one. In the broad approach, state capitalism is regarded as a market economic system where the level of state intervention in the economy is much higher than in developed capitalist countries, going far beyond addressing market failures and playing a key role in meeting political and developmental goals (Bremmer, 2010; Spechler et al., 2017). Such a system may be seen as a variation of capitalism or a hybrid form between capitalism and socialism (Ricz, 2021).1 In the narrow, or microeconomic approach, state capitalism is seen as a set of policies allowing the government to have a strong and arbitrary impact on the business sector, mainly through state-owned enterprises (SOEs) (Kurlantzick, 2016; Musacchio & Lazzarini, 2012). Trying to adapt state capitalism concepts to the realities of postcommunist transition economies (mainly of Poland and Hungary), Bałtowski et al. (2022) propose to merge wide and narrow approaches and put forward a concept of six basic features of state capitalism in these countries calling it “state capitalism with populist characteristics.” Each feature has specific goals, tools, and core groups of beneficiaries who are chosen by the government (in market capitalism, the main beneficiaries are set by market mechanisms): 1 According to the most radical (albeit rare) approach (Fabry, 2019; Mises, 2009), state capitalism exists only when the state almost completely dominates the economy, which is essentially a planned socialist system.

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1. politicization of SOEs: the government and political elite use the state-controlled enterprise sector as a source of rents; 2. politicization of SOEs à rebours: the state-controlled enterprise sector (employees, managers, affiliated trade unions, etc.) is the main rent-seeker itself; 3. cronyism: the main beneficiaries of SC are private agents from outside the public sector; 4. oligarchy: very powerful private agents have a very significant influence on economic policy; 5. economic populism, or clientelism: a patronage system where the political elite transfers goods to clients in chosen social groups expecting their political support in return; 6. economic nationalism: the state exerts an impact on the economy with the declared objective of enhancing, in the long run, the state’s political capacity, military power, or international importance. Here, the state itself may be treated as the major beneficiary. Based on a wider group of post-communist transition economies with large and/or growing state-controlled sector Kozarzewski (2021) proposes adding the seventh feature to this classification which is treating SOEs and state investments as a key tool of development policy (p. 353).

A Winding Road of the “Belarusian Economic Model” The First Years of Independence The disintegration of the Soviet Union at the end of 1991 severely affected the Belarusian economy. The country was known as an “assembly shop” of the empire and its economy was based on large enterprises in the machine building, electronics, chemical, petrochemical, and agriculture industries destined to supply the entire Soviet Union. The industrial giants of Soviet Byelorussia critically depended on a supply of raw materials and spare parts from other Soviet republics. These economic ties have been abruptly broken which led to the deep economic crisis: in 1991– 1995 the country’s GDP fell by 34.7%; the income of the population decreased by half and the number of people living below the poverty line rose from 5 to 80% (Yanchuk, 2007, p. 52). Neither the enterprises nor the government were prepared for such a catastrophe. SOEs did not

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know how to function when both sources of subsidized supplies and a stable network of customers vanished. The government has been taken by surprise too and perhaps was one of the least prepared for coping with the new situation in the post-communist space. During the first years of the independence, only very cautious, partial and inconsistent reforms were initiated mainly of deregulation kind. They failed to stabilize the economy and help the enterprise sector to adapt to the new conditions. On the contrary, attempts to save SOEs at all costs through money emission led to hyperinflation that in 1994 reached 2200%.2 Emergence of the “Belarusian Economic Model:” from Rise to the Crisis (1991–2006) In 1994, amidst a deep economic recession and growing discontent of the population with the economic policy of the government, the first presidential elections were won by Alexander Lukashenko—an authoritarian politician with a strong anti-market rhetoric. By the end of 1996, he dismantled the separation of powers and consolidated control over the state in his hands. He reversed those few shallows and inconsistent reforms that had been introduced by his predecessors (e.g. taking control of the biggest commercial banks, re-introducing tight price control, and virtually stopping the already very hesitant privatization) and re-introduced the main elements of central planning. Enterprises were obliged to meet targets of the governmental five-year plan, among others, on output growth, exports, and wage growth (EBRD, 2008, p. 105). Minsk stock exchange was nationalized; multiple state-controlled exchange rates were introduced with exporters having to sell 40% of their foreign currency income for roubles at a highly undervalued rate (EBRD, 1998, p. 154). The government re-introduced a tight price control and introduced sanctions against the enterprises which did not comply with price regulations (Silicki, 2001, p. 60). Lukashenko had also managed to restore non-market exchange with Russia. In 1996–1999, the Belarusian authorities concluded a series of treaties with the ultimate goal of establishing a common state with Russia. It was never created, mainly because Lukashenko was not sincerely interested in the real unification as it would have meant the incorporation

2 DataBank, World Bank, http://databank.worldbank.org.

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of Belarus into Russia and losing power. But these agreements guaranteed Belarus generous economic preferences from Russia for many years ahead. Belarus was given unrestrained access to the Russian market and preferential prices for Russian oil and gas, which were twice below market prices (Silicki, 2001, p. 64). The latter, among others, heavily subsidized Belarus’ export of processed oil. All this made it possible to re-launch production capacities that had remained idle since the dissolution of the Soviet Union and return on the path of economic growth which in 1996–2001 amounted averagely to 6.1% of GDP (World Bank, 2005, p. 5). At the beginning of the twentyfirst century, a rapid increase in global oil prices as well as a revival in the Russian market further boosted economic growth in Belarus: in 2003– 2008, the Belarusian economy grew by an astonishing 9.4% a year.3 However, Minsk did not manage to use the extremely favorable external environment to restructure its industry and increase the competitiveness of its products in foreign markets. In fact restructuring was frozen and by the end of the 1990s no single enterprise was declared bankrupt under the 1991 Bankruptcy Law (EBRD, 1999, p. 154). Belarus became more dependent on exports of petrochemical products to the West and more attached to the Russian market in regard to the export of other products. The possibilities to increase exports were limited, but the Belarusian government found a new source of economic growth. Since 2005, about two-thirds of GDP growth was generated by the increase in domestic consumption (World Bank, 2012, p. 9). The authorities forced SOEs to increase wages, independent of labor productivity. At the same time, state-controlled commercial banks provided loans to SOEs with interest rates below the market level or even below the inflation rate. Most of these loans became unpayable, so the state regularly re-capitalized commercial banks through money emission (Kruk & Bornukova, 2014, p. 4; World Bank, 2012, pp. 29, 36). In the second half of the 2000s, this economic model had already exhausted its potential. Macroeconomic stability was severely undermined, and Russia’s generosity was depleting: in 2007, the Russian government cut energy subsidies as a response to the policy of the Belarusian authorities, who evidently did not want to fulfill their promises of establishing a common state with Russia (Sokolov, 2007).

3 DataBank, World Bank, http://databank.worldbank.org.

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Limited Attempts of Market Reforms (2007–2015) In this situation, in order to prevent a crisis, the Belarusian government decided to modify its policy in two areas: introduce some market elements into the economy in order to increase its efficiency and restore Russian economic preferences. Within the first area, the government partially re-launched market reforms. Among others, in 2007, it simplified procedures for the registration of small and medium enterprises (SMEs) and granted concessions and tax exemptions for IT firms. In 2009, the Belarusian government liberalized all prices except for a limited number of “socially important goods” and abolished wage control. In the area of ownership policy, the government announced a privatization program which included nearly 400 SOEs (although most of them were medium-sized municipal enterprises with low profitability) and corporatized (without selling shares) several Belarusian industrial giants. At the same time many policies remained unchanged, such as the stimulation of internal demand through supporting wage growth, very soft budget constraints for SOEs, and exchange rate policy. In the second area Belarus engaged in new economic integration projects initiated by Russia, such as the establishment of the Customs Union of Belarus, Kazakhstan, and Russia in 2009 and the Single Economic Space, which came into force in 2012. This activity proved to be successful, gradually restoring the preferential regime in oil and gas trade with Russia, and was a part of Russia’s long-term policy of buying Belarus’ support for its integrationist policy toward ex-Soviet republics which eventually made Belarus the only Kremlin’s ally in its aggression against Ukraine in 2022. Among others, Russia abolished export duties on oil exported to Belarus and introduced a generous gas price discount. In 2012, Russia also provided Belarus with a USD 3 billion stabilization loan, but Belarus had to pay for it by the full transfer of ownership rights of Beltransgaz, the Belarusian national gas transporting company, to Russia’s Gazprom. The success in getting back Russian preferences apparently demotivated the reformist attempts (however hesitant and partial) of the Belarusian government. Already in 2012, it abolished its previous privatization plans and switched to ad-hoc privatization policy when each privatization deal required the President’s permission. The privatization process had been even reversed, with two large enterprises that had been

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previously privatized being taken over by the state. Belarusian authorities boosted the practice of wide-scale support for internal demand through the increase of salaries and the even more massive distribution of credits to SOEs. Until 2011, the internal demand factor indeed helped the Belarusian economy to grow, but it led to a rapid increase of imports (mainly from Russia, EU, and China) and, as a consequence, to the increasing current account deficit and inflation, which skyrocketed to 53–59% in 2011–2012.4 Together with the fixed exchange rate policy, it created the grounds for the series of financial crises in 2009–2015, which eventually led to stagnation and even recession in 2015—for the first time since 1995. An important role was also played by external conditions, for example, the falling prices of major Belarusian export commodities, and the stagnation of the economy of its major trade partner: Russia. To make things worse, Russia, trying to resolve its economic problems and was dissatisfied with the quite reluctant attitude of Lukashenko toward the creation of a common state, started reducing energy subsidies for Belarus. In this situation, the government saw no other solution but to turn to more market-oriented reforms again. Toward Stability Based on Market Mechanisms (2015–2020) The major change to Belarusian economic policy occurred in 2015 with the government’s resignation from stimulating GDP growth at any cost. The government began prioritizing macroeconomic stability over increases in output and wages. The monetary policy was tightened; the National Bank increased the interest rate well beyond the inflation level. The credit to the national economy had been reduced by one-third, which meant decreasing support for SOEs, although the structure of the credit supply remained almost unchanged. In 2016, the authorities increased household tariffs for the supply of water, electricity, and heating considerably and made a commitment to phase out all subsidies to communal services for households within a few years. Austerity measures were combined with some liberalization steps. In 2016, the government abolished price controls on “socially important goods” and eliminated volume output targets for SOEs.

4 DataBank, World Bank, http://databank.worldbank.org.

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Decreasing state support of SOEs negatively affected their functioning and caused their employees to search for better salaries in the private sector, mainly private SMEs. This inclined the government to start perceiving SMEs as the main absorber of the released labor force and to liberalize the regulatory environment for them (Sekhovich, 2018, p. 262). In 2017, a favorable taxation and regulation regime was created for IT firms and supporting services. Formalities needed to open a business in 18 industries (e.g. retail, hotel, tourist businesses, and catering) were radically reduced. At the same time, the Belarusian authorities demonstrated no interest in decreasing the share of the state sector and reducing the role of large SOEs. Unlike in 2011, no privatization plans were declared. The political elites were still trying to keep the “command heights” of the economy under their “manual control.” Stabilization and liberalization measures indeed brought some positive macroeconomic effects such as stabilization of the national currency, the reduction of inflation, and re-launching economic growth. On the other hand, this growth was quite anemic (averagely 2.3% in 2017–20195 ); the external debt accumulated in previous years (mainly toward Russian banks and the government) reached 73.4% of GDP in 2017 (EBRD, 2018) and generated a constant need to refinance it. As before, economic policy measures were accompanied by attempts to gain as many Russian preferences as possible and indeed Belarus managed to preserve a certain level of preferential treatment. However, this resource for the Belarusian economy started losing its importance. Firstly, for purely economic reasons: the economic base for preferential treatment of Belarus has been shrinking since 2015, as Russia has gradually decreased the spread between export oil prices and those on the domestic market. Besides, the stagnating Russian market could absorb less and less Belarusian goods. Secondly, the political cost of the Russian aid became less and less acceptable for Lukashenko as Russia increased its pressure on full integration between the two states, i.e. de facto incorporation of Belarus by Russia (Belta, 2019). This reversal of the role of Russia from a source of hope to a source of threat perhaps was an additional motivation for the Belarusian government to move toward cautious but still pro-market reforms.

5 DataBank, World Bank, http://databank.worldbank.org.

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Tightening the Grip Again (Since Autumn 2020) The situation started changing in the late summer of 2020 due to the biggest ever social unrest in the country caused by the official outcome of the presidential elections. Facing the perspective of losing power, Lukashenko had to revise his attitude toward Russia whose help became treated as a last resort for his regime. Russia promptly offered financial assistance for the Belarusian authorities in the amount of USD 1.5 billion which in reality consisted mostly of a deferred payment of the Belarusian government’s debt (Novaya Gazeta, 2020). Russia also engaged in propaganda support for Lukashenko’s regime and declared its readiness to send special forces to suppress the protests. Lukashenko managed to keep power. But the price paid for Russia’s help, albeit not fully known at the time of writing this manuscript (August 2022), will for sure be very high, if not disastrous. Becoming the only faithful political and military ally on whom Russia can count in realization of its expansionist plans, first of all its aggression against Ukraine, add up to the costs already incurred by Lukashenko’s attempts to preserve his power. One of such costs is economic sanctions. The biggest economic shocks to the Belarusian economic system so far were made by the EU. A false bomb alert to ground a Ryanair flight and the kidnapping of a Belarusian journalist pushed the EU to impose import restrictions on petroleum and potash, as well as introduce sanctions against Belarusian airlines, tobacco, and truck producers. The export of these goods in 2019 brought Belarus about USD 3 billion or 5% of its GDP (Papko, 2021). In March 2022 the EU extended its economic sanctions, this time for the Belarusian support of Russia’s invasion in Ukraine mainly in the form of financial restrictions. Unlike in previous periods of growing economic difficulties, the Belarusian government refrained from any liberalization measures and started re-tightening its interventionist grip. Administrative control over prices, first of all of “socially important goods” has been restored and expanded. As a response to growing budget constraints, Belarusian officials have increased the extraction of funds from private businesses. For example, the taxes on microenterprises in 2022 were increased threefold. All this together with the sanctions leads to substantial downsizing of private businesses and their fleeing from Belarus, especially in the IT sector.

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Unlike in the previous periods, the policy toward SOEs is very passive. On the one hand, privatization is still not on the agenda. On the other hand, the government refrains from the support of most SOEs and their financial situation started to depend mostly on the market situation. In 2020–2021, due to the bad condition of most SOEs, employment in the public sector continued to shrink, both in relative and absolute terms. Additionally, mass political repressions initiated by the Belarusian authorities seem to contribute to further degradation of the state-owned enterprises. In November–December 2021, Belarusian authorities have fired up to 200 thousand SOE employees (mostly qualified workers and experienced managers) who participated in political protests or were just suspected of being disloyal (DW, 2021).

Formal and Informal Features of the Belarusian Economy Ownership Structure and Ownership Control SOEs still dominate the Belarusian economy; however, since the beginning of the 1990s, their share in the economy was slowly but constantly declining. In the last decade, this process has taken a new dynamic. According to estimations based on official data, the share of SOEs in the total value of fixed assets fell from about 79.5% in 2009 to 64.5% in 2020; during the same period, the share in employment dropped from 67.3% to 60.6%. It is worth noting that this dynamic was predominantly not a result of privatization of SOEs, but of their gradual economic demise and growing de novo private sector of the economy. Proportions between state and private ownership are highly uneven across sectors of the economy and to a large extent are a result of suspended privatization and the discriminative policies applied to the private sector. Belarusian authorities have managed to keep control over the overwhelming majority of “old” enterprises inherited from the Soviet period such as infrastructure, mining, construction and manufacturing. SOEs also dominate among the largest enterprises: in 2015, only 6 out of 100 largest industrial companies (in terms of operating revenues) were not controlled by the Belarusian government (Kozarzewski, 2021, p. 317). Private enterprises, in their turn, had to develop in new niches, which emerged after the fall of communism and were not occupied by Soviet

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industrial giants. Private business has also taken control of the few spheres from which the state has withdrawn, most probably, due to high control and maintenance costs (e.g. road transport and retail). Nowadays, private firms, which are predominantly domestic, are mainly concentrated in services and IT—e.g. business services, public catering, advertising, and computer programming. In 2020, the IT sector has become the third most important sector of the economy after industry and retail. The share of this sector dominated by private enterprises reached 7.3% of the Belarusian GDP. Its contribution has become larger than the contribution of such “traditional” sectors as agriculture, construction, and transport (Belstat, 2021, p. 170). Foreign direct investments (FDI) form just a tiny part of the Belarusian economy: foreign-owned companies contribute merely 3.5% of the gross value added. The largest foreign investor in Belarus is Russia (USD 4.0 billion, 30.1% of total FDI) and the second largest investor is Cyprus (USD 2.3 billion, 17.6%). Taking into account that Cyprus is widely used as an off-shore investment platform for Russia (Repousis et al., 2019) and other former Soviet republics including Belarus (Sidoruk, 2017), Cyprian investments may largely be of Russian descent and domestic investments that have taken a round trip for tax avoidance purposes. The highest shares of foreign-owned companies are found in IT and communication (Belarus became popular for outsourcing IT services for European countries) and retail (Mukha, 2019). However, there are (very few) cases of FDIs entering more “traditional” sectors. E.g. a Lithuanian woodwork company VMG Group and a Swiss train manufacturer Stadler Rail AG opened their factories in 2013–2014. Whereas private enterprises in Belarus are subject to regular corporate governance mechanisms typical for market economies, most SOEs have the legal form of a so-called unitary enterprise, being directly administered by the central or a local government. There are a certain number of joint-stock companies with full or majority state share, but their boards usually also have no autonomy in decision-making and are just a channel for passing the government’s instructions to the enterprises. Their ownership functions are not separated from management functions and are mixed with regulatory functions. The government and local executives perform ownership functions, influence production process, and have the power to modify the regulatory environment where SOEs operate (Avtushko-Sikorskii et al., 2016, pp. 29, 37).

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In practice, ownership functions of the state are scattered among nine central ministries, regional and local executives, various government committees, and five state consortiums the origins of which can be traced back to the “branch ministries” of Soviet times and that have similar functions to ministries (Lavnikevich, 2015). Each consortium includes several dozen large enterprises from five different industries: petrochemicals, light industry, food, timber and woodworking, and wholesale trade. These consortiums may include not only SOEs, but also selected private companies which join them usually under the pressure of the government (Avtushko-Sikorskii et al., 2016, p. 20). In 2010, the government has established a second, lower level of this ownership hierarchy gathering about 800 SOEs into 102 state holdings (Ministry of Economy of the Republic of Belarus, 2016). Thus, state corporate control presents a sophisticated structure that places SOEs under the responsibility of multiple entities, often with not fully clear and overlapping competencies. State Planning System One of the fundamental features of the Belarusian economic model is the planning of economic activity by state authorities. Every five years, the Council of Ministers adopts long-term (15-year) and mid-term (5-year) plans for social and economic development of the country. All economic development plans are prepared by the Ministry of Economy in cooperation with the Ministry of Finance, the National Bank, other ministries, and state consortiums. National Strategies designed for 15 years establish general priorities in economic and social development. Despite their long-term character, these documents provide detailed information about the goals which the government expects to achieve in social, economic, ecological, and regional policies. A five-year plan for social and economic development is very similar to the long-term plan. It sets economic targets (e.g. GDP growth, export growth, increases in the labor productivity, fixed capital investments, and population income) and specifies the policy reforms and projects to be implemented in a medium-term perspective. Based on this document, the Council of Ministers drafts an Action Plan which contains a long list of detailed measures to be implemented in each aspect of the social and economic policy framework. This Action Plan includes dozens of quantitative indicators the government expects to achieve.

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Finally, each year, the President of Belarus by his decree approves a Prognosis of Social and Economic Development containing several growth targets (in such areas as, e.g. GDP and exports, population income, inflation, and FDI). Based on these indicators, the government composes a so-called “comprehensive list of targets in financial and export activities.” Meeting these targets is obligatory for all SOEs and firms participating in state consortiums (regardless of their financial standing and situation on the market); they are obliged to draft their own development plans for both five- and one-year perspectives. A special role is played by so-called “GDP-forming enterprises”—the 100 largest state-owned Belarusian firms that produce more than half of the country’s industrial output. These “national champions” are the key elements of the economic planning system being the main agents implementing the government’s plans without whom the achievement of the targets specified in these plans would be impossible. They function under the strict control of the central government. The performance of non- “GDP-forming” SOEs is supervised by lower level authorities. However, this does not mean that they have more freedom in their economic activity. Economic development plans drafted by “ordinary” companies with state participation (though not necessarily with majority state stock) are consulted, adopted, and their implementation is supervised by local executives. Belarusian law clearly states that if a SOE fails to achieve its expected targets, its director should be “brought to administrative responsibility” and the “irregularities” should be immediately corrected (Council of Ministers of the Republic of Belarus, 2005). But failure in plan implementation can have negative consequences for state officials on all levels as well. Such a rigid planning system makes it harder for SOEs to adjust to the changing economic environment, especially in times of crisis. The necessity to meet output and investment targets, as well as to maintain production and employment levels resulted in growing stocks of unsold goods, wasting money on unnecessary investments, and retaining an excessive labor force. However, the recent economic problems have caused the authorities to reduce the list of economic targets and start looking at ways to make enterprises more flexible.

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Unequal Treatment of State and Private Businesses In Belarus, it is the state which defines the rules of the game in the Belarusian economy and the private sector is to a large extent subordinated to the state-owned sector. Such domination is ensured due to, firstly, the system of legal and extra-legal barriers protecting the Belarusian public sector from domestic and foreign competitors and, secondly, through a system of extracting private businesses from resources that are directed to financing the economic and social policy of the Belarusian government. The conditions established by the state authorities for private business significantly differ from the conditions for SOEs. The majority of private enterprises work under hard budget constraints; in contrast, SOEs benefit from various types of support and do not have to fit into hard budget frameworks (Yegorov, 2013. p. 78; Ehrke et al., 2014, p. 3), although recently the level of the state support for SOEs has reduced significantly. The main instrument to support loss-making SOEs in Belarus is subsidized credits provided by state-owned commercial banks. The adverse effect of the cheap money given to SOEs is the expensive credit given to the private sector. The banks try to compensate for the losses incurred from supporting state companies by increasing the price of loans to private firms (Yegorov, 2013, p. 78). State support for SOEs may also take the form of tax exemptions, sale of raw materials and energy at reduced prices, refund or remission of debt, leasing of equipment at preferential terms and preferential treatment during participation in public procurement contracts, etc. Private enterprises are deprived of all these benefits. A very powerful tool helping the state to keep private enterprises out of the market is the rigid vertical integration of SOEs and the nonmarket exchange among them—which is characteristic first of all for export sectors and helps the government to keep control over them. For instance, state-owned farms are obliged to sell almost all their products to food processing SOEs at very low prices set by the government. As a result, these farms do not receive enough funds for development and become entirely dependent on state support. On the other hand, the low prices of the raw materials stimulate food processing enterprises, many of which sell their products abroad and receive high export revenues. Therefore, food processing SOEs have no need to buy more expensive products from private farms. This discriminatory pricing policy is widespread in other export sectors, e.g. in the machine building industry (Yegorov, 2013, p. 79).

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The government ensures the dominance of SOEs on the Belarusian market not only through generous subsidies and profit redistribution, but also through trade protectionism. The volume of imports to Belarus is regulated by the decisions of the Council of Ministers and President’s decrees. The President regularly orders SOEs to replace imported goods with domestically produced ones. Each year, the government approves a long list of “import substituting goods.” The Council of Ministers gives tax breaks to the Belarusian enterprises producing these goods and prevents foreign analogues from coming to the Belarusian market (Akulich, 2013; Daneyko, 2012). The Council of Ministers of Belarus issues the “product range lists” that oblige shops, supermarkets, and restaurants to sell a certain number of specified domestic goods. These lists include all kinds of articles produced in Belarus—from dairy products and pharmaceuticals to textiles and electronics. Imports of popular consumer goods such as alcohol and tobacco are reserved for several dozens of firms annually appointed by the President. The Belarusian authorities have also developed a broad set of informal mechanisms to extract resources from private firms and control the expansion of the private sector (Papko, 2017). The first set of tools is fiscal and criminal repressions. Authorities, law enforcement bodies, and inspections routinely use real or alleged violations of the sophisticated and exaggerated regulations to blackmail private enterprises and extract resources from them. Regular fines imposed on SMEs perform the function of informal taxes or bribes. Owners of large private enterprises often face criminal prosecution for tax avoidance, especially in times of crisis. In such a way, state authorities punish those who are reluctant to provide resources to the state. Repressions also help to discipline other private businesses and make them more “willing to cooperate” (Smok, 2017). The second set may be called a “forced corporate responsibility,” i.e. forcing private enterprises to finance or directly implement public projects. Afraid of sanctions, private enterprises provide public authorities with unpaid goods and services. They must finance the construction of public facilities, sponsor cultural and sports events, or support lossmaking enterprises. For local authorities, this is the way to find additional resources for the realization of their tasks. Their own resources and governmental subsidies more often than not are insufficient, and taking resources from private businesses allows local bureaucrats to avoid responsibility for improper performance of their duties.

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The third one is directly restricting market access for private companies. Local authorities try to support local SOEs by blocking “outsider” private enterprises from entering the local market. Local private firms competing with SOEs may also be removed from the market under some pretext like, e.g. non-compliance with technical standards or sanitary requirements. Local authorities may informally forbid both private and state-owned shops to buy products from other regions. The fourth set of tools is an abuse of property rights. At a “systemic” level, these are numerous orders and requirements of the central and local authorities that limit the possibilities of owners to use their property (requirements on employment, remuneration, price setting, etc.). It is worth noting that even if the state possesses a minority stake in a company, it still can effectively control the business. But more “radical” solutions also take place. State bodies may confiscate the property of private firms and/or put them under the control of state officials. In 2010–2018, there were at least seven cases where large private enterprises were taken over by the state (Loyko & Zayats, 2018). In the majority of these cases, the government or President issued legal acts that under various pretexts suspended the managing and supervisory boards of these companies—even in companies where the state had no shares at all. After appointing new managers, the authorities initiated the issue of shares which allowed them to buy the controlling stake. In this and other cases of violation of property rights by the state filing lawsuits to the court by the owners had little effect, because the judges were always taking the side of the government. The reason is that judges at all levels are not independent; they are appointed and revoked by the President, so their decisions are highly influenced by the executive power. State-Organized Informality Although state officials in Belarus have vast power over economic agents, and a lot of this power is executed in not fully formal or even in an outright informal way, the relations between the state and business are not permeated by corruption and rent-seeking, as can be seen in many other post-communist countries, including those which were regarded as transformation leaders, e.g. Poland and Hungary (Bałtowski et al., 2022). The study performed by Papko (2017) shows that the majority of resources extracted from businesses do not go into state officials’ pockets. This does not mean that patron–client relationships do not exist at all; they are just

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much less widespread and of a quite unique kind. From the governmental side, they are largely fueled not by the private interests (especially financial) of bureaucrats, but by their search for resources for the realization of the goals defined by the state. These preconditions, firstly, are the selective approach toward enterprises of different resource-extracting potentials, which makes larger enterprises more attractive as clients of the state authorities. Secondly, the relationships of different levels of the state apparatus with enterprises are different. Two patterns can be identified here. The first pattern covers the relationships between local authorities and private SMEs. Their resource-extracting potential is limited, so they do not attract the attention of the central level of the state administration. But for the local administration, SMEs are still attractive and are used as a milking cow to obtain resources for implementing the socioeconomic policy of the government. The peculiarity of this pattern is that it is seldom based on true patron–client relationships. Local authorities use every pretext to extract resources from SMEs giving nothing in return apart from not destroying the businesses. Local bureaucrats usually refrain from breaching the law if they are asked to give favors to entrepreneurs because they are tightly controlled and may easily become the subject of a criminal prosecution. Moreover, local authorities are just not able to guarantee protection in case of problems with law enforcement. The second pattern describes the relationships of bureaucrats with large private firms. In fact, the central authorities are interested in relationships with such businesses, and there are much more possibilities (and much greater will) for entrepreneurs to make these relationships “mutually beneficial.” The government gives large companies significant preferences in exchange for regular “help” and the realization of “socially important projects” (Sekhovich, 2019). Such an arrangement is entered not only by domestic big business, but also by foreign ones. For example, a private Swiss company Stadler was allowed to enter the Belarusian market under the condition that it would bail out Belkommunmash (a state-owned manufacturer of trolleybuses) and invest in the production of electrical transport in this plant (TUT.BY, 2014). Nevertheless, even proximity to power does not guarantee that beneficial relations will last forever. For example, Yury Chyzh, once being one of the richest Belarusian entrepreneurs and a member of Alexander Lukashenko’s inner circle, and who actively helped to realize state projects, in 2016 was put on trial under tax avoidance charges and lost his wealth and social position (Sekhovich, 2019).

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All this represents a very interesting case of state-organized informality. It was borne neither from the initiative of private actors nor from individual state officials. It originates from the specificity of the Belarusian economy, based on interventionism with weak formal enforcement mechanisms, where in order for the system to function, written rules must be supplemented with unwritten ones.

Conclusions and Discussion After the collapse of the USSR, the Belarusian economy was gradually evolving from a quasi-Soviet system with strong state planning, generous support to inefficient SOEs and the massive redistribution of funds within and across the sectors, to a more hybrid model. In this model, however, the public sector still remains the core of the economy enjoying a privileged position vis-à-vis the private sector, and the level of state interventionism remains very high. In the course of the recent 15 years or so, two tendencies have become particularly visible. The first one is gradual reduction of subsidies, partial deregulation, and attempts to make the state sector more efficient. The second one is the growing role of private enterprises, especially in the new sectors that expanded after the fall of communism and were not dominated by SOEs. Private enterprises proved to be more adaptive to the changing economic conditions and the SOE sector is gradually contracting not being able to stand growing financial difficulties. However, currently the regime is still stable and has not changed its basic features yet. The question arises about the origins of long-term durability of the “Belarusian model” that apparently had every chance to collapse years ago. This issue requires deeper investigation. At this moment it seems that the following factors may be essential—separately, they would not be able to ensure the system’s sustainability, but together they create a sufficient level of synergy. Firstly, these are historical and cultural roots of the Belarusian state such as the lack of traditions of civil society and democratic rule and deeply rooted traditions of patronage relationships between the state and the citizens. Secondly, it’s the will of Lukashenko and the political elite to keep power at all costs which, apart from political repressions and restricting civil rights and liberties, requires keeping the economy at some level of viability. Besides, a large part of the political elite may sincerely believe in the superiority of state interventionism over market mechanisms. Thirdly, it’s the specificity of

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the situation of the public and the private sector. A large part of the public sector produces mainly low-processed goods that still enjoy high demand on international markets which helps keep it afloat. Private sector enclaves, albeit being under administrative pressure, generally preserve their viability due to two factors. They occupy market niches with high profitability and in many cases also high export potential (IT, services, dairy products, etc.). At the same time, the administrative burden is not strong enough to destroy them—it would be counter-productive for the authorities to kill the private sector which is a producer of resources to be redistributed. Therefore private businesses are allowed to operate in areas where SOEs cannot generate necessary resources themselves. This kind of forced complementarity may be reinforced with a sincere will to use the value-creating potential of private businesses in the sectors that do not pose a threat to the state in keeping “command heights” in the economy. Fourthly, it is the peculiarity of Belarusian geopolitical position: despite all the problems in relationships between Belarus and Russia, Lukashenko’s regime was a valuable and indispensable Russia’s partner worth economic and political supporteven if till recently Belarus managed to avoid political dependence from Russia. On the other hand, till recently European countries for a number of reasons were not motivated enough to fight the regime. This means that the chances for large-scale market reforms in Belarus are still low because the Belarusian authoritarian regime still has a quite efficient set of formal and informal tools of economic and political domination. It petrifies the status-quo in the country, especially in the situation of the war against Ukraine which motivates Russia to give a helping hand to its sole political ally in the region. At the same time there are processes that weaken the “Belarusian model” from inside. Growing private sector increases the part of the population (those who work and their families) that does not depend on the state thus becoming less politically manageable. Employees of SOEs which keep losing state support may also less and less feel as beneficiaries of the patronage system thus contributing to its shrinking. Also exogenous factors may prove to be relevant. Firstly, international sanctions against Belarusian engagement in the war in Ukraine predominantly undermine the situation of export-oriented SOEs being one of the pillars of the system. Last but not least, high dependency of the “Belarusian economic model” on geopolitical setup also may create a pre-condition for regime decline and even change. On the other hand, the fact that

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Lukashenko eventually traded the country’s independence from Russia for keeping his position may be a sign of the growing crisis of the regime. Understanding the “Belarusian model” poses a challenge for the existing research perspectives. Using the concept of state capitalism, first of all, we must answer the question of whether an economic system where the state dominates both in the ownership structure and regulation of economic activity can be called capitalistic. According to a relaxed approach (Ricz, 2021) it does, because in Belarus basic elements of capitalism have not been fully eliminated. On the other hand, in this country market mechanisms and institutions are not by any means fundamental tenets of the system which makes Belarus different from many countries regarded as state capitalist. However, if we look at SC in the “narrow sense,” i.e. as a set of features and specific policies discussed in Sect. 7.2, most of its manifestations can be found in the Belarusian economy. SOEs and state investments are the key tool of economic policy. SOEs are highly politicized, their major role being resource distribution for political goals. In order to perform this role, SOEs enjoy a privileged position set up by the state getting resources from private sector. SOEs are one of the major tools of economic populism—one of the cornerstones of Belarusian economic policy, with the authorities trying to create the widest possible clientelist base. At least at the discourse level, economic nationalism is also clearly visible as notions of a strong and independent economy and the state that supports local producers. Cronyism exists in the case of the (not numerous) big private companies which enter “mutually beneficial” relationships with public authorities—although political rents in Belarus are limited in form and scope, seldom leading to substantial personal enrichment. Basically, only one feature—oligarchy—is virtually non-existent in Belarus (but it also does not exist, e.g. in Poland which clearly heads toward state capitalism). Besides, all the tools of state capitalism described by Bałtowski et al. (2022) are present in Belarus. It seems that this apparent contradiction between the lack of fullfledged capitalism in Belarus and the existence of numerous manifestations of state capitalism in this country may be resolved in different ways. One is further development of the SC concept, including its geohistorical adjustment, perhaps within the wider perspective of the VoC approach. However, the fruitfulness of this way may depend on whether the Belarusian case is not unique and represents some pattern found in other countries as well—and this requires further investigation. Another

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possible solution is to apply a multidisciplinary approach which would take into account the duality of the Belarusian economy. In this case, the state capitalism perspective would be used only as one of several tools of analysis, combined with other perspectives which have yet to be selected, e.g. those dealing with resource-based and redistributive economies. Theories of economic duality and hybrid regimes (Boeke, 1953; Wintrobe, 2018) may contribute as well. Another important direction of further research (which will be facilitated by choosing the appropriate theoretical perspective discussed above) is the identification of the main driving forces of the Belarusian system, including those that ensure its high sustainability (regardless of all the obvious flaws)—because only partial explanations exist so far.

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CHAPTER 8

Rent Streams and Institutional Development in the (Semi-)periphery: Iran and Hungary Miklós Szanyi and Somayeh Sedighi

The Role of Rents in the Economy and Economic Theory The Various Types of Rents Rents are present in every country. Imperfect competition always creates situations when better access to production inputs, markets, or finances will create uneven production costs. Be it sheer luck or deliberate action of creating and protecting such differences (like in the case of innovation), some economic actors earn above-average returns that also include rent

M. Szanyi (B) · S. Sedighi Department of Economics and Business Administration, Szeged University, Szeged, Hungary e-mail: [email protected] M. Szanyi Center for Economic and Regional Studies, Institute of World Economics, Budapest, Hungary

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_8

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elements. In the economy, the contestability of rent sources depends on the size and development level of markets as well as (corrective) market regulation. This is the most important task of competition policy, and partially also income policies. Governments’ ability to restore or create market competition has been regarded as satisfactory until most recently. However, the globalization process and the emergence of new international competitors like global value chains or the state-permeated market economies (Nölke et al., 2019) fundamentally changed the playing field. Competition policies aimed at national markets could not cope with these challenges. Both processes created new sources of rent on international level. As a kind of compensation, national policies started to spread curtailing competition in domestic markets and providing a suitable environment of rent creation for domestic companies. The new phenomenon of “economic patriotism” ocs & Szanyi, 2019), as a new emerged (Clift & Woll, 2013; see also Ger˝ set of policies aiming to privilege national actors very much like in the era of “economic nationalism” of the nineteenth century. Thus, the quantity of potential rent streams increased at the turn of the millennium. Among the scarcity rents, Mihályi and Szelényi (2019, p. 65) differentiate various types according to their sources. Concentrating on business rents we can pick the following ones: 1. Classical Ricardian rents in agriculture and mining 2. Natural monopolies are based on increasing returns from network effects (virtual open networks, communication systems) 3. Natural monopolies based on location (hotels, real estate) 4. Innovations (with or without legal/patenting protection) 5. Market limitations through creating entry barriers (cartels, lobbying, corruption) 6. Market limitations through state-induced monopolies. These rents work in very different environments and are treated by various economic policy tools. Their common feature is that they create a closed social relationship in a given market. Since market positions are not contestable at least in the medium run there is an immanent moral hazard in these market settings. Hazard is more intense if there are only a few beneficiaries especially if they are socially linked to political circles responsible for the regulation of the given market. Yet, economic policies can be

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applied for the treatment of negative consequences (e.g. inflation) even in the case of least contestable markets. Price and income policies are especially important in this regard. However, owners of rent sources may wish to influence policy decisions over their businesses. Auty and Furlong (2019) discussed the role of rents in explaining some aspects of the resource curse debate. Using the examples of emerging market economies they differentiated among various rent streams. The main sources of rent in these countries are: 1. Concentrated natural resource rent (minerals, oil, and gas) 2. Diffuse natural resource rent (mainly arable land suitable for the production of various commodities) 3. Regulatory rent (exclusive licenses, monopoly rights, price setting boards, etc.) 4. Labour rent (worker remittances) 5. Geopolitical rent (mainly foreign aid and other unilateral money transfers) The authors argued that the different rent streams vary in their economic impact that could trigger Dutch disease syndrome1 or distort resource allocation hypothesized for resource-dependent countries but also seen in other cases of growth collapse in developing countries. They are also different in their political consequences and degree of moral hazard. Some rent streams are easily captured by politicians and used for self-sustaining rent sources in the frame of “rent cycling”. One last special source of rent has to be mentioned: the quasi-rent. Quasi-rent is realized when the myopic short-term vision of management (or government regulation, taxation) deprives firms of the resources for sustainable long-term business conduct. The short-sighted vision of stateowned enterprise management usually stems from politics where due to the election system political mandates are limited in time. Wherever polity has captured business, there is a high degree of moral hazard of extracting as much cash as possible to finance various political goals or even personal enrichment (Gochberg & Menaldo, 2021).

1 Dutch disease is a set of consequences of large-scale income inflow that distorts economic structure, especially manufacturing industry. It is a central piece of the resource curse hypothesis.

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The Economic Impact of Rents Generally speaking, rents reduce economic growth in the long run. If we accept the classic assumption about the role of competition as a major engine of economic progress (Smith, Schumpeter, Kuznets), then the curtailment of competition would block the source of economic growth. Rents act as barriers to growth since they stem from “unearned” income. Even if rent and profit emerge simultaneously, the rent component of the income will stimulate concentration on the rent source which is in most cases use either relational capital or anti-competition practices. The main question is of course if there is effective control over the exploitation of the relational capital and the conduct of competition-limiting practice. The level of control on rents is influenced by the socio-political features of the various societies and countries. Whether they incorporate a high level of tolerance for social inequality and develop institutions of “closed social relations” or they rather create “open social relations” (using the Weberian terms, but also very similar to the concept of Limited- and Open Access Order Societies’ concept by North, et al., 2009). Mihályi and Szelényi (2019) interpreted this Weberian concept as a systemic feature. Pre-historic but also feudal societies built upon closed social relations and expropriated sources of income (mainly land) which resulted in a relatively low rate of economic growth. The advent of capitalism in the Western world opened up many social relations and unfolded dynamic entrepreneurship when wealth became accessible to wider social strata under conditions of social mobility. But the Weberian concept is also applicable to recent comparisons by stating that more open, dynamic societies can achieve higher economic and social progress. Also, policies that reduce social mobility or market competition run against the risk of less progress. Rentiers are not likely to invest their income surplus in competitive and productive activities. The Weberian concept also provides an opportunity to expand the potential sources of rent from land and mines (natural monopolies) to other businesses where closed social relationships prevail. Concrete and detailed description of self-sustaining rent generation is included in the rent cycling theory of developing countries (Auty, 2010; Auty & Furlonge, 2019). The theory distinguishes between two basic development trajectories: the low-rent competitive diversification model and the high-rent staple trap model. The theory hypothesizes that low-rent

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incentivizes elites to create wealth efficiently under competitive conditions. Low rents promote elites to apply policies that accelerate economic growth. Rapid economic growth increases all incomes in the society, but that of elite owners the most. This model has been applied successfully to newly industrialized countries that are catching up with advanced economies, and to China more recently. It also resembles the classic developmental state concept (Ricz, 2019). In contrast, high rents encourage elites’ competition to extract rent for immediate enrichment at the expense of long-term economic growth. The high-rent staple trap model helps to explain why so few resource-rich countries managed to enter a sustainable economic developmental path. It also sheds light on other, less resource-rich emerging market economies’ failures in this regard. The model states that all kinds of rents not just natural resource rents endanger growth due to the moral hazard of elites. In this chapter, we investigate under what circumstances and limits we can use the “high rent staple trap model” in a resource-rich country (Iran) and an East-Central Europe’s transition economy, Hungary. The intensity of the negatively perceived social economic and political processes and eventually also the likelihood of the protracted growth collapse depends on the type and size of the rents realized in the economy (Auty & Furlonge, 2019, p. 23). Most vulnerable are those economies that feature large-scale concentrated rents which are easily captured by governments. Such rents stem from natural resources (mainly oil and gas), international money transfers (geopolitical rent), and regulatory rents (also including quasi-rents that can be realized, e.g. through excessive taxation). Auty’s rent cycling theory can be amended by an analytically betterstructured approach explaining the interaction of rent sources, political structure, and economic growth (Sen & Pritchett et al., 2018; Tyce, 2017). The existence of rents especially natural resource rents can make it rather difficult to maintain the basic features of the competitive diversification model. After the categorization of the political environment, Sen and Tyce (2017) also describe four main economic sectors that work differently from the viewpoint of rent extraction. The role and the intensity of the use of rents (especially regulatory rents) will also depend on the structure and dynamics of the economy. The “rentiers” are mainly extractive and agricultural businesses selling much of their products abroad which gain access to Ricardian rents through the state licensing activity. “Powerbrokers” are large service providers who are working on regulated markets

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and are either natural monopolies or are granted monopoly licenses by the state (e.g. energy sector, rails, other types of linear infrastructure, trade, or heavy construction). These two groups of companies are most likely colliding with government politicians and state bureaucrats to create and share rents in the economy. “Magicians” are export-oriented firms in competitive markets. Many of them can be foreign-owned businesses. They may gain influence over governments, especially large multinational firms, and can get also rents in form of investment subsidies. However, they work in competitive markets, thus the impact of their rents will not necessarily divert them from long-term competitive strategies. Last but not least the bulk is small and medium-sized firms, the “workhorses” that provide the society with goods and services necessary for subsistence. They are not expected to develop crony relationships with politics, at least not on the national level. The activity and firm structure of the economy will determine the “rent space”, the sectors and businesses that are likely enjoying Ricardian and/or regulatory rents. The size and weight of the sectors may change over time providing different patterns of rent creation and extraction. The interplay between changing political environment and rent space will determine the actual connections of business and politics over rents: the “deals space”. Sen and Tyce (2017) identified similar moral hazards echoed by colluding business and polity in the rent space than Auty and Furlonge in their high-rent staple trap model. However, they also included a wider range of changes in exogenous factors that could alter the size and shape of the rent space thus providing changing rent seeking opportunities for the political elites. These changes can affect the rent sources differently for firms in the four segments of the economy.

The Iranian Case The Iranian case describes the actual evolution of the high-rent staple trap model with the unsuccessful attempts of certain periods to reduce resource dependence and to increase political and economic opening leading to a more competition-based social model. The Iranian economy successfully limited its direct dependence from the British government and British oil companies during the twentieth century. However, this political change did not affect the natural resource dependence of the country. Instead of the British the Iranian state became the most important beneficiary of oil rents. The Islamic Revolution did not change the

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economic drivers either. The head of the state and his court were replaced by a wider range of theocratic institutions that have used the rent for the same political purposes. We concentrate in our analysis on the later period of the Islamic Republic. Iran is a natural resource-abundant and dependent country. The country’s estimated oil reserves amount to 163,1 billion barrels, having the fourth-largest oil reserves in the world—after Canada, Venezuela, and Saudi Arabia. Also, the volume of Iran’s natural gas resources is 33.5 trillion cubic metres and in this respect, Iran ranks third in the world after Canada and Russia. Oil revenues reached 15–35% of the GDP in the 1990–2018 period. The country also shows signs of a natural resource paradox. Its relative level of development measured by the per capita GDP did not narrow the gap to the world average. The average rate of growth of this development measure in the post-second world war period was 2,1% in Iran, meanwhile, the world average reached 2,3%, and the developing countries’ figure was 3,1%. The share of crude oil production and export remained very high throughout the past decades (Pamuk, 2018). The structural changes of the Iranian economy reflected the characteristics of Auty’s high-rent staple trap model. The shrinking agriculture was replaced by services rather than non-oil industrial sectors. Due to institutional weaknesses modernization and industrialization efforts could not create self-sustaining and internationally competitive sectors. The successive development plans of the time of the Monarchy until 1978 as well as the efforts taken by the various governments of the Islamic Republic could not change oil dependence. Fluctuations and cycles of economic development reflected two basic external factors’ impact: volatile oil prices and the economic sanctions taken by the USA. These can be best illustrated by the volume of Iranian oil exports which is shown in Fig. 8.1. Figure 8.2 shows that traditional manufacturing branches like the food and textile industry declined together with agriculture. Total manufacturing share in GDP remained stable only because oil-related industries (chemicals) and the privileged car industry could manage to grow. As demonstrated by the figures, Iran failed to structurally transform its economy and deliver an inclusive growth model based on social equality. In this section we aim to go deeper and argue that the balance of power or political settlement and their interactions with rent space and creating open order deals are essential to effective natural resource government.

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Iranian Oil Export 7000

Thousand barrels daily

6000 5000 4000 3000 2000 1000

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

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Fig. 8.1 Iranian oil exports (Source Own construction based on data from British Petroleum Stat Review 2022)

35 30 25 20 15 10 5 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Food, beverages and tobacco (% of value added in manufacturing) Machinery and transport equipment (% of value added in manufacturing) Textiles and clothing (% of value added in manufacturing) Chemicals (% of value added in manufacturing)

Fig. 8.2 Structural changes of the Iranian economy (Source Own construction based on World Development Indicators)

Political Settlement in Iran In countries like Iran with a long history of oil extraction, the natural resource revenues have a profound influence on the political settlement. The bargaining power of resource-rich territories and socio-economic

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groups that have directly benefited from resource extraction can be greatly enhanced. Rentier sectors can also change the nature of ‘deals’ spaces and reduce a country’s overall governance quality. The political structure in Iran is complex and convoluted which combines democratic and theocratic elements to form what Iran terms an “Islamic Republic”. National elections are held for the posts of President (from which a cabinet can be appointed without popular consent), Assembly of Experts, and Parliament via the pre-approved electorate; this is essentially the extent of democratic components in the Iranian political system. There is however, also an upper political level that contains the organizations of theocratic rule. This segment of the political life is absolutely closed. Unelected institutions comprise of the Supreme Leader, various bodies of armed forces, the Head of Judiciary, and the Expediency Council. After the Revolution in 1979, the Constitution of the Islamic Republic of Iran envisaged an economy capable of “achieving the economic independence of the society, uprooting poverty and deprivation, and fulfilling human needs in the process of development while preserving human liberty”. Despite the clear political declaration and five years development plans, forty years after the revolution, many of these goals like economic growth, improving purchasing power parity, and reducing income inequality remained far from reality. We argue that this has happened because of the mismatch of partially democratized political institutions and concentration of power in hands of a special group of Islamists with a high amount of economic rent. The successive governments of Iran could not establish themselves in the long run so long-term development strategies could not take root in the country (see also Pesaran, 2011; Ranjbarki, 2022). For example, the Khatami government (1997–2005) introduced several reforms for better economic governance by empowering the Iranian civil society and reducing the role of militants in the political sphere, and established the Oil Stabilization Fund. Due to these reforms, revolutionary guards saw their economic and political rents under attack (Dizaji et al., 2016). The economy expanded in this period due to the decreasing political tension with the USA and the gradual rise of oil prices. Consequently, per capita GDP also increased substantially. When the reformists lost their majority in the Iranian Parliament in 2004,

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they started emptying the Oil Stabilization Fund. This happened at a time when oil prices were historically high and no urgent need for the use of the reserves was present. Obviously, the different factions have strong incentives to spend the oil revenues for their political interests and personal enrichment. But the largest rentiers are institutions in the upper strata of the theocratic political structure which are not under any social control. Policy outcomes are shaped by the varied and shifting interactions taking place between these actors. The revolutionary foundations, known as bonyads, are major parastatal organizations with a profound influence over Iranian politics and economics. They operate under the supervision of the supreme leader and were set up in the immediate aftermath of the 1979 Revolution with funds obtained by the expropriation of the wealth and properties of those affiliated with the old regime. Their missions were to carry out “good deeds” and support Iran’s poor and disadvantaged communities. Since then, these organizations have engaged in a wide range of business activities both in Iran and abroad, benefiting significantly from tax exemptions, subsidized loans, foreign currency funds, and impunity from governmental monitoring of their accounts. Islamic Revolutionary Guard Corps (IRGC) and Reconstruction Jihad (RJ) are among the most important revolutionary organizations. ICRG is a parallel institution to the army and RJ is a parallel institution to the Ministry of Agriculture and other ministries. Reconstruction Jihad shows how Iranian elites take advantage of rural development through non-coercive tactics to consolidate power. The implicit and important goal of RJ’s projects, services, and activities was to create patronage and clientelism of the provincial and rural populations to support them. The rural population showed its loyalty and support to RJ by voting for Islamic Republican Party (IRP) candidates and against their opponents in local and national elections. Elections in Iran were often decided in the provinces and villages with significant shares of the votes, not in the capital city, Tehran (Lob, 2020). Rent Space in Iran As suggested by Sen and Tyce (2017) the Iranian economy is divided into four groups of industries according to their domestic market- or export orientation and their likelihood to participate in a market competition

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or enjoy rent. The basic assumption is that powerbrokers enjoy regulatory rents and rentiers benefit from Ricardian rents that are secured also by advantageous state regulation. These rent-intensive sectors can be the primary targets of the rent-seeking political and economic elites that work in “closed social relations”. The nature of Iran’s rent space is influenced by two key factors: first, it is a resource-rich country; Iran is rich in point-source resources such as oil. Second, state-owned enterprises have dominated these sectors. With the March 1979 cancellation of all remaining consortium agreements, the Iranian state had already taken responsibility for the exploration, production, and marketing of Iranian oil. The new ruling elites were searching to acquire similar control over other areas of the economy. Powerbrokers are “the high-rent firms that serve the domestic market” (Pritchett & Werker, 2012). In Iran, this sector comprises big car manufacturers, banks, and insurance companies. Car manufacturing is given a high degree of protection from foreign competition, thus enjoying high rent, and may be categorized as powerbrokers. These sectors are subsidized by state revenues originating from oil rents. The most important channels for distributing oil rents are development projects and subsidized loans. Concerning subsidized loans, these are typically administered by state development banks to promote investment projects in peripheral regions. Well-connected entrepreneurs can get access to such loans, and use the money for other purposes than those intended. Thus, subsidized loans for raising chicken in the remote region of Baluchestan, for instance, may well end up as property investments in Tehran. Historical evidence and statistical analysis show that the banking industry in Iran follows the features of the limited access order. During the 1990s when private banking was prohibited, a few elite groups from the dominant coalition established 19 informal financial institutions. In early 2000, increasing political competition led to reforming the rules of entry into this industry in which private banks were allowed to be established formally. The 6 newly established private banks had ties to another group of the dominant coalition. Evidence suggests that the Iranian banking institutions are still politically embedded and feature limited access order. All in all, we can estimate that the rent space (potential rent-seeking) can be as high as 40% of the Iranian GDP. As Esfahani and Taheripour (2002) estimated 40% of GDP in the 1980s was regulatory rent. Stateowned companies are also present in the powerbroker sectors including

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energy, telecommunication, construction, bank, and insurance, in addition to some flagship manufacturing branches, most importantly in the automotive industry and chemicals. But it is not only the governmentcontrolled economy that potentially serves political rent-seeking. The bonyad institutions (RJ and IRGC for example) also have very important representation in the economy. These institutions finance their political and military activities from the revenues coming from regular businesses, which source can be regarded rather as quasi-rents. Evolution of the Deals Space in Iran Immediately following the fall of the Shah, the properties of both the Pahlavi court and its affiliated, foreign-tied bourgeoisie were confiscated, endowing the new state with a considerable source of economic power. A closed and disordered environment started with governing the processes of nationalization of industries, allocation of permits and licenses, and adjudication of property rights. During the period of war with Iraq, the dominant view in the government of Prime Minister Mir-Hossein Musavi as well as in the majles (parliament) was that in this time of necessity, the state must take hold of the economy to survive, imports were controlled, essential goods were rationed, and much else was subsidized. After the war with Iraq, Iran tried to change its economic policies from a state-interventionist model to a market-oriented one. Defended by its proponents as a programme for stabilization and adjustment, it was a macroeconomic agenda relying on a belief in the free-market economy and was implemented by pragmatic President Ali Akbar HashemiRafsanjani and the Reformist Mohammad Khatami. A notable effort was made to make ministries, revolutionary organizations, and educational institutions more professional, educated, knowledgeable, competent, and expert after state purges which left them with varying degrees of skills and expertise (Lob, 2020). In order to rectify this situation, Rafsanjani adopted neoliberal and structural adjustment policies, originating in the Washington Consensus, in cooperation with the World Bank in the 1990s. Rafsanjani privatized several state companies that belonged to RJ and the other ministries. However, the process of privatization was unsuccessful because they involved corruption and conflicted with the interest of the parastatal corporation and foundations (Saidi, 2020). The bonyads, the ruling class of the Islamic republic, were intent on thwarting the government’s privatization policies and protecting their

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economic dominance. In fact, they purchased many of the state enterprises put up for sale at this time themselves, diverting the privatization initiative from what it was originally intended to increase open access order, and extending their influence. While the privatization had taken place, control of state assets was not transferred to the private sector; rather to the Islamic republic’s political elite, as well as to the parastatal businesses owned by the bonyads. Other evidence of disorder deals in Iran related to the contract with the Turkish mobile telephone group. By increasing the Iranian population and growing demand for mobile phone communications, Turkcell was selected to develop a second mobile telephone network in Iran as a private sector. Finally, Turkcell had been removed from the negotiating table because it was not compatible with the expectations of Iranian business elites. It was replaced with MTN, a South African company because this partnership would not threaten their vested interests within the system of the Islamic Republic (Pesaran, 2011). The second contract, with the Turkish-Australian group Tepe-AkfenVie (TAV), was foreseen for the construction and servicing of Tehran’s new Imam Khomeini International Airport. After the airport’s opening ceremony in May 2004, the statist revivalist IRGC only expelled TAV from the contract informally. IRGC enjoyed significant material resources when it expelled foreigners from work at Imam Khomeini International Airport and replaced them with domestic workers (Pesaran, 2011). As demonstrated by these examples, the capacity of Iranian elected representatives to shape national economic policies is significantly limited by the existence of a host of non-elected and revolutionary organizations. In addition, the policy reform in Iran is also sensitive to fluctuations in the oil price. When the oil price is high, the government deregulates the economy, whereas a low oil price generally gives the opposite result, more regulation and protectionism. In the first case, the supply of foreign exchange to the economy is high, reducing the price of imports. The volume of imports can increase without the accumulation of foreign debt. In the latter case, the local currency depreciates and the price of imports therefore increases. In addition to weakening the current account, the depreciated currency increases the cost of domestic production. The manufacturing sector in Iran is highly dependent on imported intermediates and capital equipment, and the production is largely aimed at the local market. To protect local industry and reduce the spending

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on foreign exchange, the policy response to lower oil prices is typically increased tariff barriers and the introduction of currency rationing. Rent-seeking is also affected by fluctuations in the oil price. The standard assumption is that rent-seeking increases with the rise in the oil price since the size of the oil rent goes up. Inversely, a drop in the oil price should lead to less rent-seeking activity. Interestingly, however, in Iran, this is not necessarily the case. Since the policy response to a lower oil price is more regulation, rent-seeking directed towards regulatory rents is likely to increase. When oil prices go up, rent-creating regulations are lifted, but at the same, the amount of oil rent goes up. The degree of rent-seeking in the economy may therefore be relatively unaffected by changes in oil revenues, though the type of rent-seeking and the beneficiary groups can change. Iran’s lack of structural transformation is the result of the combination of two unfavorable events. First, Iran has a multi-dominant-party political settlement and parastatal organizations with a flawed long-term developmental vision. Second, to date, the combination of a competitive clientelist political system—which took hold with the introduction of a multiparty democratic system and a rents space in which rentiers and powerbrokers continued to entrench Iran’s patronage system, prevented a new long-term developmental vision. In turn, this has prevented the structural reforms necessary to allow both workhorses and magicians to achieve growth at scale and to drive structural transformation and inclusive growth. The combination of a rentier and powerbroker-based patronage system has kept the deals space largely closed, political elites have had limited incentives since 1979 to develop state capacity, because rentiers and powerbrokers did not require it to accumulate rents. When asking for tax breaks and preferential licenses rather than removal of binding constraints for value addition of the improved quality of government services, the demands of the political elites require a closed order deals space that can be provided without much state capacity. There are two ways of reducing rent-seeking in the economy. Firstly, if one of the competing groups gains full control over the state apparatus. In this case, there will be no room for destructive competition over rents.2 In the long run, however, this may not be the optimal solution, 2 Such a solution would replicate the situation in Indonesia under Suharto, where an omnipotent leader monopolized corruption and generated economic growth.

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since political hegemony tends to reduce innovation. Moreover, political monopoly still can prove fragile. The second way of reducing rent-seeking is by eliminating the power of rent-seeking groups and establishing an autonomous state. This can take place through a process of democratization, where greater transparency and accountability reduce the scope for rent-seeking. By professionally managing the oil rent and creating opportunities for all, the destructive competition that has plagued the Iranian economy for decades can turn into a constructive one.

The Hungarian Case The Hungarian case study highlights different aspects of the rent economy. As we mentioned in the introductory part, a variety of rent streams work in different countries. Perhaps we may even state that the “regular” composition of a national economy may include rent elements. The Weberian principle of the competition state may be rather the exception than the rule, a fortunate deviation from the “natural” development path. This problem is especially strongly present in the countries of the “semi-periphery” among others in East-Central Europe. The history of the region’s political and economic development can be described as a perpetual change of modernization efforts and backsliding (Szanyi, 2020). This Polanyian pendulum movement travelled between the “Western-type” Weberian competition state and the traditional Byzantine model (Polányi, 1944), where the role of rents, especially regulatory rents play an important, systemic role. The current political and economic backsliding in several ECE countries is a new episode of the historic shuttling. The main lesson of the Hungarian case is the fragility of “imported” institutions of the competition state. As part of the process the rolling back of the control mechanism over rent seeking could be reinforced with relative ease. The process left some doors open for the increasing creation of regulatory rents. These included the allocation of monopoly rights to clients, excessive taxation and depression of competitive businesses, and distortion and misuse of the competition principle in public procurements in favour of cronies. The other main source of rents is geopolitical rent: EU cash transfers for development purposes (see Váradi, 2006). They add to the domestically produced part of the national income.

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Changes of Political Settlement in the Hungarian Transition Process Historically, Hungary is considered as a latecomer in the club of Western democracies. As a consequence, Hungary (together with other Central European countries) found herself in an ambivalent position in the late twentieth century. These countries have desired core Europe’s economic, political, and social achievements, nevertheless, their social and political environment contained many elements of the other main European development models, the Byzantine Russian and Ottoman ones (Szanyi, 2020). The current impact of the authoritarian, rent-based development models was proved empirically (Djankov & Hauck, 2016; Grosfeld & Zhuravskaya, 2015; Grosjean, 2011; Kuran, 2011). Hungary played an eminent role in the transition process after 1990. The transformation of the political and economic institutional system from the structures of the previous communist epoch (political centralization and central planning) was generally regarded as a success story (Kornai, 2006, 2015). The complex challenges were met by the support of the international advising community (IMF, World Bank, EBRD, and the European Union). These institutions suggested the introduction of the classic Weberian competition state. A political elite developed that supported and carried out these changes. Since there was no alternative pattern, a relatively stable social and political consensus surrounded the changes. The success of the transition process was sealed by the joining of the Central European countries to NATO, OECD, and lately to the European Union. The Hungarian accession to the EU occurred in 2004. Right after the signature of the treaties the European development anchor started to loosen. Until 2008 the socialist governments run loose fiscal policy and did not make strong efforts to meet the Maastricht requirements of Euro introduction (which was an unconditional part of the membership treaty). Corruption also increased leading to political scandals that destroyed the reputation of the socialist and liberal party coalition in Hungary. As Mihályi rightly states, already this government passed laws that contradicted the competitive market principle and reintroduced selective state interventions in the economy (Mihályi, 2015). However, a systemic rolling back of the institutions themselves did not yet happen. This was carried out after 2010 by the right-wing populist government

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led by FIDESZ,3 that won elections with super majority. FIDESZ represented the interests of a second “national” elite that wanted to replace the previous “comprador” elite in business (Szanyi, 2016, 2022b). The outstanding election victory of FIDESZ provided exceptional opportunity for the party leaders to reshape the socio-economic system according to their taste. The fundamental document of this desire appeared right after the election victory. In this document FIDESZ party declared the need for the organization of a new social pact, the System of National Cooperation (NER after the Hungarian abbreviation). The document passed by the Parliament stated that the party considered the election victory as an unlimited entitlement of the nation for future actions to create NER. The document served as a kind of action plan of the new government. It declared the preferences for the national bourgeoisie, confrontation stance with global institutions and the EU and increasing national sovereignty have been labelled as general goals. Using the super majority in parliament the FIDESZ government started the establishment of an “illiberal democracy” (Zakaria, 1997). This meant re-writing of the Constitution and the passing of 32 “cardinal laws” to be changed by two-third majority (Bárd & Pech, 2019). Key positions like the constitutional court, the chief prosecutor, the state audit office, fiscal council, or the board of the National Bank of Hungary were soon occupied by FIDESZ cronies (Ágh, 2021). The aim of the legislative work was to introduce the closed/limited access political environment until the next elections in 2014 (Scheiring, 2020). A political environment that maintained the coulisse of democracy but paralyzed political competition in several ways. Firstly, the election system was changed in ways that favoured the political party in power. Secondly, the social control institutions were stigmatized and harassed in various ways among others by political attacks and special taxes (see Kornai, 2015; Kingsley, 2018). The muting of watchdog institutions fitted in the populist rhetoric of the government. Parallel with this, another populist anchor had been developed. Hungarian government officials continuously manufactured various images of the “public enemy” to dominate public narratives. The stigmatization of George Soros the social institutions that he sponsored, the radical treatment of the 2015 migration wave, continuous freedom fight

3 Federation of Young Democrats.

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against “Brussels” were the most notorious cases. Most recently the populist Hungarian government takes a different position than that of the EU in the treatment of the Russian war in Ukraine. The populist disinformation of the society is served last but not least by the “nationalized” public media. Independent media was abandoned or reorganized in the frames of a government-sponsored mega-monopoly in social media the “KESMA”.4 KESMA effectively controls almost 100% of written public media, two-thirds of Hungarian electronic media, and almost all broadcasting activity in the country except a single major independent TV channel. The introduction of the illiberal democracy proved to be politically successful. The closed/limited access political order worked well in the successive elections. FIDESZ won in succession the fourth parliamentary elections in 2022 with super majority. After the FIDESZ victory and super majority in parliament in 2010 the democratic institutions themselves were scaled back and hollowed out. The Hungarian political settlement became more and more limited access ordered. This political settlement was suitable for the uncontrolled expropriation of various rent streams. Rent Streams and Rent Space in Hungary The broad concept of rents that was introduced in the first part allows the identification of various rent sources in Hungary. Most obviously these are not the classic Ricardian rents since the country is poor in mineral reserves and sources of energy. The main rent sources are geopolitical rent (unilateral transfers of the European Union), regulatory rents (created by selective economic policies), and quasi-rents. In fact, all these rents are very much dependent on the attitude of government policies. In case of externally funded development projects but also other cash streams from the EU (for example the CAP), the source of the income is not the Hungarian economy. It is rather distribution policies that are shaped in order to turn transfers sources of rent. In case of regulatory rents and quasi-rents incomes generated in Hungary are redistributed by selective policies in arbitrary ways that do not respect the competition principle. From this brief description it is obvious that the kind of sectoral differentiation used by Sen and Tyce (2017) must be amended in the

4 Central European Press and Media Foundation.

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Hungarian case. In Hungary, in many cases government institutions or politicians personally decide about the rent source, as in the extreme case of corporate raiding. This rather open violation of the rule of law and similar practices served as a basis for the development of Magyar and Madlovics (2020) mafia state concept. Mihályi (2015) described many cases of regulatory capture when selective government policies (e.g. excessive taxation) reinforced corporate owners to discontinue the loss-making activity and sell companies. Buyers were usually state companies or political cronies. Such cases are not rare, however, the usage of these tools is also not unlimited. It is mainly the Europeanization anchor and EU institutions that exercised growing criticism and some control over the process. A minimum level of compliance with the coulisses had to be maintained. We assume that the most typical and possibly quantitatively the largest source of rent is public procurements. The state budget is by far the largest buyer of all kinds of goods and services. There is ample evidence that procurement tenders have been generally suspicious of fraud. The procurement rent machine can work since persecution is not independent in Hungary. One of the major criticisms raised in the EU is exactly the inadequate control of corruption in public procurement. Public procurement affects many economic branches. Public construction is perhaps the largest single chunk that also contains much of the EU cash transfers. But all purchases of public institutions are tendered. The sectorial spread of procurement rent seeking can be illustrated by the spread of government cronies’ economic activity. Besides the obvious cases of public construction (roads, railways, public buildings, etc.) cronies’ firms are also engaged in facility management, guarding/security, IT service provision, and the like. All state-owned companies can serve rent-seeking purposes either as recipients of development funds or a sources of quasi-rents (see Szanyi, 2016, 2022a). Using the four boxes approach from Sen and Tyce (2017) “powerbrokers” are almost certainly part and parcel of rent seeking in Hungary. They are sources of quasi-rents. The quality of their services declined steadily due to the lack of development sources. This and many other cases of government-controlled public infrastructure fit well with the quasi-rent concept raised by Gochberg and Menaldo (2021). Szanyi (2016) regarded the state sector as the primary source of rent in Hungary around the change of the millennium. Classic “rentiers” are relatively few. They are present in some monopoly markets like gambling, and most

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importantly in agriculture. Agriculture is systematically kept in a rentier position by EU regulation. Certainly, Hungarian farming is very much concentrated and government cronies are controlling the majority of the sector. Workhorses are not part of the rent-seeking system, simply because they are too small to become prey of cronyism. The case of “magicians” is rather interesting in Hungary. The export sector consists mainly of affiliates of large multinational companies. They seem to be more exposed to the competition: they work on global markets. Yet, in the Hungarian market most of them are affected by rent seeking. They are either beneficiaries or victims. Beneficiaries are those large factories that enjoy various kinds of state subsidies. Hungary used to be a pioneer of foreign direct investment attraction and used a variety of fiscal incentives. These were streamlined after EU accession, nevertheless, Hungary continued very generous investment promotion policies also later on (Antalóczy et al., 2011). These subsidies (be it for example tax allowances, in-kind investment contributions, advantageous market regulation) are clear sources of rents. Nationalist elites blamed the disproportional sharing of subsidies in favour of foreign firms. Interestingly, after the change of power and the victory of the nationalist elite the use of FDI advantages remained in place. It seems that foreign-owned “magicians” became built-in elements of the Hungarian rentier state. They serve as built-in macroeconomic stabilizers: they provide export surplus and they are also important taxpayers despite of their tax allowances. Many of them signed a strategic cooperation agreement with the Hungarian government (Éltet˝ o, 2022; Szanyi, 2019). The other half of the FDI-based sector is treated as enemy. They work in sectors where the nationalist elite also has some stake. Conflicts emerged in many services branches (banking/finance, retail trade, media, utility supply, energy). Foreign firms in these branches became either competitors of Hungarian cronies or provided services that the Hungarian government wanted to control. For example, an important election promise of FIDESZ was the subsidization of public utility prices. This could be achieved if the prices were capped thus providing no profits for the service providers. They were soon nationalized. In other cases the populist anti-globalization rhetoric of the government was emphasized with the selective introduction of new taxes. Some of these were targeted on just one or a few foreign firms. The most recent 2022 case was the introduction of the “extra profit surcharge” for selected foreign companies (for example banks, retail traders, cheap airlines).

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The ambivalent treatment of multinational companies also describes the third main rent source: regulatory rent. Generally speaking all selective policy measures serve as a source of rent because they discriminate (positively or negatively) among market players. The most obvious cases are monopolies. But in most other cases market process is just distorted to favour clients at the expense of unaffiliated competitors. Regulations are often used also for corporate raiding. Business people estimate a turnover of HUF 1 bn the threshold level to become likely target of corporate raiding. The Deals Space in Hungary The logic of NER attributes potentially all income sources to state control. This comes from the Byzantine perception of political power: the state and its almighty head has legitimate control over the economy. The social justification of the control right comes from the super majority won by FIDESZ in successive elections. The control right also indicates that income is allocated to those citizens who support the state with useful services. NER is defined as a new social pact after Byzantine muster. It favours the role of state power against the society. The needs of the society must be fulfilled through state institutions or through the intermediation of state institutions by political cronies. Party business capture is not a new phenomenon in Hungary (see Sallai & Schnyder, 2015; Szanyi, 2019). As early as the late 1990s the growing role of partisan firms had been observed in the economy. Stark and Vedres (2012) detected the spread of partisan company networks in Hungary during the 1990s. From 1696 observed large and medium-sized companies 10% showed a board member from political parties in 1989, the eve of the systemic change in Hungary. This share grew to 20% by 2001. In terms of capitalization the share increased from less than 10% to over 40% by 2001. Partisan CEOs were differentiated and a right-wing and a left-wing group were identified. After changes in government the share of the winning coalitions’ presence increased, while the other’s share decreased. This result clearly showed the impact of state-owned companies. However, this impact faded away by the end of the decade with advancing privatization of state assets.

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Under these circumstances the size of the deals space depends first of all on the government capacities to exercise control over economic activities. Other control functions were deliberately switched off. The European Union also had some influence and control, which was regarded as hostile intervention in the matters of NER. This is very well taken: EU institutions have not been working to support outright corruption. The freedom fight of the Hungarian government against EU institutions is in fact an attempt to reinforce the Byzantine logic of NER against the Weberian EU institutional framework. Thus, the actual size of the rent space depends on NER capacities and the remaining control institutions’ voice. A different question is the cumulative share of rents in the national income (compared to incomes of labour, capital, and state tax). As mentioned, main rent sources are regulatory rents and geopolitical rents (EU cash transfers). Of course, much of the income streams are used with the purpose of demand satisfaction. But the essential question raised by Váradi (2006) was how much of the income streams is taken away as rent? Unfortunately, we do not know. We cannot even estimate since we can only observe sporadic lawsuits of fraud which are only the tip of an iceberg. The very few lawsuits indicate very high levels of rents in the public procurement processes (up to 30–50% of the contracted amount). But even if the contracts and contract fulfilments are free of fraud the distortions of the tendering process to favour selected NER clients and the curtailment of competition will surely increase the costs and prices as Váradi (2006) rightly emphasized. Fazekas et al., (2013, p. 76) found that curtailing competition has been widespread in public procurement especially when partisan firms take part in the procedure. The analysis of EU sponsored projects in Hungary between 2009–2012 showed that 33,8% of the signed contracts received only one bid. 17,7% of the contracts were modified after being granted, offering a mode to extract rents (ibid, p. 78). An even more comprehensive survey of public procurement tenders for the years 2010–2016 Tóth and Hajdu (2018) created a database of 126,330 contracts. The share of contracts with a single bidder fluctuated between 20 and 40% with the highest values occurring in election years. The index of relative price drop (lower contract prices than the target value of the tender call) that can be expected if competitive bidding was marginal in at least half of all cases and showed a significant drop in 2010 (the year of FIDESZ election victory). Family members of the Hungarian MP and their trustees’

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companies were paid special attention. The four interest groups of this kind won 510 contracts (0,4% of the total) worth of HUF 2,5 bn (5,1% of the total). Corruption indices showed above-average values in this interest group. According to the most recent CRCB publication (Tóth, 2022) and its supplemented data the amount of public procurement increased from HUF 888 bn in 2005 to 4047 bn already by 2007 the initial year of the first full EU planning period with Hungarian participation. The increase clearly shows the outstanding role of EU funding in public procurements. Also in later years the amount varied between HUF 3000 and 5000 bn with some ups (8180 bn in 2015) and downs (758 bn in 2011). This is roughly 8–12% of the Hungarian GDP. The business group controlled by MP Orbán’s and family members’ clients runs their businesses exceptionally successful. Their companies in the construction industry have recorded 50% higher profit rates than all other companies in the sector (G7, 2022). In 2021 this rate achieved 13% while other companies scored less than 8% profit rate on turnover. There is no reason to believe that the NER companies were so much more efficient. The source of the excessive, above-average profit is more likely pure rent. Based on the results of the empirical surveys we can estimate the amount of geopolitical rent in Hungary. We do not differentiate between projects with Hungarian and EU funds due to the fact that most projects share both types of funding. We calculate the lower corruption level indicated for EU projects. If we count with public procurement averaging 10% of GDP and a “modest” 50% share of corrupt cases we come to 5% of GDP as the share of corruption-related government spending. Out of this amount one-third can be the share of rents. Quasi-rents also have played important role in Hungary. In fact, it is always rather difficult to exactly determine if a certain resource allocation is creating rent or is rather part of a deliberate structural policy that would pay off later in time. In this sense already the communist period’s forced industrialization could be characterized as quasi-rent seeker. Previously neglected services branches were developed by multinational firms in the transition process. In exchange for large-scale development they acquired ownership and also received generous market regulation to secure adequate return on their investments. This has changed fundamentally after 2013 when FIDESZ government introduced the “battle over utility cost reduction” in the election campaign. In order to reduce citizens’ overhead costs all kinds of public

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utilities got price caps. This regulation forced private (usually foreign) owners to give up and sell their assets to the Hungarian state. However, depressed utility prices continuously thwarted necessary investments and development of the infrastructure. As a consequence the quality of services started to deteriorate (Brückner, 2022; Halász et al., 2022). The exact amount of rents cannot be estimated precisely. What stands clear is that electricity and gas prices have been reduced by 25% compared to the 2012 world market prices and kept on this level until 2021. Market prices started to increase after the end of COVID pandemics when world economy started to recover. World energy prices exceeded the level of fixed Hungarian prices in 2021. The Hungarian government calculated for the 2022 budget that HUF 1300 bn would be the cost of energy price subsidization. This is 3% of the GDP. But in the summer of 2022 FIDESZ government was forced to give up fixing overhead costs when energy prices skyrocketed due to the war in Ukraine. The government could not afford the compensation of the drastic increase in energy prices. Just few weeks earlier, when the Russian war already started to drive up prices the FIDESZ election messages still heralded the firm maintenance of the price caps. It is rather difficult to estimate the level of quasi-rent realized in Hungary. The example of the “fight on the utility costs” campaign shows that the branch received subsidies in some years but was deprived of excess revenues in others. The difference of actual needs for maintenance and development of the service infrastructure and the sum received for this purpose is not available. What stands clear, however, is that the price regulation system continuously distorts service charges from actual costs. This is the same mistake that once another, socialist Hungarian government made in the 1970s and 1980s. If we count further branches and stateowned companies like railways or the Hungarian Post working under similar conditions we can estimate that in the 2010–2012 period roughly 3–5% of the Hungarian GDP was taken from firms as quasi-rents and reallocated. Instead of investments and profits the owner’s money was spent by other companies or the citizens on consumption including also imported goods and tourism abroad. Regulatory rents can be also manifold. The estimation of efficiency gains due to monopoly positions is of course not an impossible task. However, the comparison of world market prices and domestic prices for example should be carried out on all the affected markets, which is out of the scope of this paper. A more or less comprehensive data gathering has

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been carried out for the most significant government subsidies of largescale investments. This amount of money is net rent for the recipients. However, of course investment attraction and promotion is an important economic policy goals that can pay off over time. The amount of investment subsidies is not very large, 0,1–0,2% of the GDP All in all we estimate the affected rent space to be around 15% of the GDP. The realized rent stream (deals space) could be 5% of GDP in Hungary

Comparative Analysis and Conclusions The first conclusion combines the overall theoretical background of political systems, societies, and the role of rents into one framework. Special attention is paid to the logic of these systems. The Weberian open society and competition state concept (or open access order) is confronted with the traditional closed society model (limited access order). Evidently, Iran, like many other countries of the Third World inherited the traditional, we may perhaps call “archaic” social model that produces authoritarian political regimes and closed societies with rent-based economy. Income streams in the economy can be controlled by the supreme leader and state bureaucracy, mostly in the least transparent ways. Compared to this stands the Weberian competition model as a kind of deviation from the mainstream. No doubt, that open societies and competition-based economies can achieve better performance in economic and social terms. Nevertheless, the Weberian institutions do not work smoothly in the “archaic” social environment. Hungary has always been placed between the two principal models and oscillating with the Polanyian pendulum movement. In this regard especially interesting was the comparison of the two countries’ experiments with the introduction of competition state institutions. The three years long intermediary period after the Islamic Revolution and the 10 years rule of reformist governments could not achieve a fundamental breakthrough in Iran. More surprising is the Hungarian development where after also a 10-year-long period of reforms a return to the “archaic” authoritarian practice had begun. Iran failed to open up its society and economy and Hungary started to close its society and limit the access to its economy. The degree of political and economic freedom is of course still a lot higher in Hungary than in Iran. This also has consequences for the role of rents in the economy. Especially the deals space is still more limited in Hungary due to the existing

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control devices in the economy. For example, rent-seeking institutions’ activity can be better followed than in Iran, due to the more advanced information service system. Especially important is the difference in effective tax collection system and information disclosure obligations that make much information available. The firms of the NER can still be studied by independent NGOs. The real size and features of the Iranian bonyads’ business actions cannot be traced back so easily, especially not the IRGC. We can assume that the still existing controllability of rent-seeking activity in Hungary brakes fraudulent transactions. As far as the actual rent streams are concerned, an even more important role is played by the rent space that is the potential size of different kinds of rent. Evidently, Iran’s large oil and gas reserves serve as the primary source of rent. These Ricardian rents are supplemented by regulatory rents in various areas (trade, subsidized industries) and potentially also by quasi-rents of state-owned enterprises. Alone the sheer size of the Iranian oil industry produces rents of one magnitude higher level than for example geopolitical rents in Hungary. Therefore, while the deals space is estimated at 3–5% of the Hungarian GDP, the comparative measure in Iran is maybe even ten times higher. Regulatory rents and quasi-rents reallocate incomes. Reallocation of resources is also carried out by structural policies. For a very long time industrial policies used to be unfavoured by international organizations exactly because their resource reallocation policy may be regarded as rent creation. Technically at least these are all questionable policies with strong market distortion effects. Nevertheless, they are widely accepted. We do not have room here to discuss the developmental state concept (see Ger˝ ocs & Ricz, 2021). However, it is rather clear that under the umbrella of various structural policies substantial rent creation activity can be carried out. Developmental mega-projects that are sold for the society as structural policy can be sheer rent creation manoeuvres— hidden by a developmental discourse (see also Benczes, in this volume). The Hungarian media regularly delivers cases of generously sponsored and later failed businesses in the country. The clear distinction between fraud and honesty is hard to detect. Asset and income reallocation often entangles serious moral hazards. The effects of such hazardous reallocation can significantly increase if there is collusion of business and polity in the deals space. We could observe very significant entanglement both in Iran and in Hungary. In

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both cases rent seeking has been orchestrated by the national governments. The Iranian bonyads and the NER-controlled Hungarian institutions play a central role in syphoning off various types of rent from the economy and allocating the incomes. Rents are realized partially by the staff of the institutions on personal level or allocated to selected social groups in exchange for political support. For example, Reconstruction Jihad of Iran and the various bodies of EU fund distribution in Hungary alike use the rents for establishing rural support for the ruling party. Another parallel is seen in utility price subsidies in both countries. Moreover, the popular political support is also strengthened by populist pet projects in both countries which are financed from rents. Control over rent allocation is also supported by partisan financial institutions in both countries serving the technical proliferation of rent distribution. At the end of the day of course we also have to draw the balance of extensive rent seeking in the two countries. The Iranian economy is very much dependent on easily controllable natural resource rents. Moreover, its historic development model does not provide much social and institutional experience of open societies and the competition state. Hence, the country is heavily entangled in massive rent seeking that repeatedly produced growth collapses envisaged by the high-rent staple trap model. In Hungary on the other hand, rent space is more limited. Much of the rent is regulatory rent or quasi-rent, which have limited scope. As it was demonstrated, quasi-rents in all kinds of utility supply systems could be realized for only a limited number of years before the quality of the services and in many cases the technical systems decline. Similarly, reallocating EU funds’ (geopolitical rent) became harder due to stronger control over the application of those funds by the donor organizations. Consequently, Hungary has not suffered growth collapses because of excessive rent seeking behaviour as of yet. Nevertheless, the poor efficiency of the usage of development sources poses long-term risk in the country. Instead of a sustainable development trajectory Hungary seems to enter the middle-income trap.

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Ger˝ ocs, T., & Szanyi, M. (Eds.). (2019). Market liberalism and economic patriotism in the capitalist world-system. Palgrave MacMillan. Gochberg W., & Menaldo, V. A. (2021). Political economy and the three sources of rents: An application to the oil industry. https://papers.ssrn.com/sol3/pap ers.cfm?abstract_id=3758351 Grosfeld, I., & Zhuravskaya, E. (2015). Cultural vs. economic legacis of empires: Evidence from the partion of Poland. Journal of Comparative Economics, 43(1), 55–75. Grosjean, P. (2011). The institutional legacy of the Ottoman empire: Islamic rule and financial development in South-Eastern Europe. Journal of Comparative Economics, 39(1), 1–16. G7. (2022). Találtunk 117 milliárd forintnyi extraprofitot ott, ahová a kormány nem akar nézni (HUF 117 bn extra profit was found where the government does not want to watch). https://g7.hu/vallalat/20220720/haho-kedves-kor many-talaltunk-117-milliardforintnyi-extraprofitot/ Halász, P., Magyarics, Z., & Mellár M. (2022, July 4). Magyar vasúti pillanatkép 2022: újra a lejt˝ on? (Hungarian rail snapshot 2022: On the slope again?) RegionalBahn.hu. http://www.regionalbahn.hu/2022/07/mag yar-vasut-2022.html Kingsley, P. (2018, March 27). How Viktor Orban bends Hungarian society to his will. The New York Times. Kornai, J. (2006). The great transformation of Central Eastern Europe: Success and disappointment. Economics of Transition, 14(2), 207–244. Kornai, J. (2015). Hungary’s U-Turn. Corvinus Economics Working Papers 21/2015. Kuran, T. (2011). The long divergence. Princeton University Press. Lob, E. (2020). Iran’s reconstruction Jihad: Rural development and regime consolidation after 1979. Cambridge University Press. Magyar, B., & Madlovics, B. (2020). The anatomy of post-communist regimes. CEU Press, Budapest. Mihályi, P. (2015). A privatizált vagyon visszaállamosítása Magyarországon 2010–2014. (Re-nationalization of privatized property in Hungary 2010– 2014). KTI Discussion Paper, MTDP 2015/7. Mihályi, P., & Szelényi, I. (2019). Rent-seekers, profits, wages, and inequality. The Top 20%. Palgrave Macmillan. North, D., Wallis, J., Webb, S., & Weingast, B. (2009). Violence and social orders: A conceptual framework for interpreting recorded human history. Cambridge University Press. Nölke, A., Brink, T., May, C., & Claar, S. (2019). State-permeated capitalism in large emerging economies. Routledge. Pamuk, S. ¸ (2018). Uneven centuries. Princeton University Press. Polanyi, K. (1944). The great transformation. Farrar and Rinehart.

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CHAPTER 9

The Return of Industrial Policy in Turkey Mina Toksoz

Introduction The Turkish economy has had a strong performance for several decades coming close to transitioning up from middle-income status (World Bank, 2019). However, the global financial crisis in 2009, and the 2013 ‘Tapering Tantrum’ that reduced capital flows to emerging markets, revealed its underlying problems at a time when domestic and regional conflicts also increased. The AKP (Justice and Development Party) government’s response to the economic problems was to construct a new growth model around an industrial strategy. Meanwhile, its response to the political challenges was increased authoritarianism with the establishment of the Presidential system. A framework for a tech-driven industrial upgrade of Turkish industry introduced in 2010 by the Ministry of Science, Industry, and Technology, was further developed by the 10th and 11th Five Year Plans covering 2014–2023 and is currently being expanded

M. Toksoz (B) Faculty of Humanities, Alliance Manchester Business School, Manchester, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_9

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to include a ‘green agenda’. This decade of industrial policies has established a threshold of sorts for tech-led enterprises, but progress has been uneven, and faltered in recent years. This contribution provides a historical overview and empirical/analysis of Turkey’s industrial policies aiming to provide an example of Alternative Development Paths explored in the present book. As in many emerging and post-socialist economies, state-led industrialisation policies have a long history in Turkey (Ricz, 2018).The paper traces the national and global conditions that have shaped industrial policies since the establishment of the Turkish republic focusing on the current ‘return’ of industrial policies globally and in Turkey. This reversed their retreat during the neoliberal era beginning in the 1980s; and which in turn had been preceded by a state-led industrialisation policy from the 1930s. Today’s export-oriented industrial policies differ from the pre-1980s that operated behind tariff walls. But export growth has become more difficult since the global financial crisis with an increase in protectionism globally that has reduced the policy space for late industrialisers. This contrasts with the conditions facing successful developmental states in East Asia when the ‘geostrategic and economic interests of the advanced industrial states provided space for their aggressively export oriented growth’ (Haggard, 2018, p. 78). Nevertheless, the increased pragmatism regarding state intervention in the economy since the onset of the Covid epidemic and the urgency to address climate change are also creating opportunities for middle-income countries like Turkey to pursue transformative policies. The paper concludes by examining the ‘Techled’ and green industrial policies and the recent rise in Turkish ICT and start-up activities and assessing the effectiveness of the former and durability of the latter in the context of weakening institutions and macro-instability in Turkey and slowing global growth and heightened geo-strategic conflicts.1

Turkish Industrial Policy Followed Global Trends Given its high dependence on foreign capital inflows, global economic crises inevitably triggered economic and political crises in Turkey. These 1 These themes are further explored in the forthcoming book on Industrial Policy in Turkey by Mina Toksoz, Mustafa Kutlay, William Hale, to be published by Edinburgh University Press.

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have been followed by major economic reforms in the context of international financial support and associated conditionalities. Hence economic policy—including industrial policies, echoed global policy thinking on the role of the state in industrialisation and development that underwent four phases in the century since the formation of the Turkish republic, with the fifth phase triggered by the Covid epidemic currently unfolding. Infant Industry, Import Substituting Industrialisation (ISI), and Five Year Plans (FYPs) The new Turkish Republic inherited the state-centred ‘bureaucraticcentralist’ political culture of the Ottoman era where the state was the driver of top-down modernisation reforms in the nineteenth century (Heper, 1991, p. 12).2 Industrialisation was a central feature of early Republican development strategies that drew on ‘infant industry’ theses adopted by early industrialisers. Once the post-WWI ban on import tariffs imposed by Axis powers was lifted in 1929, import protectionism became a key tenet of Turkish industrialisation policy.3 High tariffs protected the state economic enterprises (SEEs) mostly in heavy industries that produced subsidised inputs for consumer goods production by the private sector. After WWII, this approach evolved into the ‘Structuralist’ framework of state-led, import substituting industrialisation (ISI) with industrial policy measures that included selective allocation of import licenses and directed credit for strategic sectors. An erratic liberalisation attempt in the 1950s ended with increased state meddling and extensive ad-hoc administrative measures to control prices and trade. A coup in 1960 re-established the military, bureaucracy, business alliance, and the ISI strategy was given greater coherence with Five Year Development Plans (FYPs) directed by a new entity, the State Planning Organisation (SPO). A relatively diverse industrial base emerged during this period which is seen as the ‘heyday’ of industrial policies. But the late 1970s

2 Metin Heper (1991) argues that the ‘Ottoman-Turkish polity’ was ‘bureaucratic centralist in the sense that in contrast to the situation in feudal polities (in Western Europe) the centre in the Ottoman-Turkish polity did not face countervailing powers’. 3 The Lausanne Treaty of 1923 (which replaced the Treaty of Sevres partitioning the Ottoman Empire at the end of WWI) recognising the new Turkish republic included a Commercial Convention which prevented Turkey from establishing its own foreign trade and customs regime until 1929.

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shock-oil price rises and the lack of focus on developing an export capacity revealed the weakness of the domestic market-oriented ISI model as the Turkish economy slid into a foreign payments crisis. From Import Substituting Industrialisation to Export-Oriented Industrialisation (EOI): 1980s Crisis and the Washington Consensus The major departure in global economic thinking away from ISI and industrial policies towards what is now called neoliberalism was adopted by Turkey following the 1980 crisis. The state-led ISI model was replaced by market-led, export-oriented industrialisation (EOI) policies codified in the Washington Consensus. Wholesale reforms aiming for exportled growth and the liberalisation of finance, trade, and capital account followed along with plans for the privatisation of state enterprises. What industrial policy remained was framed around the neo-classical critique of state intervention: that the costs of government failure outweighed the costs of market failure. ‘Vertical’ policies that prioritised specific sectors with a transformative objective were discouraged because of the inability of the state to ‘pick winners’. But ‘horizontal’ measures were promoted that allowed market forces and comparative advantage to determine sector choice. Public investment in industry and the role of the SPO declined with the national development plans becoming mostly aspirational documents. However, despite Turgut Özal’s objective to reduce the role of the state in the economy, privatisation of SEEs was held back by wide political opposition leaving key industrial sectors in state hands through the 1990s. There was increased reliance on investment and export incentives (see Chart 9.1: Incentive Certificates) and off-budget funds with low transparency. These rapidly became associated with growing corruption and rent seeking. Macro-economic instability and lack of attention to the institutional fabric of a liberalised market economy and the frequent executive decrees and ad-hoc measures amplified uncertainty in the business environment during these years (Chart 9.1). The 2001 Crisis, Post-Washington-Consensus Reforms, and the Retreat of Industrial Policy A new post-Washington-Consensus framework emerged from the lessons of the 1997 Asian crisis. While maintaining the market-led orientation of policy and the reduced role of the state, the concept of the ‘regulatory

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700 600 500 400 300 200 100 0 1980-84

1985-89

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2016-20

Chart 9.1 The Value of Incentive Certificates (1980–2020, Turkish Lira bn.) (Source Own construction based on data from Ministry of Industry and Technology [1980–94 in 1993 prices] and Incentives Implementation and Foreign Investment Secretariat [2000–2020, current prices])

state’ was introduced with an understanding of the need for independent institutions to regulate markets. Turkey’s reforms following the 2001 foreign payments and banking crisis adopted this approach to try to repair the institutional deterioration of the previous two decades. Autonomous regulatory entities were introduced and legislation was passed to establish the independence of the central bank. State role in industry retreated as privatisation finally proceeded and the banking sector was restructured. This ‘regulatory neo-liberalism’ strengthened the regulatory capacity of the state (for a while), but weakened its industrial transformative capacity (Onis, 2019). Industrial policies had already been pared back in the late 1990s due to fiscal constraints. They were further restricted by WTO and EU Customs Union membership and by EU state-aid regulations and framed in ‘neutral’ and ‘comparative advantage facilitating’ terms with mixed results (Atiyas & Baki¸s, 2015). In its place, private-sector growth through ‘business environment reforms became the new industrial policy’ (Weiss, 2021, p. 130). Still allowed were ‘horizontal measures’ such as investment incentives for regional development and small and medium-sized enterprises

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(SMEs). These supported AKP’s core constituencies mostly located in Anatolian provinces and mostly in low technology traditional sectors. Conglomerates with close connections to the AKP in construction and real estate emerged on the back of mass housing projects supported by entities such as TOKI (Mass Housing Fund) and large infrastructure projects. Relying on various army funds, a defence and related electronics sector also did well, as did sectors where Turkey had a comparative advantage—consumer durables, automotive, chemicals, and iron and steel that also benefited from FDI inflows and integration with EU supply chains. However, a partial international revival of interest in industrial policies drawing on ‘endogenous growth theory’ with its emphasis on human capital and innovation that required public investment in education and scientific research to support the ‘new economy’ sectors was mostly ignored (Hausman & Rodrik, 2003). There was little support for the high technology, ‘new economy’ sectors. Firms active in the high-tech ICT sector in the late 1990s were left to fend for themselves and devastated by the US Dot-com and 2001 Turkish financial crises. Nevertheless, the economic policy anchors provided by the start of EU membership negotiations and the IMF stand-by agreements provided a rare period of macro-economic stability that reduced business uncertainty and saw a steady growth of domestic and foreign private investment in 2002–2007. However, an appreciating lira from the mid-2000s eroded competitiveness, increased imports and encouraged the private sector to turn to foreign currency borrowing. Dependence on public investment for industry became replaced by dependence on private foreign capital. At the same time, chronic current account deficits replaced the chronic budget deficits of the 1980s–1990s. Post-2009 ‘Return’ of Mainstream Industrial Policies Mainstream acceptance of a more ‘active’ industrial policy returned after the global financial crisis of 2009 (Rodrik, 2008).4 The neo-classical role of government intervention was widened to include financial support, resolving coordination problems, and assistance in overcoming ‘discovery costs’ of new technologies. The IMF followed with proposals for ‘True 4 See also the joint International Economic Association and World Bank conference on ‘New thinking in Industrial Policy’ in Washington DC, May 22–23, 2012, co-chaired by Dani Rodrik, Joseph Stiglitz, and Justin Yifu Lin.

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Industrial Policy (TIP)’, or Technology and Innovation Policy (Charif & Hasanov, 2019). This ‘developmental liberalism’ saw industrial policy as export-oriented advocating global integration via global supply chains (Commack, 2012). By 2018, the World Investment Report was noting that 84 countries accounting for around 90% of global GDP had adopted industrial policies over the past five years (UNCTAD, 2018, p. 128) (Chart 9.2). Policy in Turkey drew on this framework in a search for a new growth model. The global financial crisis and the capital outflows following the ‘Taper tantrum’ of 2013 (when the US Federal Reserve began to taper its bond purchase programme) had revealed the underlying structural issues of the Turkish economy. These included low national savings rate, high dependence on imports and international capital inflows, low technological level of exports, low productivity in manufacturing, and signs of pre-mature deindustrialisation. The 10th and 11th Five Year Plans covering 2014–2023 outlined a new growth strategy that developed the themes introduced by the 2010 ‘Industrial Strategy’ document from the Ministry of Science, Industry, and Technology. These documents re-emphasised the ‘industrial sector’ as the main driver of the Turkish economy and aimed for a Tech-Driven upgrade of Turkish Industry.

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1973-77 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

0.0

Chart 9.2 State share of Total Investment (1950–2019, %) (Source Own construction based on Turkish Statistical Institute; *1950–1970 state share of investment in industry)

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These plans brought new forms of state intervention with an increase in state ownership over previously privatised corporates in strategic sectors, such as telecoms, with the newly established sovereign wealth fund becoming a shareholder.5 At the same time, there has been a growing involvement of the private sector in public–private partnerships (PPPs). Turkey was ranked No.1 in Europe in 2015–2019 by the European Investment Bank in the total value of PPPs that included new city hospitals and energy and transport infrastructure projects. These formulas have created a ‘private sector that is heavily involved and benefits from the state engineered rent-distribution process’ (Onis, 2019, p. 207). Increased state intervention in the economy and revival of industrial policies following the global financial crisis have also seen Turkey become more engaged with China and Russia—having to perform a difficult geopolitical balancing act with its EU and US allies (Gökay, 2021). This came with an authoritarian turn by the AKP in response to domestic and regional crises and a retreat from the institutional reforms enacted in the early 2000s. The ‘autonomous’ regulatory institutions that had been established after the 2001 crisis had been criticised from the start with the architect of the reforms, Kemal Dervi¸s, accused—by conservative circles wedded to the historical institutions of patronage, of not understanding ‘the customary Turkish way of doing politics’ (Bahçeli, 2001). Once in power, the AKP chipped away at this institutional autonomy—a process that accelerated after the 2011 elections. These trends were consolidated with the Presidential system after 2017 that centralised policy authority under the executive that further reduced transparency and accountability. Since then, the erosion of central bank independence has brought an erratic monetary policy as the AKP prepares for a closely fought election in 2023. In this ‘late-AKP’ context, the primary role of industrial policy as an economic strategy for the technological upgrade of Turkish industry has receded. It has increasingly become a political instrument to entrench AKP rule, and in the context of heightened international conflict, an effort to strengthen national security by trying to reduce the Turkish economy’s external dependencies. But with these overarching multiple political objectives, the earlier progress in the 2010–2015 years has slowed and become more uneven in recent years (see Sect. 3.3 below).

5 For an analysis of ‘state as a minority share-holder’, see Musacchio & Lazzarini (2014).

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Covid-19 and Green Industrial Policies Since 2020, the urgency of addressing the Covid-pandemic as well as climate change has prompted a further global shift away from the small-state paradigm of the neoliberal framework (G7, 2021). Mariana Mazzucato, an advisor to the G7 Panel advising the 2021 G7 meeting in Cornwall called it the new ‘Cornwall Consensus’ with a revitalised economic role for the state and government policies that move from ‘reactively fixing market failures to proactively shaping and making the kinds of markets we need’ (Mazzucato, 2021). This increasingly pragmatic approach adopted by advanced and developing countries also departs from the old dichotomies of industrial policy. The debate over ‘horizontal’ vs ‘vertical’ measures has been mostly dropped as new industrial policies include sector targeting strategies as well as wider horizontal measures such as skills development and environmental sustainability. There is a regained legitimacy for national development strategies, exemplified by the French plans to revive its Commisariat General du Plan. This ‘modern’ industrial policy framework even seems to be moving towards a moderate relaxation of restrictions on policy space embodied in international commitments. This reflects the debate over the relaxation of state-aid policies on EU subsidies to combat climate change and demands for the reform of WTO and EU rules to ‘exempt’ various sectors and industrial policy instruments to facilitate Covid-related health and environmental measures. In addition, the break with the old dichotomy of export-led vs import-substitution policies involves tacitly accepting that late industrialisers and advanced economies positioning for the new industrial revolution, or Industry-4.0, should take a pragmatic approach with ‘a blend of measures that mix import substitution with export promotion’ (UNCTAD, 2018, p. 144). This coincides with the work by Ha-Joon Chang who has long advocated a heterodox framework for industrial policy noting that the historical experience of advanced industrial countries shows the old dichotomies must be overcome to create transformative opportunities for middle-income economies (Chang, 2005; Chang & Andreoni, 2016). However, the current international context raises as many risks as opportunities with accelerating protectionism and fragmentation of the global economy since the Russian invasion of Ukraine. International rules that restrict the policy space for late industrialisers are not novel for the Turkish economy which has always navigated

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WTO and bilateral investment treaty restrictions as well as international sanctions on neighbouring economies. In the 1980s, trade restrictions included textile quotas; in the 1990s, Turkey was cited in more EU antidumping investigations than any other country; and more recently, there are protectionist measures by the EU and the US against Turkish iron & steel exports. There is also the looming EU border carbon tax and other environmental regulations that could undermine Turkey’s heavy industry and automotive exports. In response, after belatedly signing the Paris Agreement in October 2021, the AKP has begun to define a ‘green agenda’ for the Turkish economy that, combined with the Tech-driven industrial policy, to shape a ‘new growth model’. The combination of high-tech and green transition in Turkey—if effectively pursued, could ‘solve’ part of its foreign payments problem by reducing the $40bn or so hydrocarbon import bill. These trends and increasingly challenging global conditions facing the Turkish economy seem to have shifted the Turkish policy debate further from the liberal Washington Consensus than the G7 Cornwall declarations would suggest towards a vaguely defined ‘Beijing consensus’. The China-inspired strategy elevates the role of a weak exchange rate to curb the import dependence on the Turkish economy. Meanwhile, the central bank struggles with accelerating inflation using administrative measures in place of interest rate rises, in the context of an upcoming election and increased authoritarianism. This is discussed further below but first there is a review of the features of the current industrial policy framework.

New Industrial Policy Government economic policies since the global financial crisis have attempted to address the longer-term secular trend towards pre-mature deindustrialisation and the problem of low productivity and chronic current account deficits. In line with this, industrial policies have aimed for a reduction of import dependence of industry, diversification of export markets, and more recently, a technological upgrade. To accompany Turkey’s signing of the Paris Climate Accord in 2021, plans for an industrial policy framework for decarbonisation of Turkish industry is also underway. An initial framework for industrial policy came in 2010 by the Ministry of Science, Industry, and Technology. The ‘Industrial Strategy for Turkey 2011–2014’ proposed reshaping the Turkish industry to become a

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medium-and-high-technology production base for Eurasia. Based on an analysis of Turkey’s comparative advantage automotive, white-goods, machinery, and electronics sectors were prioritised. Legislative authority for these policies came with the 2012 Incentives Law that brought back the idea of ‘strategic investments’ although the new framework mostly adheres to the approach that favours ‘horizontal’ measures by defining general criteria for incentives. Sectors eligible for incentives consist of those where dependence on imports are greater than 50% and projects with 40% domestic value added. There was also the need to address the trend towards deindustrialisation and the productivity problem. Studies showed that there were too much reliance on low-productivity construction and services sectors to drive growth. In contrast, with the exception of a few break-out industries such as motor vehicles, basic metals, and textiles, productivity in manufacturing had stagnated (World Bank, 2019). These issues were addressed in the 11th FYP published in 2019 aiming for an industrial technological upgrade to raise the share of exports of medium–high-tech products from its current level of 39 to 50%.6 The plans announced are in line with ‘mainstream’ recommendations and the IMF for a tech-driven industry initiative that provides project-based incentives for high-technology and export-oriented investments within a framework to attract FDI and increase integration with global value chains (Charif & Hasanov, 2019). These projects include biotechnology pharmaceutical production, a petrochemical hub in the Ceyhan Industrial Zone (already initiated), and further support for the extensive web of techno-parks across the country. In 2020, the support schemes for SMEs administered through KOSGEB (Small and Medium Enterprises Development Organisation) were expanded to cope with the Covid-pandemic by including a programme for health and hygiene products. Complementing the 11th FYP is an industrial policy called the ‘TechDriven Industry Initiative’ for ‘end-to-end localization’ from the Ministry of Industry and Technology. It aims to cut the current account deficit by $30bn by reducing import dependence in medium–high technology intermediate goods combined with an export orientation and participation in global value chains. As seen everywhere especially since the onset of the Covid epidemic, measures also include incentives for ‘reshoring’

6 The current breakdown is 36% medium, 3% high-tech in Turkish exports.

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and increasing the share of domestic production in critical sectors such as health and pharmaceuticals. But, this focus on reducing ‘import dependence’ of the new tech-led strategy looks set to be a difficult process, with the measures to incentivise pharmaceutical production being challenged by the EU and the US at the WTO.7 These international challenges, faltering policy effectiveness due to weakening institutional capacity, and the electoral objectives of the AKP have culminated in a new strategy—called the New Economic Model. This has been tagged on to the industrial policy framework to justify the recent rapid depreciation of the currency to ‘put an end’ to the current account deficits. By fuelling inflation and increasing income inequalities, this policy mix has already had a high price with inflation accelerating to levels not seen since the 1990s. This raises another old dichotomy in industrial policy debates as to whether it was sound macro-economic policies or industrial policies that were responsible for the transformation of Asian economies.8 As with all these dichotomies, the Turkish experience would suggest that you need both. The Challenge of Decarbonisation of Turkish Industry The increasing pollution and degradation of the environment and recent natural disasters—draught widespread fires, and landslides, have put public pressure on the AKP to step up plans to transition to a greener economy. Turkey has belatedly ratified the Paris Agreement in October 2021, having held out for international financial assistance as a late industrialising, urbanising economy with per capita energy consumption a

7 The EU and US argued Turkish measures to incentivise public procurement of domestically manufactured pharmaceuticals and for EU firms to produce domestically undermined competition. The WTO ruled against Turkey and the case was referred by Turkey to the Dispute Settlement process of the WTO in May 2022. 8 This debate arose in the 1990s with a World Bank report, East Asian Miracle: Economic Growth and Public Policy (1993) arguing that sound economic policies were the main drivers of growth in East Asian economies, refuting the earlier work by Chalmers Johnson published in 1982 in MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, that it was government support for specific industries that was responsible for Japan’s post-war economic growth. For a summary of the debate, see Hufbauer & Jung (2021).

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fraction of those in the advanced economies.9 The government has also had to respond to the EU carbon tax—proposed as part of the EU’s “Fit for 55” green agenda, on imports of highly polluting sectors such as cement, aluminium, fertilisers, electricity, iron and steel, and electricity. According to a study by the think-tank, TEPAV,10 Turkey is in third place after Russia and China in terms of the vulnerability of its exports to the EU in these sectors (Sak, 2021). Despite the ongoing debate about whether the EU tax is compliant with WTO and Turkey–EU Customs Union agreements, a Green Deal Action Plan was released in July 2021 by the Turkish Ministry of Trade. This adds an environmental dimension to existing industrial policies to establish compliance with the EU Green Deal in those sectors and exports that could be disrupted by the EU carbon tax. There are also plans for a national ‘emission trading system’ designed to be compliant with the EU. With an average of $40bn per year (estimated to rise to $70bn in 2022) energy-import bill that is a major source of the foreign payments deficit, switch to clean energy is a goal that meets many objectives in Turkey. Turkey’s share of renewables—hydro, solar, wind, and geothermal, in electricity production has risen in the past decade with potential for further growth. The wind has been supported with state subsidies under a feed-in tariff system via the YEKDEM (Renewable Energy Sources Support Mechanism) since 2011 with Turkey ranking fifth in Europe in wind turbine equipment production.11 At around 44%, the share of renewables in power generation capacity in 2019 ranked Turkey between Finland and Germany. However, according to the IEA, the share of renewable energy in the total final energy consumption, remained low at 11.9% in 2018 indicating more needs to be done in transport, housing, and industry (IEA, 2021). Some major sectors are ahead of the government in implementing ‘green transitions’ including textiles and clothing: demands from major US and EU brands for ‘sustainable’ fashion has prompted Turkish suppliers to 9 As a member of the OECD, Turkey is in the ‘developed world’ category in the Paris

Accord (this differs to Turkey’s UN categorisation as a developing country), and hence does not qualify for financial assistance. 10 Economic Policy Research Foundation of Turkey. 11 ‘Turkey’s installed wind capacity reaches over 10GW’, Istanbul International Centre

for Energy and Climate (IICEC) Newsletter, November 2021. The feed in tariffs introduced in 2011 were recently changed from US$ based to TL based in June 2021.

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increase the recycling of materials and water use efficiency and end the use of coal-powered energy.12 But time is short for the green transformation required in the heavily polluting exporting sectors to avoid the EU carbon tax that will come into operation in 2026 after a transition period starting in 2023. Costing an estimated $50bn, this will require major restructuring and global repositioning of Turkish industry that had a global niche as producer and exporter of heavy (polluting) industries as advanced economies deindustrialised and moved into light industry and high-tech sectors (Köksal & Cetin, 2021). Turkish industry now has to work out how to reduce carbon emissions in core industries such as iron and steel and only 3-years to make the transition. Positive Momentum in ICT and Defence Sectors and Some High-Tech Projects Over the past 5-years, indicators of digital preparedness for a technological leap have suggested that Turkey stood reasonably well positioned: a Digital Evolution Index in 2017 put Turkey on the border of a ‘StandOut’ crowd of countries along with Poland and Malaysia (Chakravorti & Chaturvedi, 2017). Some of these trends have been strengthened by the onset of the Covid epidemic in 2020. As seen the world over, the Covid lockdowns turbo-charged e-commerce and other ICT (information and communications technologies) activities in Turkey which has seen its first “unicorns” emerge. The share of online retail in total has more than doubled to 15% in mid-2021 from 6.2% at the end of 2019 according to TUBISAD, Turkish Informatics Industry Association. $1.3bn of investments went into start-ups in the first half of 2021 surpassing the $736 m of investment over the past ten years (Ya˘gcı, 2021). There is a wide range of foreign and domestic ‘angel’ investors with the latter including investment arms of established Turkish conglomerates such as the Oyak Group, Vestel Ventures of Vestel Group, Inventram of Koc Holding, and Yildiz Ventures of Ulker Group. Among the initiatives to tackle carbon emissions in transport is a statesponsored project for the production of a domestic electric vehicle (EV) and lithium-ion battery. Tax exemptions, investment site allocation, and 12 Here are the firms which have pressed the Green-button (I¸ ˙ ste ye¸sil için dü˘gmeye basan s¸ irketler’), Dünya, 19 October, 2021. https://www.dunya.com/surdurulebilirdunya/iste-yesil-icin-dugmeye-basan-sirketler-haberi-637011.

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public purchase guarantees are among the incentives that have been made available to ensure the first vehicles are produced in 2023.13 Given the importance of the automotive sector for the economy and exports, the transition to EV will be crucial for Turkey to maintain its global position as the 3rd largest commercial vehicle producer in Europe (with an 85% average export rate) in 2020.14 The defence industries sector has become, as elsewhere, a significant conduit for high-tech production. Given Turkey’s volatile geo-strategic location and defence spending of 2.5% of GDP, governments have sought to increase defence self-sufficiency since the 1980s. The recent regional crises have reinforced this focus with defence-related projects attracting high levels of investment incentives. One of the biggest incentive allocations in 2019 was to Aselsan Konya—a public–private defence industry project.15 The sector has fostered a wide network of domestic suppliers and has four Turkish firms listed in the top 100 global defence manufacturers and exporters. With the highest R&D spending among Turkish manufacturing industries, the defence sector has the potential to produce what can be called a ‘Turkish-DARPA’ effect.16 The defence industries have had long-term investment support from various army funds, generous access to investment incentives, and some leading firms have close connections to the government. Thus, having increased its domestic content to around 70%, the sector is relatively cushioned against the current market uncertainty facing most others.

13 Is Bank Weekly Bulletin, 30 December 2019. https://ekonomi.isbank.com.tr/con tentmanagement/Documents/eng02_weekly/2019/wb_20191230_Turkish_lira_deprec iated_while_BIST100_hit_an_over_one_and_a_half_year_high.pdf. 14 Data from Automotive Manufacturers Association of Turkey. Access: https://www. osd.org.tr/homepage. 15 Defence and related sector investments reach TL2bn in 11-months (‘Silah ve muhimmiyat yatırımları 11 ayda 2 milyar liraya ula¸stı’), Dünya, 7 January, 2020. https:// www.dunya.com/ekonomi/silah-ve-muhimmat-yatirimlari-11-ayda-2-milyar-liraya-yaklastihaberi-460022. 16 DARPA—the US Defense Advanced Research Projects Agency—that has been responsible for many pioneering R&D and innovations for defence technologies which have been further developed into commercial use by the private sector.

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Table 9.1 ICT and R&D indicators

Mobile phone subs (per 100 people) vs Poland Internet users (% of population) vs Poland High-tech exports (% of manuf. X) vs Poland GERD (R&D spending) % GDP vs Poland

2000

2010

2020

12.5 17.5 3.8 7.3 4.0 3.0 0.47 0.64

85.4 122.5 39.8 62.3 2.2 8.0 0.79 0.75

96.8 127.7 74.0 84.5 3.2 10.1 1.06* 1.32*

Source Authors own compilation from DEIK; World Bank; UNESCO, OECD; * 2019

Heading for a Middle-Of-The-Road Innovator Trap? The question is, can this rate of growth in high-tech activity be sustained and expanded into an economy-wide increase in productivity? Or, will it be limited to the defence sector and a few show-case projects such as the EV? Also, can the Turkish industry decarbonise rapidly enough to maintain its global market share? Twenty years ago there was another burst of activity in the ICT sector. Several internet service providers (ISPs) were set up by established holding groups in the late 1990s, and hightech exports were growing fast. But the bursting of the US Dot-com bubble and Turkish financial crisis of 2000–2001 devastated many entities. Although there was strong growth in medium technology exports such as automotive that benefited from the strong global growth, hightech exports such as computer, electronic, and optical goods as a share of total peaked in 2004–2005. Despite a rapid economic recovery, the neglect of industrial policies by the incoming AKP government in 2002 meant that the opportunity was missed to encourage a wider transformation of Turkish industry into a higher technology structure (Table 9.1). In contrast, the past decade has had extensive tech-oriented industrial policies offering major investment incentives to the ICT sector.17 The table of ICT and R&D indicators suggests that there has been progress in Turkey in the past 20 years. However, the rapid pace of improvement has slowed in recent years. This is seen with the uneven progress of GERD 17 For an extensive analysis of Turkish R&D policies, see Kutlay & Karao˘ guz (2017).

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(Gross Expenditure in Research and Development) as a share of GDP (see Chart 10.3, GERD % GDP) with the gap with comparable economies such as Poland widening after 2016. GERD has risen from 0.79% in 2011 to 1.06% in 2019 but looks unlikely to reach the government target of 1.8% by 2023. The aim of raising the share of high-tech exports with a target of 5.8% by 2023 set by the 11th FYP is also looking hard to meet. These trends are in line with the latest UNESCO Science Report in 2021 that noted Turkey could be heading for a middle-of-the-roadinnovator trap in contrast with the previous report’s positive tone in 2015 that Turkey was catching up in economic and technological terms with the advanced economies (UNESCO, 2021, p. 338). The problem identified by the report was that the increased government incentives for R&D were not translating into economy-wide productivity growth or the export of high-tech products because business was not ‘grasping the government’s helping hand in support of technological development and innovation’ (ibid, italics added by the Author). The share of R&D carried out by businesses only began to surpass government-funded R&D after 2017. Although it is now closer to around two-thirds (vs 78% in South Korea), among the major contributors are the defence industries. The report also noted that Turkish researchers’ involvement in international research networks was limited and there was a decline in research output between 2016 and 2018 due to the loss of academic research staff in the aftermath of the attempted coup in 2016. There is also the problem of lack of cooperation between the private sector and research institutions which some of the many ‘techno-parks’ struggle to overcome18 (Chart 9.3). A major barrier to ‘business grasping the government’s helping hand’ have been problems with the implementation of industrial policies and the organisation of the incentive schemes and credit support. Kutlay and Karao˘guz (2017) list problems with monitoring and steering the R&D funds, and problems of public–private coordination that constrain the developmental impact of the technological upgrading plans in Turkey. For example, in the aftermath of the 2016 failed coup, there was a rapid

18 There are exceptional ones that do not have this problem such as the ODTUTeknokent at the Middle East Technical University in Ankara. Set up in the late 1980s, it now houses 470 firms including R&D arms of Aselsan, Havelsan, Tusa¸s, and Siemens in defence, electronics, and aerospace; Türk Telekom, Neta¸s, in telecoms; Arçelik, Vestel, and Samsung in consumer goods (see also Gökçe, 2021).

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1.40 1.20 1.00 0.80 0.60

Turkey GERD % GDP

2019

2017

2018

2016

2015

2013

2014

2011

2012

2010

2009

2008

2007

2006

2005

2003

2004

2002

2000

2001

0.40

Poland GERD % GDP

Chart 9.3 Gross Domestic Expenditure on Research and Development in Turkey and Poland (as % of GDP, 2000–2019) (Source Own construction based on OECD data)

roll-out of the Credit Guarantee Fund (KGF) which was expanded tenfold in four months to 7% of GDP in 2017 to boost investment; but, 90% of the credits were used for working capital rather than new investment in machinery and equipment (IMF, 2018).19 Raft of new incentives have been rushed out prior to every election and following frequent crises. In 2018, an OECD report noted the proliferation of ‘75 different incentive and subsidy schemes in place’ (OECD, 2018, p. 41). More have been added since, also increasing problems in monitoring the fiscal implications of the incentive programmes including contingent liabilities of public–private partnerships (PPPs) and credit guarantees (IMF, 2017). In this context there is a risk that the new ‘Green agenda’ could add yet another layer to the existing mix of incentives, increasing the difficulty for businesses to navigate this complex industrial policy framework. In the absence of the former State Planning Organisation, there have been suggestions to merge some ministerial and research entities into a Japanese style MITI that oversaw Japan’s industrial transformation (Yülek, 2018).20 But, the government is persisting with creating yet more new 19 In 2018, the government hastily issued new instructions to try to correct this and ensure KGF credits were directed into capital investment and exporters. 20 It is notable that in France, the revival of the Commissariat General du Plan was announced in September 2020.

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commissions and ministerial restructurings. The latest additions were the establishment of an Industrial Executive Commission (Sanayi Icra Kurulu) to provide technical support and boost flagging private-sector investment in 2020, and in October 2021, a new Climate Change Commission to prepare sectoral plans for the green transition in the renamed ministry of Environment, Urbanisation, and Climate Change.

Recurring Turkish Features that Undermine Effective Industrial Policy The decade of industrial policies supporting high-technology investments has succeeded in establishing a threshold in Turkey in terms of ‘learning’, human capital, and infrastructure. However, supportive industrial policy is not sufficient to ensure these developments are sustained and translate into economy-wide productivity gains. Many of the organisational problems discussed above frequently arise with industrial policies and can be found in many countries, including advanced economies with more established institutions and democratic accountability (The Economist, 2022). Yet, if Turkey’s decarbonisation and tech-led investment plans are to succeed and industry to make the next productivity leap, some deeper recurring and interrelated problems arising from specific Turkish features also need to be addressed. One is the dependent and fragmented business elite that is the historical legacy of state-business relations established in the early years of the Republic. Industrial policies were utilised to create an indigenous ‘Turkish’ industrial business elite during the early Republican period. The legacy of this state-sponsorship has been a business community that lacked autonomy and operated on the basis of gaining ‘favours’ from the state (Bugra, 1991). By the 1970s, this had begun to change as industrialisation progressed and business from the early years of the Republic grew and gained some independence. However, this was not the case for the new stratum of businessmen fostered by the AKP to create a loyal AKP-aligned business elite once it came to power. While this initially had a positive democratising impact, polarising rhetoric and favouritism of the government have deepened divisions in the business community and increased its dependence on the state. Yet, it is also the case that during major crises such as in 1980 and 2001, such divisions were overcome with wide political alliances formed to implement state-led structural reforms aiming at national objectives.

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Second is the persistent macro-instability and uncertainty associated with low national savings rates and slow development of capital markets that create a dearth of long-term funding for industrial development. This is reflected in the ‘paradox of Turkish liberalisation’: that even in periods of liberalisation, state intervention remained significant as seen in the 1950s and the 1980s to offset the preference by private investors for short-term gains in rent-rich sectors (Bugra, 1994, p. 146). In addition, an export capacity that is unable to meet external funding requirements of high energy-import dependence has been reflected in current account deficits and associated currency and payments crises. These maintain a high level of vulnerability to external global shocks that contribute to persistent macro-economic instability and undermine business investment. Regional geopolitical conflicts compound the volatility with the Russian invasion of Ukraine being the most recent one. The result is heightened market uncertainty for producers regarding the cost of funds and inputs leading to persistent demand for state support to mitigate the macroshocks. Periods when funding constraints were eased and a semblance of macro-stability was established were mostly due to an increase in external funding such as the rise in FDI associated with the privatisation programme and the prospect of EU membership in the first decade of the 2000s. The conditions above bring with them the third factor: a ‘reactive’ policy-making by governments that reflects weak state capacity. Lacking established institutionalised governance mechanisms that could reduce market uncertainty and rent-seeking, governments resort to adhoc administrative measures and increased executive control, creating a vicious circle of further de-institutionalisation. Hence, an uncertainty amplifying role of the state is perpetuated irrespective of the degree of state intervention in the economy. The post-2001 crisis reforms tried to address this ‘crisis of governance which occurred as a result of the populist, clientelist, and corruption producing nature of Turkish politics’ by establishing independent regulatory authorities (Dervi¸s et al., 2004). These reforms improved state capacity and policy effectiveness for a while but had begun to unravel after the global financial crisis. The reversal of these institutional reforms reflects the political choices made by the AKP governments. However, early opposition to the reforms also came from wider circles. Economic sociologists have found many factors contribute to implementation problems and durability of ‘blue-print’, top-down institutional reforms imported from advanced economies and

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as seen with the ‘institutional monocropping’ in the EU membership accession process. The experience and governance problems in Eastern European EU members have revealed that social embeddedness of the institutional reforms is critical to their survival (Block & Evans, 2005; Bruszt, 2015).

Navigating Uncertainty, Institutional Weakening, and Macro-Instability in Late AKP Era The problems associated with the recurring features of dependent business elite, weak institutions, macro-instability, and market uncertainty in the Turkish economy have reached new heights in the late AKP era. AKP’s defensive and authoritarian response to global and domestic political challenges that culminated in the Presidential regime after the 2017 referendum and the subsequent centralisation of authority has undermined bureaucratic autonomy, transparency, and public sector accountability. These changes made to the legal and constitutional framework combined with the longer period of rule of the AKP (since 2002) has meant that the ‘political and economic institutions in Turkey have declined further during the latter years of AKP rule’ than any other regime (Pamuk, 2021, p. 31). Loss of bureaucratic autonomy of entities such as the Central Bank since 2017 and the resulting ad-hoc and erratic policymaking since then have brought periodic rounds of sharp currency weakness, eroding the central bank foreign currency buffers. In 2021, this credit-led growth policy-mix and sharp cuts in interest rates by the central bank brought the sharpest slump in the Lira since the 2001 crisis and fuelled inflation that reached 70% by April 2022. This reflects a desperate attempt to maintain growth to support the electoral prospects of the AKP combined with a moral critique by its current leadership to interest earnings. It is also an attempt, given increased international tensions and regional conflicts, to reduce Turkey’s external vulnerabilities. Business pleas for a ‘stable’ currency and alarm at its collapse have been dismissed as a price worth paying to drive import substitution, increase exports, and reduce the current account deficit. It seems there is a return to a version of ‘import substituting industrialisation’ paradigm but with monetary policy ‘shock-therapy’ now replacing import tariffs (Kavcioglu, 2021). The government’s ‘shock-therapy’ policy to encourage import substitution with a collapse of the currency in 2021 seems a poorly disguised

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cover for a mis-guided anti-inflation policy that not only contributes little—but also, runs counter to the longer-term aims of industrial policies for a tech-upgrade of Turkish exports. The oft-repeated government aim of reducing import dependence and the current account deficit by $30bn is an objective well-designed industrial policies can achieve over the longer term. But although the Turkish lira real exchange rate has been declining for a decade, current account deficits have persisted and remain driven by cyclical trends.

Conclusion The 2002–2007 period of macro-economic stability was preceded by reforms that reduced political patronage in public institutions and strengthened policy effectiveness. This and the accompanied democratisation reforms have been overturned in the past decade. The resulting problems as discussed above are also highlighted in a report by Tüsiad, a business association, who have joined the growing criticism of AKP policies, tracking the close relationship between per capita income and institutional strength (Tüsiad, 2021). The report shows per capita incomes rising after the 2001 institutional reforms and their deterioration in both incomes and institutions after 2016. This corresponds with our observation of effective industrial policies in 2010–2015 when the institutional gains from the 2001 reforms were still somewhat protected (Estrin & Bruno, 2020).21 The centralisation of economic policy under the Presidency since 2017 had been partly justified to enable better coordination and effectiveness of policy implementation. But the general trajectory of the Turkish economy has been mostly negative since. Despite the centralisation of power and an established loyal business circle, the AKP’s management of the economy has generated more macro-instability. Although specific focused projects with well-defined objectives, such as the defence industry and EV are making progress, longer-term investments to enable the application of higher technology in wider industry is hampered by business uncertainty. The difficult global economic environment with tightening monetary conditions, rising energy, food and commodity prices, and the ongoing 21 Estrin and Bruno put Turkey in the “hierarchically coordinated market economy” category that suggests it could be suited for industrial policies if government effectiveness is there.

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war in Ukraine is adding to the uncertainty. Turkish policies must navigate between these difficult global trends as well as international sanctions on its two biggest neighbouring markets—Russia and Iran.22 At the same time, and on a more positive note, the effective promotion of environmental industrial policies provides opportunities for middle-income and mid-level powers, such as Turkey (Chang, 2010). But first a measure of macro-stability and a reset of the institutional and political fabric are needed to ensure policy effectiveness if Turkey is to move beyond its middle-income trap.

References Atiyas, I., & Bakı¸s, O. (2015). Structural change and Industrial Policy in Turkey. Emerging Markets Finance and Trade, 51(6), 1209–1229. Bahçeli, D. (2001). Kicking and screaming all the way, briefing, No 1342. EBA Agency Press. Block, F., & Evans, P. B. (2005). The state and the economy. In N. Smelser & R. Swedberg (Eds.), The handbook of economic sociology. Princeton University Press. Bruszt, L. (2015). Regional normalisation and national deviations: EU integration and transformations in Europe’s Eastern Periphery. Global Policy, 6(1), 38–45. https://doi.org/10.1111/1758-5899.12226 Bugra, A. (1991). Political sources of uncertainty in business life. In M. Heper (Ed.), Strong state and economic interest groups: The post-1980 Turkish experience. de Gruyter. Bugra, A. (1994). State and business in modern Turkey, a comparative study. SUNY Press. Chakravorti, B., & Chaturvedi, R. S. (2017). Digital planet 2017: How competitiveness and trust in digital economies vary across the world. The Fletcher School, Tufts University. https://sites.tufts.edu/digitalplanet/files/ 2020/03/Digital_Planet_2017_FINAL.pdf Chang, H. -J. (2010, January). Industrial Policy: Can we go beyond an unproductive confrontation. Turkish Economic Association Discussion Paper. Chang, H. -J., & Andreoni, A. (2016, July 13). Industrial policy in a changing world: Basic principles, neglected issues and new challenges. 40 Years of the Cambridge Journal of Economics Conference. Chang, H. -J. (2005). Kicking away the ladder, development strategy in historical perspective. Anthem Press. 22 This difficult balancing act is also taking place in international relations. See Kutlay & Onis (2021), Levaggi & Donelli (2021), Dalacoura (2021).

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Charif, R., & Hasanov, F. (2019). The return of the policy that shall not be named: Principles of industrial policy. IMF Working Paper, WP/19/74. Commack, P. (2012). The G20, the crisis, and the rise of global developmental liberalism. Third World Quarterly, 33(1), 1–16. Dalacoura, K. (2021). Turkish foreign policy in the Middle East. International Affairs, 97 (4), 1125–1142. https://doi.org/10.1093/ia/iiab082 Dervi¸s, K., Gros, D., Emerson, M., & Ülgen, S. (2004). The European Transformation of Modern Turkey, Centre for European Policy Studies (Brussels) and Economic and Foreign Policy Forum (Istanbul). Estrin, S., & Bruno, R. (2020). Taxonomies and typologies: Starting to reframe economic systems. In E. Douarin & O. Havrylyhyn (Eds.), Handbook of comparative economics. Palgrave Macmillan. G7. (2021). Global economic resilience: Building forward better. Final Report of G7 Panel on Economic Resilience. https://www.g7uk.org/wp-content/upl oads/2021/10/G7-Economic-Resilience-Panel-Report.pdf Gökay, B. (2021). Turkey in the global economy: Neoliberalism, global shift and the making of a rising power. Agenda Publishing. Gökçe, H. (2021, November 23). Devlerin adresi: ODTU Teknokent (The adress of the giants: ODTU Teknokent). https://www.dunya.com/sektorler/ devlerin-adresi-odtu-teknokent-haberi-640581 Haggard, S. (2018). Developmental states. Cambridge University Press. Hausman, R., & Rodrik, D. (2003). Economic development as self-discovery. Journal of Development Economics, 72(2), 603–633. https://doi.org/10. 1016/S0304-3878(03)00124-X Heper, M. (1991). The state and interest groups with special reference to Turkey. In M. Heper (Ed.), Strong state and economic interest groups: The post-1980 Turkish experience. de Gruyter. Hufbauer, G., & Jung, E. (2021, November 21–25). Scoring 50 years of US industrial policy. PIIE Briefing. IEA. (2021). Turkey: Energy policy review, international energy agency. https:// iea.blob.core.windows.net/assets/cc499a7b-b72a-466c-88de-d792a9daff44/ Turkey_2021_Energy_Policy_Review.pdf IMF. (2017). Fiscal transparency evaluation report: Turkey, International Monetary Fund. Country Report No. 2017/208. https://www.imf.org/-/media/ Files/Publications/CR/2017/cr17208.ashx IMF. (2018). Turkey: 2018 Article IV consultation-press release; Staff report; and Statement by the Executive Director for Turkey. International Monetary Fund, April 2018. https://www.imf.org/en/Publications/CR/Issues/ 2018/04/30/Turkey-2018-Article-IV-Consultation-Press-Release-Staff-Rep ort-and-Statement-by-the-45822 Kavcioglu, S. (2021, October 28). Current account surplus would mean price stability. Bloomberg.

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Köksal, C., & Cetin, G. (2021). The international trade analysis of Turkey’s polluting industries. Journal of Economic Policy Research, 8(2), 257–275. https://doi.org/10.26650/JEPR.930212 Kutlay, M., & Karao˘guz, H. E. (2017). Neo-developmentalist turn in the global political economy? The Turkish case. Turkish Studies, 19(2): 289–316. Kutlay, M., & Onis, Z. (2021). Turkey’s foreign Policy in a post-Western order. International Affairs, 97 (4), 1085–1104. https://doi.org/10.1093/ia/iia b094 Levaggi, A. G., & Donelli, F. (2021). Turkey’s changing engagement with the global South. International Affairs, 97 (4), 1105–1124. https://doi.org/10. 1093/ia/iiab093 Mazzucato, M. (2021, October 13). A new global economic consensus, project syndicate. https://www.project-syndicate.org/commentary/cornwallconsensus-rebuilding-global-governance-by-mariana-mazzucato-2021-10 Musacchio, A., & Lazzarini, S. (2014). Reinventing state capitalism, Leviathan in business, Brazil and beyond. Harvard University Press. OECD. (2018, July). OECD economic surveys: Turkey. www.oecd.org/eco/sur veys/economic-survey-turkey.htm Onis, Z. (2019). Turkey under the challenge of state capitalism: The political economy of the late AKP era. Southeast European and Black Sea Studies, 19(2), 201–225. https://doi.org/10.1080/14683857.2019.1594856 Pamuk, S. (2021). Economic policies, institutional change, and economic growth since 1980. In A. S. Akat & S. Seyfettin Gürsel (Eds.), Turkish economy at the crossroads: Facing the challenges ahead (pp. 1–36). World Scientific Publishing. Ricz, J. (2018). New developmentalism in the 21st century: Towards a new research agenda, Working Paper 245. Institute of World Economics, Centre for Economic and Regional Studies, Budapest. Rodrik, D, (2008). Normalising Industrial Policy, Commission on Growth and Development, Working Paper, No 3. World Bank. Sak, G. (2021, September 1). Sanayi Politikası yoksa Ye¸sil mutabakat s¸ oku s¸iddetli olur’ (Without an industrial policy, there will be a big shock from the Green Agenda). TEPAV. The Economist. (2022, January 15). Special report, Business and the state: The new interventionism. ˙ Tüsiad. (2021). Yeni bir anlayı¸sla gelece˘gi in¸sa: Insan, Bilim, Kurumlar (A new approach to constructing the future: People, science, institutions). https://tusiad.org/tr/yayinlar/raporlar/item/10855-yeni-bir-anlayi sla-gelecegi-i-nsa-i-nsan-bilim-kurumlar UNCTAD. (2018). World Investment Report, 2018: Investment and new industrial policies. United Nations Conference on Trade and Development. United Nations. UNESCO. (2021). Science report: The race against time for smarter development.

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Weiss, J. (2021). Neoclassical economic perspectives on industrial policy. In A. Oqubay, C. Cramer, H. -J. Chang & R. Kosul-Wright (Eds.), The Oxford handbook of industrial policy. Oxford University Press. World Bank. (2019). Country economic memorandum: Firm productivity and economic growth in Turkey. Turkey Productivity Report. The World Bank. Ya˘gcı, S. (2021, July 26). Turkiye’de 10 unicorn yola çıkmaya hazırlanıyor (10 Turkish Unicorns on the way). Dünya. https://www.dunya.com/girisimcilik/ turkiyede-10-unicorn-yola-cikmaya-hazirlaniyor-haberi-628689 Yülek, M. (2018). Thinking about a new industrial policy framework for Turkey. In A.F. Aysan, M. Babacan, N. Gür & H. Karahan (Eds.), Turkish economy: Between middle-income trap and high-income status. Palgrave Macmillan.

CHAPTER 10

Educational Developmentalism: A Key to the Success of the East Asian Developmental States Csáki György

Introduction Singapore, South Korea, and Taiwan have realised spectacular macroeconomic performances in recent decades. These countries had started their independent national and economic development, in the 1950s and 1960s, as extremely poor underdeveloped economies. By the turn of

A study prepared in the research project „From developmental states to new protectionism: changing repertoire of state interventions to promote development in an unfolding new world order” (NKFI FK_124573)”, led by Judit Ricz, Centre for Economic and Regional Studies—Institute of World Economics. C. György (B) Kodolányi János University, Budapest, Hungary e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_10

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the millennium, however, they had become advanced knowledge-based economies: this achievement was realised in less than two generations’ time. This unparalleled success is undoubtedly largely the result of the effective operation of the East Asian developmental state. The “classical” type of developmental state tried to avoid the deterioration of the terms of trade with foreign exchange restrictions and an active exchange rate policy. The developmental state intended to replace the non-existing entrepreneurial stratum that led to the enlargement of state sector as well. The developmental state was a state of industrialisation to go beyond the limits of the former import substituting industry that was typical in the colonial way of the division of labour and the development of indigenous manufacturing industry seemed to be the symbol of economic independence—even in state ownership. This way of development meant a clear counter pole to the dominant neoclassical orthodoxy of that time. Japan has always been widely considered the archetype of the developmental state as it was described in Chalmers Johnson’s acclaimed book (Johnson, 1982). According to Johnson, the ‘secret of the Japanese economic miracle’ was the result of the “plan-rationalist state”. (Ibid. 23) Several distinguished scholars joined the basic ideas of Johnson’s epoch-making work. Amsden extended Johnson’s theory on South Korea (Amsden, 1989), Wade intended to verify it in a general context. Wade (1990) and Evans (1995) pointed out the state’s eminent role in choosing and developing adequate technologies. Stiglitz looked at SouthEast Asian economic successes as an evident practical disproof of the orthodox neoliberalism represented by the major international financial organisations (Stiglitz, 2004). Developmental states in East Asia in the 1950s–1970s were based upon export-led development in addition to strong market protection—that followed the Japanese neo-mercantilist model. In economic policy terms, the basis of this developmental state was a state planning system which articulated in sound sectoral preferences: the main task of the state was to identify those sectors which provided the most favourable sale opportunities. East Asian developmental states realised that their labour forces required effective education and training reforms with special attention to education in technical and natural sciences as well as technical training. Since the late 1980s, in the age of globalisation, it became impossible to keep alive widespread

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system of state subsidies, operating trade and foreign exchange restrictions, limiting penetration of transnational corporations, etc.1 Cheap labour reserves in the East Asian developmental states were exhausted, so changes in macroeconomic strategy were inevitably towards higher technological standards and the more skilled labour. Macroeconomic policy of the developmental state has generally consisted of three key elements. The first element was a clearly articulated industrial and trade policy which was the driving force of industrialisation and closely determined the required structure of the education system. The second element of this model was the centralised control over and direction of the education systems, that the state assumed to provide the necessary skilled labour force2 . The third element was the innovative mechanisms they devised to ensure that the skill requirements of the new industries informed the decisions made about the outputs of the education and training system (Ashton et al., 1999, 12).

Public education: similarities and peculiarities Although all the three countries followed the same model, that is the developmental state and the Japanese-type neo-mercantilism, their concrete macroeconomic strategies were different: for five decades, Taiwan has relied on small and medium-sized enterprises—directly limiting the emergence of large companies and operated almost exclusively as a manufacturing supplier. South Korea, instead, supported “national champions”: its economic policy concentrated on the development of a few globally competitive large companies. In Singapore, given its obviously specific situation and conditions, from the beginning, economic development was based on foreign direct investment: this citystate has been a real born-global economy. As far as public education systems are concerned, there are also basic similarities—but important differences as well.

1 The recent evolution of the develpmental state in the framework of globalisation is comprehensively analysed by the studies of Ger˝ocs —Ricz, 2021. 2 At the same time, this direction of the education system made an important contribution to the development of nation-building.

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At the beginning of their modern development, in the 1950s and 1960s,3 all the three countries faced identical problems in education: . they had almost non-existing public education systems (at least there was no compulsory and free public education even on the elementary level). . two out of the three countries changed the language of instruction: since the very beginning of the development of comprehensive public education systems, English became the universal language of instruction in Singapore and traditional Mandarin Chinese in Taiwan.4

Positions in PISA rankings OECD is certainly right to claim that the “Programme for International Student Assessment (PISA) examines what students know in reading, mathematics, and sciences. It provides the most comprehensive and rigorous international assessment of student learning outcomes to date. Results from PISA indicate the quality and equity of learning outcomes attained around the world and allow educators and policy makers to learn from the policies and practices applied in other countries” ( OECD, 2020). Singapore, South Korea, and Taiwan, all three countries have performed outstandingly in recent PISA assessments. In PISA 2012, in terms of sciences, Singapore achieved 551 points, South Korea 538 and Taiwan did 523 points (compared to the OECD mean value of 501 points) and ranked at 3rd , 5th and 10th best position. As far as reading capabilities were concerned, the OECD mean value was 496 points, while the result of Singapore was 542 (3rd best), that of South Korea was 536 points (6th best) and Taiwan achieved 523 points (7th best). The performances in mathematics were as follows (compared to the OECD mean 3 As it is well-known, Singapore became independent (from Malaysia) in 1965. In Taiwan, the Republic of China was re-established in 1949/50, after the end of civil war in China with the political takeover by Kuomintang. The civil war in Korea was ended with an armistice in 1953 (therefore, we can count the independent development of South Korea from then). 4 In Taiwan, it happened under the pressure of the new political ruling forces, while in Singapore, it was the outcome of a sovereign political decision:

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value of 494 points): Singapore 569 (2nd best), South Korea 526 points (7th best), and Taiwan 531 points (5th position).5 Three years later, in PISA 2015, performances were similarly excellent with some important changes. Singapore was the best in all three disciplines: 556 points in sciences, 535 points in reading and 564 points in mathematics (the OECD means scores were 493.493 and 490 points). South Korea was ranked 11th in sciences (516 points), 10th in mathematics (524 points) and 8th in reading (517 points). Taiwan was ranked 3rd in mathematics (542 points), fourth in sciences (532 points), but 19th in reading (497 points).6 The most recent PISA survey covered the performances of 2018. PISA 2018 surveyed 79 high- and middle-income countries (and territories) and assessed the performances of 4,000 to 8,000 15 years old students. “15-year-old students in four provinces/municipalities of China—Beijing, Shanghai, Jiangsu and Zhejiang —outperformed their peers in all of the other 78 participating education systems—in mathematics and science by a wide margin, and in reading, only Singapore came close”7 (Schleicher, 2020, 5). Singapore was ranked second in all three disciplines —its bay far the best performance since the city-state is assessed in PISA surveys. In reading, Singaporean students had 549 points (the OECD average8 was 487 points), in mathematics they achieved 569 points (compared to the OECD average of 489 points), and in sciences they performed 551 points (while the OECD average was equal to 489 points). South Korean students’ performance was not far behind their Singaporean peers: in reading, South Korea was ranked 9th with 514 points, in mathematics, it was at 7th position with 526 points and in sciences, the country performed again 7th with 519 points. As far as Taiwan is concerned, as in general, it performed worse in reading with 503 points (that meant 17th in ranking), in sciences, it achieved 10th position (with 516 points), and in mathematics, it was ranked 5th with 531

5 https://www.oecd.org/pisa/keyfindings/pisa-2012-results-overview.pdf, Downloaded 16 June 2022. 6 https://www.oecd.org/pisa/pisa-2015-results-in-focus.pdf 7 The four provinces/municipalities represent economically the most developed part of

China. 8 The sample included 79 countries; the OECD average means the average of the 38 OECD member-countries.

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points (Ibid. 6–8). These are clearly outstanding achievements, even more impressive ones than the well-known spectacular economic successes. In the three countries, student performances do not depend too much on their socio-economic status: even students of the middle decile performed much better than the OECD average and students of the bottom decile performed quite closely to the average (Ibid. 9–10). The great majority of students in all the three countries proved a better reading proficiency (both in terms of computer-based and paper-based assessments) than the global mean9 (Ibid. 16–17). The PISA 2018 survey revealed further two very interesting characteristics of the Singaporean, South Korean and Taiwanese public education systems: the extremely good performance in reading did not require extreme expenditures in either case, Taiwan spent even less than the OECD average (USD 89 092), and Singapore and South Korea spent 10–12% more which resulted in 2nd and 7th positions. In terms of time spent studying per week, in Singapore and South Korea about weekly 52 hours of learning, in Taiwan 46 hours were required to achieve the excellent performances. It was more than the OECD average of 44 hours a week10 (Ibid. 22–24). Therefore, these public education systems are much more money-effective than time-effective ones.

Public education in Singapore Singapore became independent in 1965 and in that time, it was “a poor, small (about 700 km2 ), tropical island with few natural resources, little fresh water, rapid population growth, substandard housing (…). At that time there was no compulsory education and only a small number of high school and college graduates and skilled workers. (…) Singapore had no assets other than its deep-water port.11 (…) Moreover, it had to import most of its food, water, and energy. The Republic of Singapore seemed an unlikely candidate to become a world-class economic and educational powerhouse” (OECD, 2011, 160). Singapore’s only potential resource was its human capital, its confidence in human talent—as Prime Minister 9 That means, they were ranked in one of the five (out of nine) higher level. 10 The most time-effective teaching/learning systems are those of Finland, Sweden,

Japan, Czech Republic, and Switzerland. 11 Nevertheless, this port secured control of a particularly important maritime trade route through the Strait of Malacca.

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Lee Kuan Yew expressed it in his memories: “it had taken me some time to see the obvious, that talent is the country’s most precious asset. For a small, resource-poor country like Singapore, with 2 million people at independence in 1965, it is the defining factor” (Lee, 2000, 135). Therefore, in the beginning, the Singaporean government focused on attracting labour-intensive manufacturing capital to the city-state. From the mid-seventies onwards, more sophisticated manufacturing sectors based on more highly skilled labour became increasingly decisive. By the mid-1990s, Singapore had reached that level of development where it could start to attract research and innovation-intensive sectors as well: the knowledge-based economy became an achievable goal, and Singapore began to attract highly skilled scientists and technology-intensive firms. All this happened in a country where, thirty-forty years earlier, there was no public education system.12 The establishment and development of public education in Singapore had a major role in nation building, to promote the basic idea formulated in the National Pledge: “One united people regardless of race, language or religion”. While establishing comprehensive public education system, the choice of language(s) of instruction was a key issue: since the beginning, there have been four languages of instruction: English, (Mandarin) Chinese, Malay, and Tamil. Although, children of all nationalities can learn in their native language, in a decade, English became the general language of instruction13 and Mandarin Chinese the second “first language”: Singaporean leadership envisaged as early as in the late 1970s, that Mandarin, after English would be the second key to economic development.14 These basic decisions of “language management”15 proved

12 However, that English and (Mandarin) Chinese-language private schools (including secondary schools and colleges) were considered by far the best schools in the region, so children from the middle classes of neighbouring countries who wanted to study in high-quality English or Chinese schools, flowed into Singapore from the early twentieth century. 13 As English became the official language of public administration in 1978. 14 “The seven different major south Chinese dialects spoken in Singapore made it easier

to persuade all to convert to Mandarin. Had we been like Hong Kong with 95% speaking Cantonese, it would have been difficult if not impossible. For many Chinese Singaporeans, dialect is the real mother tongue and Mandarin a stepmother tongue. However, in another two generations, Mandarin can become their mother tongue” (Lee, 2000, 155). 15 See: Ghim—Chew, 2016.

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to be one of the decisive factors of the spectacular economic development of Singapore. The introduction of English as the compulsory language of instruction served as an effective basis to introduce an AngloSaxon education system.16 Thirty years later, having achieved extraordinary economic success, Lee Kuan Yew rightly emphasised “English as our working language has prevented conflicts arising between our different races and given us a competitive advantage because it is the international language of business and diplomacy, of science and technology. Without it, we would not have many of the world’s multinationals and over 200 of the world’s top banks in Singapore. Nor would our people have taken so readily to computers and the Internet” (Lee, 2000, 155-156). In the first period of the development of public education in Singapore, between 1965 and 1978, the major goal was the establishment of a comprehensive, compulsory, and free basic, elementary school system, that is expanding basic education as quickly as possible. Universal primary education was developed by 1965—lower secondary education became universal by the early 1970s. The achieve these goals, many teachers/instructors were recruited, and the training system of teachers/instructors was also established. This first period was officially called survival-driven phase and turned out to be even more successful as it had been intended: “By the end of the “survival-driven phase”, Singapore had created a national system of public education” (OECD, 2011, 161). However, the quality of education was poor, drop-out rates were high and the system was unable to provide enough skilled labour force for the developing manufacturing industries. After the first oil-price shock of 1973, Singapore’s comparative advantages eroded in lowskilled, labour-intensive industry due to the spectacular development of regional competitors and the forced economic restructuring also required major improvement of the public education system. “The government’s economic strategy was to move Singapore from a third-league, labourintensive economy to a second-league, capital, and skill-intensive country. So, in January 1979, a new education system was introduced. Singapore moved away from its earlier one-size-fits-all approach to schooling that would create multiple pathways for students in order to reduce the dropout rate, improve quality and produce the more technically skilled labour 16 It took about one and a half decades of political tensions and disputes to achieve that: the Malay and Indian minorities have accepted English as the language of instruction, but the Chinese community strongly opposed it (Lee, 2000, 145-149).

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force needed to achieve the new economic goals. (…) The multiple pathways included three types of high school: (i) academic high schools, which prepared students for college; (ii) polytechnic high schools that focused on advanced occupational and technical training and that could also lead to college; and (iii) technical institutes that focused on occupational and technical training for the lowest fifth of students” (Ibid. 161). This period between 1979 and 1996 was labelled the efficiency-driven phase of education when the basic qualitative aspirations were to decrease dramatically drop-out rates and the training of highly skilled technical professionals at all levels of the education system. To achieve the latter objective, to ensure the uniform development of technical education at all levels, the Institute for Technical Education (ITE) was created in 1992. The official name for the phase that began in 1997—and continues to this day—is the ability-based, aspiration-driven phase. This paradigm shift was spurred by the recognition of the dominant role of the knowledgebased, innovation-driven economy17 in the current world economy, alongside the experiences of Asian financial crisis of 1997. This change of paradigm is reflected in the two official mottos of the era: ’Teach Less, Learn More’ (TLLM) and ’Thinking Schools, Learning Nation’ (TSLN). “The vision of TSLN hinges on the premise that, devoid of natural resources, the future sustainability and wealth of the small city-state depends on the capacity of its people to learn—and to learn continuously throughout their lives. The decision to make a radical shift toward ability-driven education in the late 1990s was timely and imperative” (Goh & Gopinathan, 2008, 30). In recent decades, the focus of the Singaporean education system has increasingly shifted towards the foundation and support of innovation, creativity, and research. Accordingly, the flexibility of the education system has increased, with a focus on developing the ability to work in teams and to acquire appropriate IT skills. The period since 1997 has seen an increase in the autonomy of schools. Primary and secondary schools are allowed to develop their own curricula through "tripartite" agreements (between the school, the Ministry, and the National Institute of Education) and a certain decentralisation of educational management has developed in parallel with the general change of political emphasis. “The Singapore government has repeatedly stated its intention to decentralise its power and move away

17 About the innovation-driven economy, see Szalavetz, 2011.

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from a direct interventionist control model to a more remote supervisory steering model. (…) While forms of decentralisation have been observed in the Singapore education system, the current efforts of the government in the education system can be much more accurately described as a form of decentralised centralism” (Tan & Ng, 2007, 158—italics added by the Author). The main driver of decentralisation in politics is not to promote democracy per se, but to improve the efficiency and effectiveness of governance. Similarly, decentralised centralism in the education system does not mean greater democracy within the school. The highly centralised education system of Singapore is governed by the Singapore Ministry of Education (SMoE), which has overall control and management of public schools and oversight and advice for private institutions. Public school teachers are directly employed by the SMoE and their salaries are disbursed directly by the Ministry.18 The language of instruction in all primary schools is English, and Mandarin Chinese. Malay and Tamil are compulsory as mother tongues. The education policy is a tripartite cooperation between the SMoE, the schools and the National Institute of Education (NIE)19 , which is the country’s only teacher training institution, and which prepares basic and continuing training programmes following the guidelines and under the direct direction of the SMoE. After a year of pre-school playgroup, Singaporean children go on to kindergarten for two years and start primary school at the age of 67, where they follow a four-year-long foundation stage followed with two years of orientation stage. State-run kindergartens are operating in primary school buildings and provide all-day occupation and activities.

18 Therefore, education is the largest employer in the government sector, with 55, 008 people employed by the SMoE in 2021—the Ministry of Interior, including the police, had 30, 042 employees. Source: https://data.gov.sg/dataset/government-fiscal-position-ann ual?resource_id=4b9846f9-f629-4e29-b493-f5d02df92d72, Downloaded 22 June 2022. 19 The NIE began operations on 1 July 1991 as a highly autonomous institution of the country’s second major public university, Nanyang Technological University (NTU). The strategic vision 2018-2022 is about future-oriented thinking, about preparing for lifelong purposeful and not simply outcome-oriented learning, which makes learning, and therefore necessarily education, "life-long, life-deep, life-wide and life-wise" (NIE, 2018). For the 2020-21 academic year, 722 students are enrolled in BA and BSc programmes, 1, 354 in MA and MSc programmes and 193 in research programmes. The NIE awarded 542 undergraduate degrees in the academic year. (Source: ntu.edu.sg/about_ntu/corporateinformation/facts&figures, Downloaded 22June 2022)

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The other nursery schools also operate following the Ministry’s methodological guidelines, under the supervision of the Ministry. The Compulsory Education Act, adopted in 2001 and entered into force on 1 January 2003, stipulates that child must start education at the age of 7. Primary schooling is compulsory and free.20 During primary education, students learn English, mathematics, and mother tongue, with science education starting in Grade 3, and complemented by arts and music, character and citizenship, physical education, and social studies in the orientation phase (Grades 5 to 6). Regardless of compulsory education, more than 98% of Singaporean children spend at least 10 years in the public education system—after completing six years of primary school, they spend a further four years in some form of secondary education. School buildings are uniform in appearance and layout, are built on standard designs. At the end of six years of primary school, students take the Primary School Leaving Examination (PSLE). The results of the PSLE determine which secondary school students can continue their studies: 60% of students attend a four-year express secondary school, while those who require longer education continue their studies in a standard academic course (25%) or in a standard five-year technical vocational course (15%). There is a further access to secondary schools offering arts and sports education through the Direct School Admission exercise (Tan, 2018). In 2020, there were 180 primary schools in Singapore, out of which 139 were government-run and 41 government-aided. Among the 136 secondary schools, there were 101 government-run and 28 governmentaided, and these are complemented with 2 independent, 1 specialised independent, and 4 specialised secondary schools. There are 16 mixed schools composed of 4 government-run, 3 government-aided, 6 independent, and 3 specialised ones. 11 junior colleges and specialised institutions supplement the number of public education institutions to the total of 343 (SMoE, 2021, 2). In 2020, 13,296 students were enrolled in 28 private schools, and were educated by 2,170 teachers. Six out of these private schools were full-time Islamic religious ones, where 281 teachers taught 3,576 students (Ibid. 15). The ratio of students to teaching staff has decreased between 2015 and 2020 from 16.0 to 14.5 in primary education, and from 12.2 to 11.9 in secondary education (Ibid. xviii).

20 A monthly fee of S$13 per child is charged to cover "miscellaneous costs".

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Total spending on education accounts for 15.9%of Singapore’s budget—followed by defence at 185% and health at 16%, but ahead of transport subsidies at 12% and home affairs at 7%. The weight of primary and secondary education in the Singapore budget is not very high, hovering around 2%—much lower than similar shares in Scandinavian countries, but also significantly below the budget share of public education in Japan (3%). The low budget share is ’more than offset by the efficiency of the use of financial resources’—largely due to the small but fully integrated network of schools concentrated in a small urban environment (Tan—Dimmock, 2014, 746–747). There has always been a close link between the development of economy and education, and the government has strongly encouraged this. In parallel with the economic development and structural changes, the Singaporean education system has responded to the economic necessities to continuously improve the quality of education providing the labour supply needed to make Singapore globally competitive. Education in Singapore has always focused on developing strong maths, science, and technology skills. A solid foundation in maths and science acquired in primary school is the basis for later success. Mathematics and science are core subjects in both primary and secondary school.21 Progress in this area is clearly reflected in the consistently high positions in the PISA rankings since 2009. Singapore’s public education system has excelled in all aspects over the past more than half a century: the universalisation of secondary education, the high rate of tertiary enrolment, all demonstrate the excellence of the Singaporean education system—not to mention its outstanding ranking in international comparisons.22 Both the permanent elements and the changing structure of Singapore’s public education system have contributed to the excellent results. The decision to make English the general language of education immediately after independence was particularly fortunate: a basically Anglo-Saxon education system and the results of assessment methods that follow the most modern Anglo-Saxon models make it easy for Singaporean students to be internationally mobile—at 21 This is even more essential as more than half of higher education programmes are science and technology oriented. 22 This is well reflected in the outstanding rankings of two major Singapore universities in the major global academic rankings, in addition to their excellent results in the PISA surveys, as described above.

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all levels of education. Consequently, Singaporean students can continue their studies without any difficulty in the Anglo-Saxon world and return home from Anglo-Saxon educational institutions to seamlessly reintegrate into Singaporean education. In Singapore, education planning is an integral part of macroeconomic planning—in the short, medium, and long term as well. This implies that at all levels of the education system, the ’output’, the knowledge of the graduated students is closely matched to the needs of the labour market. Just as Singapore’s economic policy is sensitive to changes in the global economy, its education policy is also globally minded: the Singaporean education system, from primary schools to universities and in continuing professional development, is constantly drawing on global experience in education science and organisation, as well as professional development. “It is also noteworthy that some of today’s highest-performing education systems have only recently attained their top positions. Less than 17% of 55-65-year-old Singaporeans scored at level 3 or higher in literacy in the Survey of Adult Skills (a product of the OECD Programme for the International Assessment of Adult Competencies, a kind of PISA for adults)—one of the smallest proportions amongst participating countries—while 63% of 16–24-year-olds did so, one of the largest proportions” (OECD, 2020, 5).

Public education in the Republic of Korea (South Korea) The Republic of Korea (hereafter South Korea) is, in some ways, the most educated country in the world: 70% of the South Korean population aged 24-35 has a tertiary education—the highest proportion in the world. The country has a particularly high-quality public education system— measured by student performance on global education rankings. In the PISA 2018 survey, South Korea was ranked 8th in reading, 7 th in sciences, and 5th in mathematics (Schleicher, 2020, 5–7).23 After the devastating Korean War ended in 1953, South Korea was an impoverished agricultural country—one of the poorest in the world. Infrastructure, including educational institutions, had been destroyed by the war and per capita GNP was no more than USD 79. South Korea

23 About further details of South Korea’s PISA performances, see point 2.1.

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today is "an advanced high-tech country with one of the highest Internet penetration rates in the world. In South Korea, education has a high social importance, which is closely linked to social mobility, income levels and positions of power" (Mani & Trines, 2018). While in 1945, 22% of South Korean society was literate and only 2% had attended a tertiary education institution, today literacy covers 98-100% of the population, and in 2015, 93% of the age group concerned were enrolled in a tertiary education institution. By the 1960s universal primary compulsory education had been introduced. In 1985, nine years long education (up to the age of 15) was made compulsory—but this has been practically irrelevant for decades, as 98% of 15-year-olds in 2015 continued their education until at least the end of upper secondary education (i.e., until the age of 18). The Korean educational tradition had not been supportive of coeducation at all: the first coeducational schools started in the early 1980s, and in 1996 only 5% of students were in a coeducational school/class. This has now increased to one-third—that is, of course, still a very low proportion by international standards (Mani & Trines, 2018). Keeping pace with the rapid post-war economic growth, the South Korean public education system experienced a very dynamic quantitative expansion in the 1960s and 1970s. The number of schools, students, and teachers all increased dynamically—but the rapid growth resulted in excessive class sizes, oversized schools, shortages of well-trained teachers, and adequately equipped schools. The 1980s were a period of qualitative development, and educational innovations started to be focussed mainly on effective teaching of science. The 1990s brought another major change to the South Korean public education system: in 1998—the former Education Act was replaced by the Basic Education Act, Primary and Secondary Education Act, and the Higher Education Act. According to the Lower and Secondary Education Act, the following schools can be established for pre-primary education and lower and secondary education: kindergartens, primary schools and civil schools, lower secondary schools, civil secondary schools, secondary schools and commercial secondary schools, special schools, and other schools. According to the law, South Korea has a single-track education system with a 6+3+3+4-year breakdown. The 1998 education laws did not change the 9 years long compulsory education. Since the 2012-13 school year, free public kindergartens—with half-day childcare—have been available for children before they start school (from the age of 3), alongside a very extensive network of private kindergartens

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(CIEB, 2021). 90% of five years old South Korean children attend kindergarten. The education administration is working to establish a full-day free kindergarten network (Mani—Trines, 2018). Nine core subjects are taught at the primary school: moral education, Korean language, social studies, mathematics, science, physical education, music, fine arts and arts and crafts. Students are taught by one teacher for each subject. English is taught from the third year (with special teacher) in an age-appropriate, light, mainly conversational way— not through grammar rules-based, mechanical learning, as is the practice in many upper secondary schools (Diem et al., 2021). In the secondary school, there are 12 compulsory subjects, as well as electives and a variety of extra-curricular activities. At this level, subjects are taught by specialist teachers. There are three types of secondary schools: academic schools, vocational schools, and special secondary schools where the focus is on the arts, science, foreign languages, or other subjects. Education is provided on a two-semester system, with a minimum of 220 days of instruction per year. The aim of public education is, in the official words, to develop ’well-educated individuals’ who are ’healthy, independent, creative and moral’, in accordance with the traditional values of Korean society and the policy expectations (Ibid.). 95% of students finish secondary school —80% in theoretical/general secondary schools. To reduce the huge demand for ’elite schools’, the South Korean education government has distributed students (after the sixth grade) by “lottery” among regional lower secondary schools (CIEB, 2021). The ’national curriculum framework’ is developed by the Korean Ministry of Education (KMoE) and updated every five to ten years. In lower secondary schools, in addition to early education of language, maths, and English, students study social studies (’moral education’), science, and IT, and continue with physical education, music, and art— with an increasing number of optional subjects each year. Each semester, students also have at least one non-exam subject, which is taught for at least one lesson each school day and can be either a ’non-traditional subject’ or a course that students take on their own (CIEB, 2021). In upper secondary schools, students study social studies and Korean history (in addition to continuing the previous core subjects), have a subject called "science exploration and experiments", learn the Chinese alphabet and start studying a second foreign language, and take humanities subjects. In vocational education, the share of general studies is

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40%. Special schools are available for students who need special education methods. There are also so-called "miscellaneous schools", which are specialised for rare professions, but also include foreign schools that do not use South Korean curricula and teaching materials (Ibid). In South Korea, in the 2020 academic year, there were 8,388 kindergartens (out of which were 3,887 privately owned), 5,855 primary schools (out of which 2,475 were owned and managed by local governments), 2,144 lower and 2,313 upper secondary schools (85% of the lower secondary schools and 60% of the upper secondary schools are owned and managed by local governments). In the kindergartens, 36,461 teachers care 538.537 children (14.77 children per teacher), in the primary schools 176.756 teachers are instructing 3,299,133 students (18.66 students per teacher), in the lower secondary schools 1,976,656 students are taught by 109.059 teachers (18.12 students per teacher), and in the upper secondary schools 126.819 teachers are teaching 1,982,207 students (15.63 students per teacher).24 Enrolment rates in South Korea are very high at all ages and in all types of schools: in the academic year of 2020, 48% of that age group were enrolled in kindergartens, 98.4% of the given age group were enrolled in primary schools. Almost 96% of students complete the compulsory 9th grade, and the secondary school enrolment rate was over 91%. By international standards, the share of students in higher education is also very high, 70.4% of the age group. Enrolment rates of 9+3 years were already very high at the end of the twentieth century—there are not too many possibilities for increasing this quantitatively. South Korea, despite its impressive successes in the economy and the development of education, faces serious social challenges: it has the highest suicide rate in the OECD25 , divorce rates are rising, and fertility rates are falling. This is compounded by a dramatic increase in the indebtedness of middle-income households and a decline in household savings (Hultberg et al., 2017, 2). The reason for this can be identified as the dramatic rise in housing and education costs, alongside slowing wage 24 Korean Ministry of Education, source: http://english.moe.go.kr/sub/info.do?m= 050101&page=050101&num=1&s=english , Downloaded 24 June 2022. 25 According to WHO data, there were 28.3 suicides per 100,000 people in South Korea in 2015, two and a half times increase compared to 1995. According to an OECD analysis, suicide is the most common cause of death among South Koreans youth under 40.

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growth (McKinsey, 2013, 1). South Korea has one of the most highly educated labour forces in the world economy, with 69% of the population aged 25–34 having completed tertiary education, the highest proportion among the 36 OECD countries, and 3,555 tertiary technical graduates per 100.000 inhabitants in 201126 (the outstanding results in the PISA surveys were discussed above). The real question is not how successful South Korea has been in educating and training its population and workforce—the adequate question is to what extent these historical successes have contributed to the contradictions and challenges of South Korean society, and how justified is it to change education policy? In South Korea, social status and position in the hierarchy are the most important: a degree from one of the three most prestigious higher education institutions27 provides graduates with an invaluable network capital and almost guarantees employment in government/administration or one of the 63 chaebols.28 Compounding the social problems, the single-earner family model prevails in South Korea, with women staying out of the labour market from the birth of their first child, which is severely undermining household finances due to slowing wage growth and dramatic increases in housing and education costs. Privately funded education starts at an early age: 35.5% of two-year-olds and more than 83% of five-year-olds attended private kindergarten in 2016. It is estimated that the total private education expenditure of the population in 2015 was 17,800 billion won (almost 16 billion USD), with the average monthly family education expenditure being 244.000 won or 217 USD (Hultberg et al., 2017, 4). The reaction to these problems is ’one-child-at-a-time’: families are increasingly having only one child—in the hope of providing the best possible education (i.e., a degree from one of the three elite universities). This is a fundamental explanation for the rapid decline in fertility rates (Ibid.). If South Korea continues to have such high housing and education expenditure, other elements of household consumption are 26 That is the highest ratio among OECD member-countries ( Hultberg et al., 2017,

3). 27 Seoul National University, Korea University és Yonsei University. 28 Large industrial and trading conglomerates, following the Japan model, which

became global conglomerates (e.g., Samsung, Hyundai, LG etc.) as "national champions " of the industrialisation programme launched in the 1960s. In 2010, the five largest Korean companies accounted for 58% of GDP.

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not expected to expand significantly—and thus a more balanced ratio of domestic consumption to exports is not expected (McKinsey, 2013, 5–6). South Korean educational revolution began in the post-liberation years, amid political instability, poverty, and the devastating Korean War, and thus preceded the start of South Korea’s highly acclaimed economic development. Since the 1950s, South Korea has stood out among developing countries—its enrolment rates per age group have always been higher than in other developing countries with similar GDPs (Seth, n. d. 1). From the very beginning, the huge social demand for schooling was a key element in the spectacular expansion of education. This allowed the state, when it was severely under-resourced, to place the financial burden of education on the students and their families: families bore the real costs of officially free primary education, and all secondary schools and half of universities were private institutions in the decades after 1945. Even poorer parents were prepared to make huge sacrifices for their children’s education. The widespread public demand for education greatly facilitated the achievement of the state’s objective of rapid universalisation of primary education (Ibid.). The ’learning fever’ has been an important tool in South Korea’s development of its education system—it is certainly not an exaggeration to say that it has been a key driving force of the country’s modern, prosperous economic transformation. This overwhelming desire for learning will be one of the determining factors for the country’s further socio-economic development.

Public education in Taiwan29 Taiwan has certainly been one of the greatest success stories of East Asian developmental state of the second half of the twentieth century. According to Amsden’s major work “Taiwan distinguishes itself as one of the few nonsocialist economies since Japan to rise from the grossest poverty to the world of the developed. As if this were not enough (…) income distribution has also been far less inequitable in Taiwan as in other poor market economies” (Amsden, 1979, 341). Taiwan’s macroeconomic performance in the 1950s–1960s–1970s was unique among developing countries: per capita GDP grew 3.5 fold between 1953 and 1977, in the 29 This section is partially relying on two previous publications: Csáki, 2016 and Csáki, 2021.

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same period exports grew from 11 to 58 (!)% of the net national product while the share of agriculture in GDP decreased from 34 to 12%. A special characteristic of Taiwanese development is that regardless of huge foreign capital inflows and high growth rates income inequalities decreased permanently: the Taiwanese Gini coefficient was 0.56 in 1953, 0.32–33 in 1963 and 1968 and decreased to 0.29 in 1973, while the income shares of bottom 20% of all population increased from 1.7% in 1953, 7.7% in 1963 to 8.9% in 1973 (Barrett & Whyte, 1982, 1069). This tendency of lowincome inequalities lasted till the mid–1990s (Bourguignon et al., 2001). Much of the low-income inequalities was apparently due to Taiwan’s economic strategy focusing on the priority—almost exclusive support of small and medium-sized enterprises. During the Japanese colonial period, between 1895 and 1945, school attendance increased from 3.8% in 1904 to 71.3% in 1943 and literacy in Taiwan became common. Modern schools were formed with widespread establishment of primary schools while secondary schools and colleges were mostly for Japanese nationals (Devison, 2003, 64). The Kuomintang, after taking over the leadership of Taiwan in 1949, pragmatically preserved the achievements of Japanese colonialism (for example in agriculture). So, it did in public education. Six-year mandatory education was introduced by Japanese colonisers and this term prevailed after 1949 as well. The fundamental change was the introduction of Mandarin Chinese as a compulsory language of instruction.30 Nine-year-long education has been mandatory and free since 1968. Until the late 1980s, severe regulation prevailed in the Taiwanese education system—especially in the following four fields: the establishment of new schools, teachers’ licensure, the issuance of diplomas and school curricula. Between 1945 and 1968 about 60% of elementary school students followed studies in junior high school after successfully passing the joint entrance examination. In 1968, the entrance exams were eliminated between the primary school and the junior high school, elementary school graduates were assigned to the neighbouring junior high school.31 This radical reform was quite surprising politically, but economic constraints 30 From then on, Taiwanese schoolchildren had to learn in a foreign language - their mother tongue was a dialect of southern China, and very few people in Taiwan spoke traditional Mandarin Chinese. 31 A very small minority has been allowed (and financially able) to choose private schools.

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forced the comprehensive reform of education (Chu & Yu, 2010). Obviously, a centralized control and management system has prevailed, the main tool for this has been the formation and licensure of teachers. Between 1950 and 2000, Taiwanese public education has undergone a huge quantitative evolution: compared to 1950, when in 1,504 schools 20,020 teachers taught 1,054,927 students (52.22 students per teacher), in 1981, 219.788 teachers educated 4,641,000 students (21.11 students per teacher) in 5,241 schools. In 2001, at the quantitative peak of public education, 271.625 teachers educated 5,324,091 students in 8,158 schools (19.6 students per teacher). Since, due to demographic reasons, the numbers decrease but an important qualitative development has taken place: in 2021, 185.000 teachers taught 4,172,000 students in the Taiwanese public education system the student-per-teacher ratio was 22.55.32 This is a favourable ratio even in international comparison. While in 1951, education expenditures were equal to 1.73 of the then GNI and 9.93% of total government expenditures, since the 1990s total educational expenditures were well over 5% of the yearly GNI.33 In 2001, expenditures on public education amounted to NTD 407 billion that represented 17.9% of total government expenditures. In the fiscal year 2020, the public education expenditures of NTD 634 billion were equal to 19.6% of the budget.34 The statement of World Bank’s experts certainly applies to Taiwan: “the allocation of public expenditure between -basic and higher education is the major public policy factor that accounts for East Asia’s extraordinary performance regarding the quantity of basic education provided. The share of public expenditure on education allocated to basic education has been consistently higher in East Asia than elsewhere" (World Bank, 1993, 199). The Taiwanese public education system is based on the structural characteristics of the Anglo-Saxon system: 6-year primary school and 3-year junior high school are mandatory (and free, obviously) and are followed by

32 Source: Ministry of Education Republic of China (Taiwan), http://english.moe.

gov.tw/ctasp?xItem=14504%26CtNode=11430%26mp=1és. https://stats.moe.gov.tw/enc hartweb/ ,Downloaded 26 June 2022. 33 Ministry of Education Republic of China (Taiwan), https://english.moe.gov.tw/ct. asp?xItem=14504&CtNode=11430%26mp=1, Downloaded 26 February 2022. 34 Ministry of Education Republic of China (Taiwan), https://stats.moe.gov.twenchart web/Default.aspx?rptvalue=eng_f4 , Downloaded 26 June 2022.

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a diversified secondary education system. 9-year-long compulsory educational system was introduced in 196835 . Children start their primary studies at the age of 6—after having spent 3 years in pre-school playgroup and kindergarten. Students leaving junior high schools can choose either 3 years long general or vocational schools or 5 years long junior college. After these 12 or 14-year-long education processes, students from general or vocational schools are obliged to pass a Joint University Entrance Examination to follow their studies either in higher professional education (2 years) or in university education (4 years) to obtain a Bachelor’s degree. The official language of instruction is Mandarin Chinese, and the academic year runs from September to June. English tuition is compulsory since the 5th school year of the elementary school. Taiwanese and Hakka Chinese as local languages are also widely taught. As of 2014, the literacy rate of Taiwanese population of 15 years of age and above was 98.5%. Major subjects of primary education include Mandarin Chinese (as the official language), mathematics, science, English (typically beginning in grade 5), native languages, social studies, homeland education, music, and arts.36 Students graduate from primary school with a primary school diploma and may follow their studies in junior high schools —without formal entrance examination. Senior high schools last for 3 years during which the goal of students is to aspire to enter university. In most junior high schools, there is a choice between science and liberal arts programs. University entrance is granted through entrance examinations, followed by lecturer recommendations regarding the best study course to follow. Vocational training takes place in parallel also for 3 years. In vocational training, there is obviously a great emphasis on practical skills. Most students are 35 Earlier, the compulsory learning period was 6 years—as it had been introduced under Japanese colonial rule. 36 Preschool education is not part of Taiwan’s mandatory education system; it is, however, strongly supported by the government by financial assistance to financially disadvantaged families to enrol their children in kindergartens. In 2012, the Early Childhood Education and Care Act consolidated the education and care of young children (between 2-6 years of ages) under a single administrative system. Since the early 2000s, 96% of children aged 5 years, or more are enrolled in education. (Ministry of Education. Source: http://english.moe.gov.tw/ct.asp?xItem=7089&ctNode=502, Downloaded 27 June 2022.)

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specialised in a core subject, for example computer science, a particular engineering skill, or business methods, etc. A part of students in vocational training become able to follow their studies on universities as well.37 Taiwanese students have always performed very well in PISA surveys38 —especially in mathematics and sciences, results in reading have generally been much more modest, which led to serious professional debates. As the outcome of these debates, the Ministry of Education (MoE) realised that the country’s “education system had historically been criticized for putting too much pressure on students and focusing too heavily on exams requiring rote memorization rather than creative application of knowledge. The Ministry felt that this emphasis on cramming for fact-based exams hampered students’ chances for success on the PISA test, which required substantial critical thinking skills, and handicapped the nation’s international competitiveness. In response to this need, the Ministry has promoted changes to policy on teacher professional development, so that teachers are encouraged to teach reading and develop reading curriculum with more of a focus on critical thinking. It also improved teacher preparation programs and set the bar for entry into the teaching profession much higher. (…) The reforms to teacher preparation, the new focus on reading professional development, and the substantial investment in reading curriculum and instruction are all designed to ensure that students receive a more well-rounded education, are exposed more regularly to high-quality materials, and are able to apply what they are learning to practical problems. In other words, they are intended to align Taiwan’s system more intentionally with the critical thinking skills required on the PISA assessments” (Driskell, 2014).39 Regardless of the problems of teaching reading in Taiwan, many experts argue that the main reason for the relatively poorer reading performance is that Taiwan uses traditional Mandarin Chinese in education, rather than the reformed (and simpler) version—as in the People’s Republic of China.

37 The current law mandates 9 years of free and compulsory education (between the age of 6 and 15), but a substantial reform is under way to extent it to 12 years. 38 In details, see it in point 2.1. 39 In the 2012 PISA survey, there was an unexpected improvement (7th place), but

Taiwanese students have subsequently returned to the results seen before 2009.

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Conclusions It is widely accepted that one of the key factors behind the spectacular economic successes of East Asia’s developmental states, especially Singapore, South Korea, and Taiwan, has been the equally spectacular development of the education system. It is also well-known that educational reforms took place ahead of economic reforms, and that the profound development of education systems had well preceded dynamic economic growth. It applies for all the three countries, that “managed a pace of skill formation that it achieved within the space of one generation something which it took the advanced industrial countries three generations to achieve” (Ashton et al., 2002, 6). The success of the East Asian developmental state has certainly been based on the interaction of well-chosen educational development goals, macroeconomic strategy, and socio-cultural factors. The development of the education system did not simply precede economic development, the spectacular economic catch-up, but was obviously one of its major foundations. Therefore, the use of the very term of educational developmentalism seems plausible and justified. At the same time, there are several general lessons to be learnt for the design and development of an education system that meets the requirements of a knowledge-based economy and society. First, the strong political commitment to the continuous reforms of education, together with the dominant social aspiration for higher education for children were decisive. Second, centralisation proved very useful from the beginning, because governments focused on creating appropriate educational structures and providing resources and did not hinder institutional creativity. Third, education policy decisions were effectively integrated into a broader decision-making framework, the economic development strategy (Kim, 2002, 38-39). Just as the economic strategies of the three countries, within the framework of the developmental state and Japan-type neo-mercantilism, were different, so too were their strategies for educational development in many respects. Nevertheless, on several important issues, there are deep similarities in the development of education systems, which have been key to the foundation of socio-economic successes. In all the three countries, the education systems are based upon the Anglo-Saxon model, considering their own historical and cultural traditions. These characteristics facilitate integration into global trends and

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make the mobility of teachers and students run smoothly—both in terms of integration into foreign educational institutions and reintegration into the national system. It is important to emphasise the pragmatism of education strategies and the successful implementation of these strategies. As education planning has been an integral part of macroeconomic planning, structural changes in education have effectively supported the development and the structural changes in the economy. All this was only possible with sufficient flexibility of the education systems and through continuous teacher training and methodological and pedagogical development. The timely shift in the focus of the public education system towards mathematics and science education was decisive for the development of a knowledge-based economy and society. Just as economies are constantly adapting to global economic trends, the methods and aspirations of public education are adapting to global trends —competence development, autonomy, creativity, support for group work, etc. In all three countries, public education has access to the necessary financial resources (although not higher than the international average), but organisation and efficiency are the keys to development. While many attribute the enthusiasm and respect for education and high qualification to a "Confucian socio-cultural heritage”, the origins of the "education fever" are more complex. There is no doubt that learning and learning-to-learn in these countries is associated with moral perfection and social prestige—and that is a tradition identified with Confucianism that flowed in the region from China, but also with the Western, mainly American, perception of education as progress, and political aspirations, have contributed greatly to the development of a very strong social commitment to learning. Immediately after the war/independence, there was a strong political commitment to the rapid universalisation of primary education. This eradicated illiteracy, helped to strengthen social cohesion, and significantly reduced territorial disparities (in South Korea and Taiwan), while providing a workforce with adequate basic skills for a dynamic industry that was starting to develop in the 1960s. It is not clear, however, why South Korean, Singaporean, and Taiwanese students are so successful in mathematics and science—neither of these disciplines are traditional strengths of East Asian intellectuals. In addition, early development efforts in these countries focused education primarily on the teaching of civic rights and duties (loyalty, patriotism, self-consciousness

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and anti-communism). The modernisation strategy launched in the 1960s also relied more on spirit/soul than on technology. The attention paid to science and technology education increased significantly from the 1970s, in parallel with the structural changes in manufacturing and the development of the vocational training system. There is no doubt that Confucianism builds strong social capital by producing strong families with values based on frugality, hard work and an appreciation of learning. It is undeniable that strong family ties and the high prestige of learning may have contributed to the educational success of East Asian countries, but we cannot forget, as Sorensen points out, that Confucian economic and family values have been present in the daily life of East Asia for over a thousand years—without the region being particularly successful in global comparison. It is only since the 1960s/1970s that Confucianism has been referred to as the main source of socioeconomic success in the world—regardless of how different Confucianism is in China, Japan, and Korea (Sorensen, 1994 , 11). Permanent reforms and comprehensive development of education systems have been unquestionably a vital factor to the spectacular progress that has transformed the developmental states, of Singapore, South Korea, and Taiwan, from poor and underdeveloped countries into high-income, well-structured, developed countries in a historically unprecedentedly short period of time. Undoubtedly, the well-developed in all elements and internationally competitive education systems that have been established, provide a solid basis for these countries to successfully develop further in the knowledge-based world economy.

References Amsden, A. H. (1989). Asia’s next giant: South Korea and late industrialization. Oxford University Press. Amsden, A. H. (1979). Taiwan’s economic history: A case of etatisme and a challenge to dependency theory. Modern China, 5(3), 341–379. Ashton, D., Green, F., Sung, J., & James, D. (2002): The evolution of education and training strategies in Singapore, Taiwan and S. Korea: A development model of skill formation. Journal of Education and Work, 15(1), 5–30. https://doi.org/10.1080/13639080120106695 Barrett, R., & E. & Whyte, M. King,. (1982). Dependency theory and Taiwan: Analysis of a deviant case. American Journal of Sociology, 87 (5), 1064–1089.

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Bourguignon, F., Fournier, N., & Gurgand, M. (2001). Fast development with a stable income distribution: Taiwan, 1979–1994. Review of Income and Wealth, 47 (2), 139–163. CIEB. (2021). South Korea: Learning System. Center of international education benchmarking, https://ncee.org/center-on-international-education-benchm arking/top-performing-countries/south-korea-overview/south-korea-instru ctional-systems/, Downloaded 23 June 2022. Chu, C., & Yu, R. (2010). Understanding Chinese families. A Comparative Study of Taiwan and South-East China. Oxford University Press. Csáki, Gy. (2016): Developmental state, globalisation, crisis—Taiwan’s macroeconomic adjustment. In D. Karalekas, & Cs. Moldicz, (Eds.), Miracles do happen: Taiwan’s economic development. Budapest: Budapest Business School University of Applied Sciences. Csáki, Gy. (2021): Educational developmentalism: The case of Taiwan. InT. Ger˝ ocs & J. Ricz (Eds.), The Post-Crisis developmental state. (pp. 125–151). Perspectives from the Global Periphery Cham: Palgrave Macmillan. https:// doi.org/10.1007/978-3-030-71987-6 Davison, G. M. (2003). A short history of Taiwan: The case for independence. Praeger Publishers. Diem, R., Levy, T. & van Sickle, R. (2021): South Korean education. Asia society center for global education. https://asiasociety.org/education/ south-koreaneducation#%7Etext=The%20Korean%20public%20education% 20structure,three%20years%20of%20high%20school.&text=Upon%20complet ion%20of%20primary%20school,comprises%20grades%20seven%20through% 20nine, Downloaded 23 June 2022. Driskell, N. (2014). Global perspectives: Explaining Taiwan’s dramatic improvement in Pisa reading. National center on education and the economy. October 27. http://ncee.org/2014/10/global-perspectives-explai ning-taiwans-dramatic-improvement-in-pisa-reading/, Downloaded 27 June 2022. Ger˝ ocs, T., & Ricz, J. (Eds.). (2021). The Post-Crisis developmental state. Perspectives from the global periphery. Palgrave Macmillan. Ghim, P., & Chew, L. (2016). From third world to first: A case study of Lee Kuan Yew and language management in Singapore. Linguistics and the Human Sciences, 11(1), 31–50. https://doi.org/10.1558/lhs.v11i1.19181 Goh, C. B., & Gopinathan, S. (2008): Education in Singapore: Development since,. (1965). In B. Fredriksen & J. P. Tan (Eds.), An African exploration of the East Asian education (pp. 80–108). The World Bank. Hultberg, P., Calonge, S. D., & Kim, S. ù-H. (2017). Education policy in South Korea: A contemporary model of human capital accumulation? Cogent economics & finance, 5(1). https://doi.org/10.1080/23322039.2017.138 9804

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Johnson, C. (1982). MITI and the Japanese miracle. The growth of industrial policy, 1925–1975. Stanford University Press. Kim, G. -J. (2002). Education policies and reform in South Korea. In J. H. Bregman, G. -J. Kim,F. J. M. A. Rameckers, & S. Stallmeister, (Eds.), Secondary education in Africa: Strategies for renewal.(pp. 29–40). The World Bank . McKinsey. (2013). Beyond Korean style: Shaping a new growth formula. McKinsey (Global Institute), April 1, 2013. https://www.mckinsey.com/featured-ins ights/asia-pacific/beyond-korean-style Downloaded 25 June 2022. Ministry of Education. (2020). 2020 Education in Korea. http://www.korean educentreinuk.org/wp-content/uploads/2021/04/2020EducationinKorea. pdf , Downloaded 23 June 2022. Lee, K. Y. (2000). From the third world to the first: The Singapore story 1965–2000. Singapore and the Asian Economic Boom. HarperCollins Publisher. Lee, S. K., Goh, C. B., Fredriksen, B., & Peng, T. J. (2008). Toward a better future. Education and training for economic development in Singapore since 1965. The World Bank. Mani, D., & Trines, S. (2018, October 16). Education in South Korea. World Education News + Reviews, https://wenr.wes.org/2018/10/education-insouth-korea, Downloaded 23 June 2022. NIE. (2018). NIE Strategic Vision 2022. https://www.nie.edu.sg/about-us/niestrategic-vision-2022/, Downloaded 22 June 2022. OECD. (2011). Singapore: Rapid improvement followed by strong performance. In Strong performers and successful reformers in education lessons from PISA for the United States. (pp. 160–175). OECD Publishing. https://doi.org/10. 1787/9789264096660-en OECD. (2020). PISA 2018 results. https://www.oecd.org/pisa/publications/ pisa-2018-results.htm, Downloaded 16.06.2022. Schleicher, A. (2020). PISA 2018. Insights and interpretations. OECD Publishing. Seth, M. J. (n.d.). Popular demand and education in South Korea: An historical overview. https://core.ac.uk/download/pdf/51179771.pdf, Downloaded 25 June 2022. Singapore Ministry of Education, (SMoE, 2021). Education Statistics Digest 2021. https://www.moe.gov.sg/-/media/files/about-us/education-statisticsdigest-2021.ashx?la=en&hash=9E7EFD9B8088817C207F8AE797037AAA2 A49F167, Downloaded 22 June 2022. Sorensen, C. W. (1994). Success in Education in South Korea. Comparative Education Review, 38(1), 10–35. Stiglitz, J. E. (2004). The Post Washington Consensus Consensus. Working paper, Initiative for Policy Dialogue, New York.

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Szalavetz, A. (2011). Innovációvezérelt növekedés? [Innovation-driven growth?]. Közgazdasági Szemle, 8(5), 460–476. Tan, C. Y., & Ng, P. T. (2007). Dynamics of change: Decentralised centralism of education in Singapore. Journal of Education Change, 8(2), 155–168. https://doi.org/10.1007/s10833-006-9016-4 Tan, C. Y., & Dimmock, C. (2014). How a “top-performing” Asian school system formulates and implements policy: The case of Singapore. Educational Management Administration and Leadership, 42(5), 743–763. https://doi. org/10.1177/1741143213510507 Tan, A. -L. (2018). Journey of science teacher education in Singapore: Past, present and future. Asia-Pacific Science Education, 4(1), 1–16. https://doi. org/10.1186/s41029-017-0018-8 Wade, R. H. (1990). Governing the market: Economic theory and the role of government in East Asian industrialization. Princeton University Press. World Bank. (1993). The East Asian miracle. Economic growth and public policy. The World Bank.

CHAPTER 11

Are There Varieties of Capitalism in Developing Countries? Public Finance and Social Transfers in Türkiye and Poland Aslı Ceren Saral, Zeynep A˘gdemir, and Deniz Abukan

Introduction In comparative political economy literature varieties between national capitalisms is one of the main research agendas. This line of research mostly depends on developed capitalist economies’ typologies1 ; in which capitalist mode of production complies with social reproduction in a fashion that translates into high national incomes with various welfare 1 These typologies are originated from Weber’s concept of ideal type. “The quantitative approach to unique cultural constellations and the conception of ideal types are intimately linked with the comparative method. This method implies that two constellations are comparable in terms of some feature common to them both….. As general concepts, ideal types are tools with which Weber prepares the descriptive materials of world history for comparative analysis. These types vary in scope and in the level of their abstraction” (Gerth ve Mills, 1946, 60).

A. C. Saral (B) Department of Public Finance, Ankara University, Ankara, Turkey e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_11

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regimes. This type of typology may not be fully appropriate for analyzing the varieties of capitalism in developing countries, as the institutional structures and social reproduction mechanism in these countries are relatively lagging behind in adapting to the capitalist mode of production. However, the common features used in creating these typologies can be used to understand the trajectory of capitalist development in developing countries. In this context, in order to understand the varieties of capitalism in developing countries we examine welfare practices which are fundamental to the alignment of capitalism with the social reproduction process. According to this research agenda, in order to analyze varieties of capitalism in developing countries with highlighting the state role in double movement process, we use the tools from mainly two approaches. The varieties of welfare capitalism approach, Foucoult’s governmentality concept and Sanyal’s poverty governmentality concept derived from it. In this fashion we first have a discussion on the theoretical tools that we use. Then we analyze the social protection structures and expenditures in Türkiye and Poland, respectively. In order to capture the varieties, we use the conceptualization from both string of approaches and also make comparisons with theoretical ideal types within approaches and between two developing countries under both country analysis and in the conclusion.

Theoretical Framework After World War II, one line of discussions on comparative capitalism was essentially about catching up with the most developed nations and in this regard looking for the best variety of capitalist development. In the beginning the champion was the United States of America (USA) and convergence to its success was not only a theoretical question but for some nations like Germany an ongoing plan, namely Marshall Plan.

Z. A˘gdemir · D. Abukan Department of Public Finance, Kır¸sehir Ahi Evran University, Kır¸sehir, Turkey e-mail: [email protected] D. Abukan e-mail: [email protected]

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The Marshall Plan itself was orchestrated by the United States, yet given that all nations have different social structures and institutional frameworks, the Double Movement Process and its results differed in all. In time, varieties of development paths emanated from those differences. There were some important turning points in history that paved the way for divergence of interest in investigation about development paths from convergence of capitalist development to differences between institutional frameworks of nations. In 1970s the crisis United States encountered was one of them. The questions for other successful development paths have risen due to some political failures and economic shocks affecting almost all nations. It was the end of the long era of benevolent US hegemony and especially in Europe different socio-economic development paths other than modern democratic capitalism of United States were begun to be explored more (Streeck, 2010, 11). The other one was in 1989, when capitalist production regime left with no competition. The fall of Soviet Communist Regime left the investigation of economic development in the framework of capitalism. Coates (2005, x) puts forward this agenda explicitly: “There is no more important issue in the advanced capitalist world these days than that of how best to organize a successful economy. The old issue of ‘capitalism versus socialism’ is currently off the agenda. The issue of ‘capitalism versus capitalism’ currently is not ”. The quotation above has been taken from the collaborated book of Coates (2005) titled Varieties of Capitalism, Varieties of Approaches. The title indicates that, while the most popular among them is Hall and Soskice’s Varieties of Capitalism, in comparative political economy tradition there are many approaches that analyze the social forces behind the differences in national capitalisms. Streeck defines four models for those approaches: social embeddedness, power resource, historical-institutionalist and rationalist-functionalist model. Respectively, the emphasis of each model for capitalist variety is social and cultural structures, collective political action and welfare politics, inherited institutions, and comparative economic advantage (Streeck, 2010, 17–22). Regarding this classification, influential Hall and Soskice’s varieties of capitalism approach is defined as a rationalist-functionalist model in which “capitalist variety in institutional structures and public policies is causally explained and normatively evaluated by its functions for economic efficiency” (Streeck, 2010, 22). In the work of Hall and Soskice (2001, 6) they characterize their approach as actor-centered economic development

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in which firms are the most important actors due to their role in integration process regarding global competition and technological change and this role is related to their capacity for solving coordination problems between actors. Depending on the mechanisms used for solving these problems, namely market or non-market mechanisms, they define two Varieties of capitalism, respectively, as liberal market economies and coordinated market economies. The Varieties of Capitalism approach are basically about successful capitalist growth strategies. It is not enlightening about the socio-economic double movement process or government’s role in it. There is a prominent approach in comparative political economy namely varieties of welfare capitalism, defined as power resource model in which main source of variety is political, and non-capitalist social solidarities along with governments are main actors: politics, legislation and governments’ economic policies determine economic performance and order (Streeck, 2010, 18–19). So the socio-economic structures can be and are altered through political actions. Stemming from the work of Esping-Andersen (1990) “The three worlds of welfare capitalism”, in varieties of welfare capitalism there are three welfare regimes; Conservative/Corporatist (Continental Europe – Bismarkian), Liberal (Anglo-Saxon – Beveridge) and Social Democratic (Scandinavian) models. These welfare regime types are determined with three distinctive conceptualizations in Esping-Andersen (1990). The first one is decommodification which refers to partially reversing the commodification process of capitalism with modern social rights which would lessen the dependency on market for social reproduction. The second one is stratification, which is related with the question that does a welfare regime diminish or preserve existing status or class differences? Does it create new social strata, while it is expected to diminish inequalities? And the last one is about family vs. state role in providing welfare. In this context, familization and defamilization concepts, respectively, refer to welfare policies that put the family at the center and intervene only in case of family failure to provide welfare; and policies that put the individual rights in the center and give state the main role in providing welfare. In works of Esping-Andersen (1990, 1999), Conservative/Corporatist regimes are characterized with high levels of stratification that are about preserving existing status differences. In this regime role of family in providing welfare is central and states role is subsidiary. Social insurance schemes are reflecting both stratification with pensions and health

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benefits’ diversification depending on status and also familization with benefiting from these schemes through family ties. Liberal welfare regimes are characterized with very low degrees of decommodification and their main feature is being residual in the sense that state intervenes only to high social risks and only to compensate the needs and in this regard are rooted from the poor relief of nineteenth century. The high percentage of means or income tested social assistance programs are good indicators for these regimes. Social Democratic regimes characterized by universalistic rights-based benefits and decommodification levels are high and role of state in providing welfare is central. Another line of research on different forms and different paths of capitalism has derived from Foucault quite recently, who (2008) in The Birth of Biopolitics: Lectures at the Collège de France, 1978—1979 followed a method that analyzes developed capitalist countries with the concept of “governmentality”. On the other hand, Sanyal (2014) set out from Foucault, approached the capitalist development in post-colonial countries from a framework such as “poverty governmentality”. According to Sanyal, primitive accumulation overturned in the 1970s. Primitive accumulation creates dispossessed workers who have no means of subsistence rather than their labor and disciplines the idlers and beggars for working. But in post-colonial countries there is a wasteland, “the space of rejected, marginal […] has no role to play in the creation of the economic conditions of capital’s expanded reproduction” (Sanyal, 2014, 63–64). An economy based on necessity is developed to govern this wasteland and in a sense this is the governing of poverty. Sanyal calls this process “poverty governmentality”. Foucault (2008) examined the differences in capitalism in developed countries, while Sanyal focused on developing countries using Foucault theoretical framework. Foucault analyzed different forms of capitalism in countries such as the USA, Germany and France with the concept of “governmentality” similar to “the art of government”. He defined his study with his own words as: […] ’government’ in the strict sense, but also ’art’, ’art of government’ in the strict sense, since by ’art of government’ I did not mean the way in which governors really governed […] I wanted to study the art of governing, that is to say, the reasoned way of governing best and, at the same time, reflection on the best possible way of governing. That is to say, I have tried to grasp the level of reflection in the practice of government and on the practice of

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government […] In short, we could call this the study of the rationalization of governmental practice in the exercise of political sovereignty (Foucault, 2008, 2).

While the state in the USA has an anarcho-liberal governmentality, in Germany it has an ordoliberal governmentality. In the anarcho-liberal governmentality the expansion of the market area is essential; the state works for the expansion of the market space. In the ordoliberal governmentality, the state strives for ensuring the conditions of existence of the market (Foucault, 2018). For example, while in the USA the university is designed as part of the market space, in Germany it becomes a tool used by the state to develop the market economy. If the preconditions for marketing in the field of agriculture are insufficient, for example, if there is not enough workforce, the state reviews education system of universities within this framework (A˘gdemir, 2020). Sanyal (2014) used Foucault’s concept of governmentality to analyze post-colonial capitalism and argues that the poverty governmentality dominates the development process of post-colonial countries. First of all, Sanyal (2014) puts the concept of primitive accumulation into a critical framework. For him, capitalism has created a reserve army of labor through primitive accumulation, in other words, it has created a desert with no means of subsistence, which could be an important beginning to understand the present. But the reserve army of labor is not in the wasteland, post-colonial capitalist development today in the context of poverty governmentality, creates the need economy for the reserve army of labor. More clearly: The post-colonial economic, in our conceptualization, is constituted by a dual process: on the one hand, the ongoing process of primitive accumulation of capital estranges direct producers from their means of labor, creating a wasteland constituted by the expropriated and dispossessed, and in a parallel process of reversal of primitive accumulation a need economy is created for their rehabilitation. The dynamics of the post-colonial economic formation is to be understood in terms of this simultaneous process of destruction and creation, dissolution and conservation, obliteration and reinscription of the need economy. Dispossession and rehabilitation are the two contradictory forces that together define the economic landscape of post-colonial capitalism. (Sanyal, 2014, 64)

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It is critical to note what the need economy of Sanyal implies. The need economy is. […] an ensemble of production activities in which producers are engaged in commodity production. But this production space is fundamentally different from the space of capitalist production in that while the product of these activities are sold in the market, the purpose of production is to acquire money that will enable the producers to have access through the market to a bundle of goods and services that will satisfy their needs. (Sanyal, 2014, 69)

After the 1970s, the capitalist development paradigm shifted from meeting basic needs such as health and housing to attracting the poor to a need economy. Unlike primitive accumulation, accumulation in capitalist development has shifted into the realm of poverty to create an economy of need for the poor, one example of which is microcredit. Marx stated that primitive accumulation creates a reserve army of labor, but according to Sanyal, the opposite is true now. Now, poverty management (governmentality) has replaced development strategy. Contrary to Marx, there is no reserve army of in the capitalist desert. Managing poverty mostly involves adapting the reserve labor force to the informal economy. According to Sanyal, the informal sector is a field that aims to subsistence. It remains outside of capitalist production relations. Labor is not managed by capital, no profit is created, and only enough goods are produced to refill the initial supply and subsistence. In this context, the state will invest in consumption, such as health, education, and food security, rather than production. Those who remain in the informal sectors must now be provided with loans, inputs, and technology as part of the development process. This will be the state’s responsibility. Is the government attempting to coordinate the reserve army of labor force with the informal sector? Have social transfers served as a bridge between the reserve army of labor and the informal sector? Is the state attempting to expel the reserve army of labor force from the capitalist desert?

¨ Social Transfers in Turkiye When examining social transfers, the fundamental dynamics of the Turkish economy must be taken into account. In this context, it would be useful to evaluate the growth and employment of the Turkish economy on a fundamental level. While the average growth rate was 7.3% in the

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2003–2007 period, this rate decreased to 3.4 in the 2008–2014 period (Boratav, 2015, 141). The average growth rate for the 2014–2017 period was around 5.3%. The contraction in 2009, with the help of speculative capital inflows, caused the relative growth rates to follow a positive course in 2010 (Yeldan, 2011). Due to the depreciation in Turkish Liras in 2018, economic growth slowed starting from the second half of the year, and with the effects of covid-19 pandemic Türkiye’s average growth rate fell to 1.9% in the 2018–2020 period. The main dynamic of growth in the Turkish economy has been consumption financed by speculative capital inflows after 2000. Unemployment figures increased with the 2007 crisis and remained in double digits with few exceptions. The share of public expenditures in GDP in Türkiye varies between 31 and 35% and remains quite low compared to European countries in between 2007 and 2020.2 In comparison to Europe, social policy in Türkiye is rather restricted. Health and education are given publicly and for free in certain European nations and the state has usually also been active in the housing sector. While education is free in Türkiye, state intervention in the housing sector is quite restricted. On the other hand, the health system is strongly influenced by contributions (Sallan-Gül & Gül, 2008, 277). In other words, there are two primary axes of social policy, the first being free education and the second being a work-based social security system (Bu˘gra & Keyder, 2006, 213). As can be seen in Table 11.1 and Table 11.6, while the share of social expenditures in GDP is 12% on average in Türkiye, this ratio is 19% on average in Poland between 2008 and 2019. According to Eurostat data (Tables 11.1 and 11.6), it is possible to say that while the share of health payments in social transfers in Türkiye has decreased, pension payments have increased. Apart from pension and health expenditures, another noteworthy item in Türkiye is the expenditures made for the worst-off people in the society. Since Poland allocates a larger portion of GDP to social transfers, expenditures on social transfer types in GDP are generally higher than Türkiye’s. Türkiye has transferred more unemployment benefit than Poland in recent years. While transfers to the disabled, the unemployed and the lowest segment of society are increasing in Türkiye, they are decreasing in Poland. Another noteworthy point is that the share of health expenditures in GDP in Poland tends to increase compared to Türkiye, and family-oriented transfers are

2 Eurostat, 2022.

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well above Türkiye’s. In order to evaluate the data correctly, it would be useful to look at the structure of social transfers and social security system in Türkiye. While social security protects registered workers in Türkiye, benefits extend to individuals who are not covered by social security. This contrast demonstrates that there is no social assistance system based on citizenship and rights (Metin, 2011, 183). Social benefits are designed to address the income shortfall of low-wage, informal and irregularly insecure employees. On the other side, it is attempting to narrow the pay disparity between registered workers. Thus, social assistance has assumed a role that assures the neoliberal labor market’s reproduction (Kutlu, 2018, 353–354). Likewise, social assistance in Türkiye has resulted from anti-poverty initiatives. Before 2000, poverty was a problem that could be remedied by conventional ways of solidarity; nevertheless, it became a severe issue in the 2000s. The concentration of critical literature on social assistance in the 2000s (Balaban, 2018; Bu˘gra & Keyder, 2006; Bu˘gra, 2008; Çelik, 2010; Durmaz, 2016; Erdo˘gdu, 2014; Koray, 2007; Kutlu; 2018; Metin, 2011; Özu˘gurlu, 2003; Senses, ¸ 2001; Zabcı, 2001; Sallan-Gül & Gül, 2008; Urhan & Urhan, 2015) supports the notion that social assistance plays an important role in the 2000s. In fact, it would not be incorrect to argue that social assistance methods in Türkiye were rather underdeveloped before the 2000s. In this context, the first public-sourced social support income in Türkiye and the cash transfer for those over 65 and disabled, if they have no one to care for them, became effective in 1976. A legislation issued in 1986 created the Social Assistance and Solidarity Encouragement Fund (SYDTF) to find resources to satisfy the needs of disadvantaged residents. It is anticipated that the fund’s resources would be allocated through Social Assistance and Solidarity Foundations (SYDV), which will be formed in all districts and provinces. Despite the fact that the General Directorate of Foundations and the Social Services and Child Protection Agency (SHEK) are responsible for social assistance, SYDTF’s only objective has been social aid. Nonetheless, the Fund was not operational at the time of its creation. In 1992, the Green Card3 application process for people with a minimum income and no social security coverage began (Dodurka, 2014, 4). 3 Free health service provided for low-income groups without any income determination

yet.

33.80 2.93 49.04 9.67 2.52 1.11 0.00 0.93 100

35.46 2.25 47.40 10.52 2.64 0.65 0.00 1.09 100

sickness/health care disability old age survivors family/children unemployment housing social exclusion n.e.c Total

Source Own construction based on Eurostat (2022) data

35.76 2.67 47.73 8.79 2.58 1.40 0.00 1.06 100

4.2 0.4 6.1 1.2 0.3 0.1 0.0 0.1 12.5

2010

% of GDP 3.9 4.7 0.2 0.4 5.3 6.3 1.2 1.2 0.3 0.3 0.1 0.2 0.0 0.0 0.1 0.1 11.1 13.2

2009

sickness/health care disability old age survivors family/children unemployment housing social exclusion n.e.c Total

2008

% 33.15 3.34 47.46 11.36 2.72 1.03 0.00 0.94 100

4.0 0.4 5.7 1.4 0.3 0.1 0.0 0.1 12.0

2011

3.8 0.4 5.8 1.4 0.4 0.2 0.0 0.2 12.2 of Total 31.41 3.65 47.82 11.64 2.90 1.26 0.00 1.32 100

2012

Table 11.1 Social protection benefits in Türkiye (2008–2019)

3.6 0.4 5.7 1.4 0.4 0.1 0.0 0.2 11.9 Benefits 30.42 3.74 48.30 11.81 3.19 1.19 0.00 1.35 100

2013

30.18 3.81 48.33 11.91 3.12 1.30 0.00 1.35 100

3.6 0.5 5.7 1.4 0.4 0.2 0.0 0.2 11.8

2014

29.27 3.68 48.57 11.90 3.24 1.91 0.00 1.43 100

3.4 0.4 5.7 1.4 0.4 0.2 0.0 0.2 11.7

2015

27.61 3.62 49.02 11.98 3.72 2.47 0.00 1.58 100

3.5 0.5 6.2 1.5 0.5 0.3 0.0 0.2 12.6

2016

27.45 3.55 49.26 11.90 3.98 2.31 0.00 1.56 100

3.3 0.4 5.9 1.4 0.5 0.3 0.0 0.2 12.0

2017

27.54 3.36 49.76 11.82 3.84 2.34 0.00 1.33 100

3.2 0.4 5.9 1.4 0.5 0.3 0.0 0.2 11.8

2018

27.39 3.38 49.34 11.93 4.35 2.95 0.00 0.66 100

3.4 0.4 6.1 1.5 0.5 0.4 0.0 0.1 12.3

2019

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According to Senses ¸ (2001), the Fund was formed as political criticism rose after the implementation of structural changes after 1980. In this context, social assistance has been recommended as a political result of World Bank-supported poverty reduction initiatives in order to offset the negative impacts of structural adjustment programs. Social assistance has taken many forms in various nations. Countries such as India, Pakistan, Sri Lanka and Bangladesh have contributed assistance for food, loans, job development and essential commodities and services. The purpose of the social assistance was to mitigate the social effects of rising poverty. On the other hand, among the goals of the programs were entry to labor markets and obtaining a specific position on the market. In this context, initiatives including education, credit and enhancing production in informal fields and agriculture were implemented. On the other side, the Latin American social programs tried to remove the negative consequences of the structural adjustment program. As a result, the emphasis of the program has switched from unionized workers to unprotected non-working segments, particularly women and children, and the distribution of social rights has been substituted with social benefits for certain groups. Consequently, the distribution issue is no longer a dispute between working class and other segments, but a problem for low-income groups. State duty was reduced to the poorest citizens, and social security services were left to the 2001, 238–241). In this framework, social policy focused homes (Senses, ¸ on the structurally unemployed who fell out of the working class, the protection of dependent workers was replaced by the development of human capital, and social integration was replaced by competition and productivity (Özu˘gurlu, 2003, 64). Similarly, the 2001 crisis in Türkiye led to a diversification and institutionalization of social assistance. In this context, the Social Risk Mitigation Project, which was initiated by the World Bank and developed its social assistance strategies, aimed to prevent the risk of social explosion that would be the result of the increased poverty caused by the 2001 crisis in Türkiye and the IMF and World Bank’s stability and structural adjustment program. According to a World Bank research based on data from 2001, those most susceptible to food insecurity were uneducated, single-parent urbanites with multiple children (Zabcı, 2001, 231). Human capital extinction and the insufficiency of the social assistance network have been cited as Türkiye’s primary challenges. The primary motivation for the project is the decline of human capital, as poverty prevents youngsters from receiving proper education. Another cause for

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A. C. SARAL ET AL.

the decline of human capital is families’ reliance on child work (Zabcı, 2001, 229–230). The initiative has four primary goals: immediate assistance to those affected by the crisis, an increase in the social assistance capacity of state institutions, conditional provision of basic health and health services to the poorest 8% of the population and the creation of opportunities for the poor to increase their income and employment (Zabcı, 2001, 232). Under the project’s quick aid pillar, contributions are made to education, health aid, fuel aid and food help (Zabcı, 2001, 233–234). In the second phase of the project, parents receive a conditional cash transfer in exchange for bringing their children to school and obtaining basic health care (Zabcı, 2001, 234). It is planned to develop the personnel and technical infrastructure of institutions such as the Social Assistance and Solidarity Encouragement Fund, the Social Assistance and Solidarity Encouragement Foundations, the Social Services and Child Protection Agency and the State Institute of Statistics in order to increase the state’s social assistance capacity. In the final phase of the project, various collaborations between the Social Assistance and Solidarity Encouragement Fund, Social Assistance and Solidarity Encouragement Foundations, nongovernmental organizations and universities were intended to increase employment opportunities and reduce poverty (Zabcı, 2001, 235). The Social Assistance and Solidarity Encouragement Fund, which was not functional in the 1980s in Türkiye, became the main center of social assistance. Conditional Cash Transfer program was implemented in exchange for receiving education and health services as part of Türkiye’s fight against poverty with the World Bank in the early 2000s. In 2004, the General Directorate of Social Assistance and Solidarity (SYDGM) was formed to implement the anti-poverty initiative with the World Bank (Dodurka, 2014, 3). In contrast, Conditional Cash Transfers began to be distributed under the themes of education and health by more than 900 local foundations. The Ministry of Health’s green card initiative ˙ 2015, 94–95). continued (Ipek, As shown in Table 11.2, the greatest proportion of social assistance between 2004 and 2006 was allocated to pension and health expenditures4 for low-income groups through the green card, which became one

4 While Eurostat data shows total health expenditures, here we are referring to health transfers made by the state to the lowest income group namely green card.

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ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

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of the pillars of human capital formation. Between 2004 and 2006 green card health expenditures increased. Aside from this, the Social Assistance and Solidarity Incentive Fund have significant financial resources, in line with the World Bank’s recommendations, and the largest expenditure of the Social Assistance and Solidarity Incentive Fund was coal aid (Çelik, 2010, 76). Municipalities were also key components of the social assistance system, through which gasoline, food, clothing and school supplies were distributed (Çelik, 2010, 78). Municipalities became the new face of social assistance, which has resulted in clientelist relationships (Durmaz, 2016). The distribution of social benefits was inconsistent and disconnected. Patronage and clientelism played a large role in the distribution of social benefits due to the dominance of political parties as the principal aggregators of society’s interests and the difficulty to develop a Weberian style of public administration. Fragmentation has been exacerbated by “insider” organizations’ resolute defense of overly high compensation (Aybars & Tsarouhas, 2010, 756). As seen in Table 11.2, similar to the early years of the 2000s, resources were distributed through Social Assistance and Solidarity Encouragement Foundations, municipalities have gained a prominent role in social help, and coal aid and health aid given to those with low incomes were considerable. These tendencies were very similar to those in the early 2000s. In addition, a centralization of aid-providing organizations and a rise in spending on home care were noteworthy. In 2006, the home care pension was implemented (Aygüler & Ayalp, 2018, 9). Within the framework of home care pension, a monthly pension is paid in exchange for caring for a disabled individual who is unable to work and has a particular degree of disability (Aygüler & Ayalp, 2018, 6). Considering the rules for receiving a pension, which includes spending 24 h with the disabled person, not working, and being a relative of the afflicted person, it is evident that the care service in a patriarchal society will be left to women. Home care assistance contributed to the reinforcement of the patriarchal structure, which was defined as the man as the head of the family and the woman as responsible for the management of the home and the care of the individuals in the home, and further exacerbated the difficulties faced by women (Aygüler & Ayalp, 2018, 10). It appears that, with the assistance of home care, social services have been removed from the public sphere and transferred to family members, particularly women, and the service that should be provided on the basis

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of rights has been formulated as the duty of women, creating the impression that assistance is a reward (Altunta¸s & Atasü-Topcuo˘glu, 2014). This is consistent with Balaban’s (2018) argument that housewives were the most influential factor in the transformation of the social policy system in the 2010s. In Table 11.3, we observe that home care support has become a significant expense item, surpassing benefits for the elderly and the disabled and ranking second after health aid offered to those with the lowest incomes in 2016 and 2018. The other trend that occurred in the 2010s, was the centralization and systematization of the social assistance system and the growth in transfers. The government was successful in reaching 22% of poor households. In contrast to coal aid and periodic aids, social aids are provided to housewives (ibid). According to Tables 11.4 and 11.8 the female labor force participation rate of Türkiye is almost half that of Poland. Given that social assistance is geared toward housewives, it is possible to say that Türkiye’s social policy is aimed at disadvantaged women. However, when we investigate home care support, we find that the aid provided to low-income women is not for employment objectives, but rather has a role that increases the burden on women. In an effort to alleviate women’s poverty, women who must engage in the workforce are sentenced to domestic duty. Within the context of centralization, the Ministry of Family and Social Policies5 was founded in 2011 with a dispersed social assistance institution structure. While the General Directorate of Social Assistance was transferred to the Ministry, Social Security Institution green card payments were transferred to the Ministry of Family and Social Policies. Therefore, it is the separation of social security, which is viewed as a right, and aids, which are viewed as assistance (Dodurka, 2014, 4). In 2013, a social assistance system consisting of “central and regular financial aids to specified category groups, as well as indefinite, irregular, and predominantly inkind or cash aid delivered by SYDVs, came out” (Dodurka, 2014, 3). In 2009, it was intended to record the aid areas using the Social Information System and computer technologies, as well as to verify the veracity of the declarations through other public systems, and institutional capacity 5 It amalgamated with the Ministry of Labor and Social Security in 2018 to become the Ministry of Family, Labor, and Social Services. In 2021, following the formation of the Ministry of Labor and Social Security, the ministry’s name was changed to “Ministry of Family and Social Services”.

Social Security Institution Social Services and Child Protection Institution The Directorate General of Foundations

orphand, disabilility and dependent payment ˙ Imaret (hospice)

Old age and disability pension Kind and cash aid

5.1

14.0

50.7

16.9

19.7

1.6

1,159.2

Expenditure (deflated with GDP deflator, 2009 = 100)

1,092.5

Number of beneficiaries (thousand)*

51.7

2.6

19.7

1,266.3

Number of beneficiaries (thousand)*

Table 11.2 Social Assistance expenditure in Türkiye (2004–2006)

48.0

8.5

22.0

1,377.7

Expenditure (deflated with GDP deflator, 2009 = 100)

77.3

5.0

27.3

1,243.9

Number of beneficiaries (thousand)*

(continued)

59.9

15.1

51.4

1,612.1

Expenditure (deflated with GDP deflator, 2009 = 100) 11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

271

Number of beneficiaries (thousand)*

Expenditure (deflated with GDP deflator, 2009 = 100) Number of beneficiaries (thousand)*

Expenditure (deflated with GDP deflator, 2009 = 100)

3,649.2 1,743.5

7,409.6

Expenditure (deflated with GDP deflator, 2009 = 100)

12,550.9

Number of beneficiaries (thousand)*

Source Own compilation and calculation based on The Presidency of Strategy and Budget 2007: 231 and IMF-World Economic Outlook (WEO) (2022) for GDP Deflator

Health Green Card 13,418.6 997.3 10,811.6 2,482.2 Ministry Social All social aid 7,244.6 1,980.7 7,433.7 1,790.5 Assistance and Solidarity Foundations General Directorate *The number of beneficials may be duplicated The figures related to the municipality were not taken from the report due to the lack of data

Table 11.2 (continued)

272 A. C. SARAL ET AL.

Ministry of Family and Social Services (2011)

Social and economical assistance (family in need) Home care

Number of households benefiting from social assitance Old age and disability pension

2018

2019

2020

2,877.7

376.8

3,040.8

1,335.5

136.6

481.2

513.3

185.8

1,412.9

3,494.9

3,119.6

512.2

2,930.2

514.2

198.9

1,510.3

3,283.0

3,348.5

570.1

4,182.7

529.4

220.0

1,527.0

6,630.7

(continued)

3,312.1

586.2

4,145.0

Number of Expenditure Number of Expenditure Number of Expenditure Number of Expenditure beneficia(deflated beneficia(deflated beneficia(deflated beneficia(deflated ries with GDP ries with GDP ries with GDP ries with GDP (thoudeflator, (thoudeflator, (thoudeflator, (thoudeflator, sand)* 2009 = sand)* 2009 = sand)* 2009 = sand)* 2009 = 100) 100) 100) 100)

2016

Table 11.3 Social assistance expenditure in Türkiye (2016–2020)

11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

273

Social Assistance and Solidarity Foundations Genel Health Insurance (Green Card) The Direc- Orphan torate and General of disabled Foundaassitance tions

2018

2019

2020

3,031.5

4,230.2

14.9

3,154.1

6,683.1

3.7

4.9

6,945.9

0.0

17.0

4,193.6

2,783.9

5.0

7,524.1

0.0

18.2

4,973.8

3,025.5

4.6

7,810.6

0.0

18.2

5,166.6

6,005.6

Number of Expenditure Number of Expenditure Number of Expenditure Number of Expenditure beneficia(deflated beneficia(deflated beneficia(deflated beneficia(deflated ries with GDP ries with GDP ries with GDP ries with GDP (thoudeflator, (thoudeflator, (thoudeflator, (thoudeflator, sand)* 2009 = sand)* 2009 = sand)* 2009 = sand)* 2009 = 100) 100) 100) 100)

2016

Table 11.3 (continued)

274 A. C. SARAL ET AL.

National Education Ministry

˙ Imaret ( Hospiece) Scholarships for primary and secondary school students Scholarships for primary and secondary school students

2018

2019

2020

17.4 10.4

307.2

20.3 20.7

259.5

386.4

20.7

8.4

311.0

1.4

17.2

147.2

2.5

8.1

194.0

13.2

15.1

185.2

20.7

8.2

(continued)

20.3

8.9

20.6

Number of Expenditure Number of Expenditure Number of Expenditure Number of Expenditure beneficia(deflated beneficia(deflated beneficia(deflated beneficia(deflated ries with GDP ries with GDP ries with GDP ries with GDP (thoudeflator, (thoudeflator, (thoudeflator, (thoudeflator, sand)* 2009 = sand)* 2009 = sand)* 2009 = sand)* 2009 = 100) 100) 100) 100)

2016

11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

275

Coal Aid

Scholarships for university students

2019

2020

17,876.0 1.02

671.0

16,866.0 1.08

2,084.7

1,053.2

2,253.3

603.8

2,082.3

557.5

1,246.2

1,095.2

531.2

1,878.4

569.7

20,662.7 1.17

2,931.1

40.2

985.7

1,774.1

414.3

23,484.0 1.30

2,875.8

351.4

975.4

Source Own compilation and calculation based on The Presidency of Strategy and Budget, 2021: 292; 2019: 303 and for GDP Deflator IMF-World Economic Outlook (WEO) (2022)

General Directorate of Credit and Dormitories Turkish Hard Coal Authority Local government Total Total Social Assitance /GDP %

2018

Number of Expenditure Number of Expenditure Number of Expenditure Number of Expenditure beneficia(deflated beneficia(deflated beneficia(deflated beneficia(deflated ries with GDP ries with GDP ries with GDP ries with GDP (thoudeflator, (thoudeflator, (thoudeflator, (thoudeflator, sand)* 2009 = sand)* 2009 = sand)* 2009 = sand)* 2009 = 100) 100) 100) 100)

2016

Table 11.3 (continued)

276 A. C. SARAL ET AL.

52.2 29.7 48.4 27.8 53.2 31 9 10.3

28 46.3 26.2 51.9 29.6 10.9 11.7

2011

50

Source Own compilation based on Eurostat (2022) data

Employment, % of population (20–64 Years, Total) Employment, % of population (20–64 years, female) Employment, % of population (15–64 Years, Total) Employment, % of population (15–64 years, female) Labour Force Participation Rate (15–24 years, Total) Labour Force Participation Rate (15–24 years, Female) Unemployment Rate (15–24 years, Total) Unemployment Rate (15–24 years, Female

2010

8.3 9.6

31.8

53.3

28.7

48.9

30.9

52.8

2012

8.9 10.8

33.2

54.4

29.6

49.5

31.8

53.4

2013

10.1 12.1

33.6

55.1

29.5

49.5

31.6

53.2

2014

10.4 12.9

34.9

56

30.4

50.2

32.5

53.9

2015

Table 11.4 Employment, unemployment and labor force in Türkiye (2010–2020)

11.1 13.9

36.2

56.9

31.2

50.6

33.2

54.4

2016

11.1 14.2

37.5

57.9

32.2

51.5

34.5

55.3

2017

11.1 14

38.3

58.5

32.9

52

35.2

55.6

2018

14 16.7

38.7

58.4

32.2

50.3

34.4

53.8

2019

13.4 15.1

35

54.9

29.7

47.5

32

51

2020

11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

277

278

A. C. SARAL ET AL.

was thus attempted to be built (Dodurka, 2014, 4). As can be seen in Table 11.3, a point that has attracted attention, in this context, is that the spending area of The Social Assistance and Solidarity Incentive Fund has doubled in 2020 compared to the previous year. Similarly, the number of individuals receiving social assistance has doubled. The probable cause of this predicament is the recession caused by the 2018 financial crisis. In Türkiye, the social security system is financed by the premiums of the employees, and the income-expense deficit is covered by the state. Prior to the reform made in the 2000s, the social security system had a fragmented structure, including the Emekli Sandı˘gı (Pension Fund), which is affiliated with public personnel, Ba˘g-Kur (Ba˘gımsız Çalı¸sanlar Sosyal Sigortalar Kurumu-Self Employed Social Insurance Institution), which includes self-employed workers, and SSK (Sosyal Sigortalar Kurumu- Social Insurance Institution), which includes private sector employees. In the 1990s, the income-expenditure gap in the social security system caused the system to be reformed (Ya¸sar, 2011, 175). In this framework, the social security system was gradually restructured under the leadership of the World Bank in 1999 (Aybars & Tsarouhas, 2010, 754–755). With the reform made in 1999, measures were taken to increase revenues and reduce expenses. Measures such as raising the premiums required for retirement and introducing new premiums were made to increase income. In order to reduce expenses, the retirement age was increased gradually, the conditions of retirement entitlement were made more difficult, and some of the parameters in the calculation of pensions were reduced. Unemployment insurance was put into practice, and new job-finding training practices were introduced. In the medium and long term, it is aimed to enter the private pension system, health reform, institutional restructuring and the establishment of a wide social assistance system (Öz¸suca, 2003, 145). The triple insurance system was combined under the umbrella of the Social Security Institution (SGK) by institutional arrangement (Aybars & Tsarouhas, 2010, 754–755). With the passage of the Social Insurance and General Health Insurance (GSS) Law No. 5510 in 2006 and its full implementation in 2012, the health system underwent the following significant changes: – Additional expenses for up to three boxes of prescription drugs; – Inclusion of green card holders in the income determination scope of SGK;

11

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279

– Within the scope of the income test, only those whose monthly income per capita does not exceed one-third of the minimum wage have their premiums covered by the state; – Those with “more than one monthly income per person at least” are required to pay premiums at four different levels; – SGK may omit unacceptable health treatments from the guarantee list, not pay for them. As can be observed, the General Health Insurance has altered the position of the unemployed, informal laborers and green card holders, and has split individuals who get health care into “insured” and “general health insurance” categories (Güzel et al., 2010, 741). Consequently, unemployed and unregistered workers were permitted to pay for their own health insurance. In other words, a distinction was made between working and non-working in health services, and it was believed, as stated by the World Bank, that only the most vulnerable, those with a per capita income of less than one-third of the minimum wage, would receive free health care. According to Fi¸sek (n.d.), the state intervention did not diminish in general as a result of the social security reform, but only in the social realm. Rather than developing cooperation between separate social security institutions, the unification of social security institutions is intended to alleviate budgetary difficulties. Public Hospitals were transferred from SSK to the Ministry of Health and the number of premiums required to obtain health insurance was increased only to address financial issues. According to Çelik (2010), the primary objective of the social security reform was to decrease the state’s contribution to the social security system. The significance of the public sector’s exit from the social security system has resulted in a transition to a voluntary basis (Durmaz, 2016). The most important income of the Social Security Institution is the premium income. In order for premium incomes to be high, unregistered employment should decrease, the number of insured should increase, the insured should earn high income and the collection rate should be high (Alper, 2011). Income problems in the social security system are related to the increase in informal work. Likewise, unregistered workers do not contribute to the social security system. On the other hand, unemployment is an issue that prevents contribution to the social security system (Ya¸sar, 2011, 175). Unemployment reduces the premium income to the social security system and increases the expenditures with the unemployment insurance (Fi¸sek, n.d.). As can be seen in Tables 11.4 and 11.8,

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A. C. SARAL ET AL.

Türkiye has a higher unemployment rate compared to Poland in general, and the unemployment rate has reached 13% in 2020. While the population increases, the population paying premiums decreases and the number of dependents increases. On the other hand, expenses are constantly increasing. Premium amnesties, early retirement practices, increase in health expenditures are the reasons that increase expenses (Ya¸sar, 2011, 175–176).

Polish Social Policy Only several decades ago, before 1989 Poland was a national economy with a socialist development model. The institutional framework and socio-economic structure were all designed under a strict socialist rule. Then in 1989 a very harsh and fast transition process started, which occurred under the transformative neoliberal era. This “shock therapy” resulted in a recession for the first year. When the economy came out of the recession structural unemployment problems caused social discontent (Smiecinska, 2021, 253). Poland encountered another socio-economic shock in late 1990s. Accession negotiations with European Union had started in 1997 and Poland became a full member in 2004. After 1992, Polish economy had successive positive growth rate until 2020, when the COVID-19 health crisis had affected world economy drastically. Even through 2008–2010 global economic recession, with the help of fiscal space, government was able to implement counter-cyclical fiscal policies and Polish economy’s economic growth continued. Then the German recovery in 2013 supported the Polish economy, unemployment rate decreased, domestic consumption and investment increased (Pataccini & Eamets, 2019, 473–474). Generally the share of government in economy has converged to developed welfare states. Government expenditure as a share of GDP has shown a decreasing trend, until 2020. In 2020 like other economies it has risen to 48.7% of GDP. GINI coefficient also decreased and is rather low compared to other countries. The primary development indicator, GDP per capita constantly rose to 32,448 $ (PPP) in 2020 and unemployment rates decreased to historically and comparatively low level of 3.2% in 2020 (Table 11.5). Regarding social policy there are some significant periods in Poland history. Siemienska and Domaradzka (2020, 405–406) summarize these periods for last four decades. Between 1989 and 1996, the transition

2009

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

44.1

31.1

45.8

31.1

30.9

43.1

30.7

43.0

30.8

42.6

30.6

41.7

29.8

41.1

29.2

41.3

27.8

41.5

28.5

41.8

27.2

48.7

3.7 4.8 1.3 1.1 3.4 4.2 3.1 4.8 5.4 4.7 -2.5 24,085 25,205 25,538 25,826 26,730 27,871 28,776 30,162 31,773 33,284 32,448

2010

Source Own compilation based on IMF-WEO data and Eurostat data for GINI

GDP growth % 4.2 2.8 GDP per 22,522 23,148 capita, PPP ( 2017 $) Government 44.2 45.0 Expenditure (% of GDP) GINI Coefficient

2008

Table 11.5 Macroeconomic indicators in Poland (2008–2020)

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281

282

A. C. SARAL ET AL.

period from socialist regime to free-market is marked by the commodification of some services provided by government (crèches, kindergartens, care for the disabled, etc.). Between 1997 and 2001, important changes were made in family policy, aiming to help poor and less wealthy families. Improvements were made in housing, education and health services in line with the liberal concept of social welfare. Since 2004, with the membership of the European Union, new resources for welfare policies have become available. Between 2007 and 2015, welfare programs of the neoliberal era were implemented in Poland, such as raising the retirement age to 67 and abolishing the Open Pension Funds system. Since 2015, conservative changes have been made in social policies and practices, such as low retirement ages and family benefits based on child care have been introduced. This type of family benefits system also created the conditions for women to be excluded from the labor market. On the other hand, social assistance, especially cash assistance, has become an important political tool used to increase social support in election processes. Even though, the Polish economy did not experience severe economic downturn compared with EU region during the 2008 crisis, the government policies had been criticized from a populist framework after 2015. Within this framework, changes have occurred in social policy named as “expansionary social policy”. At the center of the new social policy was universal child benefits that is so-called benefit for bringing up children or 500 Plus. Flexibility in the labor market was limited and the lowest wage was raised. The policy to increase the retirement age has been suspended (Stubbs ve Lendvai-Bainton, 2019, 552). Under the recent regulations, organization of social protection system is running under two ministries in Poland. Ministry of Family and Social Policy is responsible for sickness and maternity (cash benefits), invalidity, old-age, survivors, accidents at work and occupational diseases (cash benefits) which are provided by Social Insurance Institute and its regional units. The ministry is also responsible for family benefits provided by Community Social Policy Centres and unemployment benefits provided by Regional and Local Labour Offices. Ministry of Health is responsible for healthcare benefits and these are provided by Regional Health Funds (MISSOC, 2022). Siemienska and Domaradzka (2020, 406) points out two main problems of decentralization process in benefit provision which is an ongoing process started in early 1990s. The first one is about the capacity in provision and financial resources. The second one is the organizational problems between levels of government. The local

11

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283

governments are not responsible for financing the benefits, but only for providing these. Depending on these facts, it is hard to say the system is really decentralized. The pension system along with health care resembles or converges to continental conservative welfare regimes, which are less universalistic and more dependent on social insurance and in that manner displays high levels of stratification. The health care system is not universal. It runs under a “compulsory social insurance scheme which provides benefits in kind to all employees and self-employed and assimilated groups and also pensioners, students, farmers, and members of insured persons’ families” (MISSOC, 2022). The high degree of familization is also evident with the coverage of insured person’s families, which means unemployed members of the family depended on the bread-winner. High level of stratification is evident in pension schemes in which there is a first pillar, financed on a pay-as-you-go basis, and a funded second pillar. The Polish pension system also includes special schemes for policemen, soldiers, prosecutors, judges (ibid). As though system resembles continental conservative welfare regimes, its benefits are still below the more developed countries’ examples. Social benefits have risen to 20.9% of GDP in 2019, which is still below the EU average (Table 11.9). The share of old age benefits, which heavily consists of pension benefits has the highest share in total benefits. Sickness and health care benefits rank second. Unemployment, housing and social exclusion benefits are marginally low. Family/children benefits rank third and had gradually risen through 2019. There is a significant increase in family and childcare benefits mainly due to the implementation of + 500 program in 2015. It is doubled from 1,5% of GDP in 2015 to 3% of GDP in 2019. In Poland there are two types of family/children benefits. All benefits are tax-financed and cover all the residents. Family Allowance is a means-tested benefit, for which to obtain the benefit, family income per capita must be under a certain amount of money. But eminent benefit for bringing up children or socalled 500 Plus program benefits are provided to all residents without any means-testing, with own words of Ministry of Family and Social Policy; “The “Family 500 +” program means a benefit of PLN 500 per month for every second and next child, without any additional condition. Lowincome families also receive support for the first or only child, provided

2010

% of GDP 4.4 4.6 4.4 1.7 1.6 1.7 8.9 9.7 9.1 2 2 2 1.2 1.3 1.3 0.4 0.4 0.4 0.1 0.1 0.1 0.2 0.2 0.2 18.8 19.8 19.2 % of Total benefits 23.45 23.32 23.00 9.15 8.14 8.66 47.31 49.05 47.57 10.41 9.95 10.33 6.62 6.49 6.95 1.87 1.96 2.13 0.34 0.30 0.31 0.87 0.8 1.06 100 100 100

2009

Source Own construction based on Eurostat (2022) data

sickness/health care disability old age survivors family/children unemployment housing social exclusion n.e.c Total

sickness/health care disability old age survivors family/children unemployment housing social exclusion n.e.c Total

2008

4.1 1.6 9 1.9 1.3 0.3 0.1 0 .1 18.5 22.44 8.57 48.94 10.2 7.27 1.55 0.31 0.72 100

23.17 8.87 48.01 10.19 7.07 1.55 0.31 0.83 100

2012

4.2 1.6 8.8 1.9 1.3 0.3 0.1 0.2 18.3

2011

Table 11.6 Social protection benefits in Poland 2008–2019

23.02 8.15 48.71 10.11 7.36 1.6 0.29 0.74 100

4.4 1.6 9.4 1.9 1.4 0.3 0.1 0.1 19.2

2013

22.8 8.21 49.17 10.14 7.37 1.30 0.30 0.71 100

4.3 1.6 9.3 1.9 1.4 0.2 0.1 0.1 19

2014

23.62 7.77 48.68 9.90 7.99 1.09 0.26 0.69 100

4.5 1.5 9.2 1.9 1.5 0.2 0.0 0.1 19

2015

23.57 7.61 45.52 9.08 12.54 0.87 0.22 0.61 100

4.8 1.5 9.2 1.8 2.5 0.2 0.0 0.1 20.3

2016

22.84 7.3 45.19 8.95 13.35 1.61 0.19 0.57 100

4.5 1.4 8.9 1.8 2.6 0.3 0.0 0.1 19.6

2017

22.03 6.82 47.42 8.78 13.04 1.22 0.16 0.53 100

4.2 1.3 9.1 1.7 2.5 0.2 0.0 0.1 19.2

2018

24.13 5.64 45.15 7.8 14.49 1.11 0.13 1.55 100

5 1.2 9.4 1.6 3 0.2 0.0 0.3 20.9

2019

284 A. C. SARAL ET AL.

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they meet the criterion”.6 By 2022, families that have income per capita not more than PLN 674 (e147) per month and in the case of families with a disabled child (PLN 764 (e166) per month, meet this criterion (MISSOC, 2022). Another program that aims partially cover expenses of childcare came into force on 1 January 2022. The program is called Family Care Capital and under it “the benefit is granted for every second and subsequent child in the family, aged from 12 to 36 months, in the total maximum amount of PLN 12,000 per child”.7 As its name refers, the program aims to promote breeding along with 500 plus. Siemienska and Domaradzka (2020, 421) put emphasis on the relationship between these benefits given to families based on the number of children and low employment levels and also poverty of women. There is evidence for this assertion in the poverty and employment rates. The poverty rate before all social transfers had not decreased, slightly increased in recent decade but after social transfers this rate had fallen gradually to 14.8% for total and 15.7% for female. The poverty rate gap between female poverty and total poverty rate has been closed with pension benefits in all the years. But the famous 500 plus program does not seem to reduce the gap between female poverty rate and total poverty rate to be closed up more. In 2019 and 2020 this gap (after social transfers) has widened. There should be some effects of the COVID-19 health crisis which seem to increase the female poverty rate before social transfers further—which is a matter to be considered—but there is no evidence for the 500 plus program to be female-biased in reducing poverty, which is also not an aim of it. While the female unemployment rates have fallen parallel to total unemployment rates, female labor force participation rates and employment rates are still falling behind the total numbers (Table 11.8). Also employment rates are lower than European union averages for female employment which is 62% for 15–65 age group and 66.1% for 20–64 age group in 2020. In total social benefits, Poland falls behind EU-27 with 20.9% of GDP. But family/children benefits exceed EU-27 average with 3% and converge to the levels of Denmark, Germany and even exceeded that of Sweden. Social exclusion and housing benefits are very low with total

6 https://www.gov.pl/web/family/family-500. 7 https://www.gov.pl/web/family/family-care-capital-parents-will-have-a-choice.

Source Own construction based on Eurostat (2022) data

After social transfers After social transfers (female) Before social transfers (but after pension) Before social transfers (but after pension) (female) Before social transfers Before social transfers (female)

17.6 17.7 24.4 24.3 43.3 45.2

2010 17.7 17.6 24.1 23.9 43.4 45.2

2011

Table 11.7 At-risk-of-poverty rate in Poland 2010–2020

17.1 17.1 22.9 22.8 42.7 44.4

2012 17.3 17.3 23.0 22.9 43.0 44.7

17 16.8 23.1 22.8 43.7 45.5

2013 2014 17.6 17.2 22.9 22.4 43.6 45.0

2015

17.3 17.4 22.9 22.9 43.1 45.0

15 14.9 24.0 23.8 43.6 45.1

2016 2017

14.8 15.0 24.8 24.9 44.4 46.2

2018

15.4 15.8 24.4 24.6 43.9 45.5

2019

14.8 15.7 23.4 24.2 43.9 46.1

2020

286 A. C. SARAL ET AL.

62.5 55.8 57.5 51.3 65.7 58.9 9.8 10.5

55.6 57.0 51.1 65.3 58.5 9.7 10.1

2011

62.2

Source Own construction based on Eurostat (2022) data

Employment, % of population (20–64 Years, Total) Employment, % of population (20–64 years, female) Employment, % of population (15–64 Years, Total) Employment, % of population (15–64 years, female) Labour Force Participation Rate (15–24 years, Total) Labour Force Participation Rate (15–24 years, Female) Unemployment Rate (15–24 years, Total) Unemployment Rate (15–24 years, Female

2010

10.2 11.0

59.7

66.5

51.9

58.0

56.2

62.9

2012

10.5 11.2

60.1

67.0

52.2

58.4

56.3

63.2

2013

9.1 9.7

61.1

67.9

54.0

60.2

58.2

64.9

2014

7.6 7.8

61.4

68.1

55.6

61.6

59.9

66.3

2015

Table 11.8 Employment, unemployment and labor force in Poland 2010–2020

6.2 6.3

62.0

68.8

57.3

63.5

61.5

68.2

2016

5.0 5.0

62.6

69.6

58.9

65.3

63.0

70.0

2017

3.9 3.9

63.3

70.1

60.3

66.6

64.5

71.4

2018

3.3 3.7

63.4

70.6

60.7

67.5

64.9

72.3

2019

3.2 3.3

63.6

71.0

60.9

67.8

65.2

72.7

2020

11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

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France Denmark Finland Germany Austria Italy Belgium Norway Sweden Netherlands EU- 27 countries (from 2020) United Kingdom* Switzerland Greece Iceland Spain Portugal Slovenia Luxembourg Croatia Poland

2.0 4.8 2.8 2.5 1.8 1.6 2.5 4.4 2.6 2.5 2.0

1.6 2.0 1.1 4.0 1.6 1.7 1.1 2.2 2.1 1.2

8.3

8.0 4.9 8.6 6.5 6.2 7.4 5.5 7.1 5.0

disability

9.0 6.4 6.8 10.3 7.7 6.4 7.5 7.9 7.4 9.4 7.9

sickness/ health care

10.8 13.5 7.2 9.9 11.4 9.0 7.1 7.2 9.4

11.2

12.6 12.2 12.9 9.4 12.8 13.9 11.0 10.4 12.0 10.3 10.8

old age

1.2 2.4 0.5 2.3 1.8 1.2 1.6 1.7 1.6

0.1

1.6 0.2 0.8 1.7 1.6 2.6 1.8 0.2 0.2 1.0 1.6

survivors

1.5 1.5 2.4 1.3 1.2 1.8 3.3 1.9 3.0

2.3

2.3 3.3 3.0 3.3 2.6 1.1 2.1 3.2 2.9 1.2 2.3

family/ children

0.8 1.0 0.8 1.7 0.7 0.5 1.2 0.6 0.2

0.3

1.9 1.3 1.6 0.9 1.5 1.6 1.5 0.5 0.8 0.8 1.2

un -employment

0.3 0.0 0.4 0.1 0.0 0.0 0.1 0.0 0.0

1.1

0.7 0.7 0.9 0.5 0.1 0.0 0.2 0.1 0.4 0.4 0.4

housing

Table 11.9 Social protection benefits by function—% of GDP (European Countries) (2019)

0.6 0.4 0.7 0.2 0.2 0.8 0.5 0.3 0.3

0.5

1.2 1.3 0.9 0.2 0.5 1.0 0.7 0.7 0.7 1.3 0.6

social exclusion n.e.c

25.1 24.8 24.7 23.7 23.1 21.8 21.6 20.9 20.9

25.4

31.2 30.2 29.6 28.9 28.6 28.2 27.4 27.4 27.1 26.9 26.8

total

288 A. C. SARAL ET AL.

2.0 1.0 1.1 0.7 1.5 0.9 1.9 1.4 1.3 1.3 1.3 0.9 0.5 0.7 0.4

6.6

5.1 6.2 4.5 5.7 4.6 4.7 4.9 4.8 4.8 4.5 4.5 5.3 5.1 3.4

disability

8.7 8.1 8.1 7.1 7.2 6.6 6.6 6.7 6.2 7.0 7.2 6.2 4.1 6.1

6.4

old age

1.8 0.5 1.3 0.8 0.8 0.0 0.4 0.8 1.9 0.2 0.6 1.1 0.3 1.5

3.1

survivors

1.3 1.6 1.0 1.6 1.9 2.4 1.7 1.6 0.6 1.6 1.7 0.8 1.3 0.5

0.8

family/ children

0.5 0.4 0.9 0.5 0.3 0.5 0.7 0.5 0.6 0.6 0.0 0.2 0.8 0.4

0.5

un -employment

Source Own construction based on Eurostat (2022) data https://ec.europa.eu/eurostat/statistics, * for UK 2018

Bosnia and Herzegovina Serbia Czechia Cyprus Slovakia Hungary Estonia Lithuania Bulgaria Montenegro Latvia Romania Malta Ireland Türkiye

sickness/ health care

0.0 0.2 0.3 0.0 0.4 0.1 0.1 0.0 0.0 0.1 0.0 0.1 0.5 0.0

0.0

housing

0.6 0.2 0.9 0.2 0.2 0.1 0.3 0.2 0.4 0.1 0.1 0.2 0.1 0.1

0.2

social exclusion n.e.c

19.0 18.3 17.7 17.4 16.4 16.3 16.1 16.0 15.8 15.4 15.0 14.5 13.0 12.3

19.6

total

11 ARE THERE VARIETIES OF CAPITALISM IN DEVELOPING …

289

290

A. C. SARAL ET AL.

of 0.3% of GDP. Unemployment benefits are also very low with 0,2% of GDP. Compared with other countries with low unemployment rates like Germany, low unemployment benefits cannot be justified by low rates. In comparison with Türkiye, the difference in welfare state development is evident. Türkiye falls behind almost all countries regarding social protection benefits as a share of GDP (Table 11.9). Following Esping-Andersen (1999), the liberal, conservative and social democratic structure of national welfare regimes can be evaluated by the degree of universalism of the benefits and share of means or income-tested benefits is a good indicator for evaluation. In Table 11.10 it is rather easy to distinguish countries with social democratic welfare regime. In Sweden, which has the inspirational democratic welfare regime all the benefits are non-means tested and likewise very low in Denmark and Norway. In the countries with liberal regimes (i.e. Ireland and United Kingdom) and conservative regimes (all the rest) this share is rather high. What is striking is that Hungary and Czechia have the lowest shares and in Poland, this share is declining rapidly. As a known fact, all three were ones ruled under socialist regimes. Türkiye’s family/children benefits display highly residual characteristic of liberal welfare regimes. In conclusion, Poland seems to converge to developed welfare states, mostly to its neighbors’ continental conservative welfare states. But there are still underdeveloped features of welfare system compared to them. In line with Esping-Anderson (1999), in the best versions of welfare regimes within capitalist nations, there is not only high levels of decommodification but also high levels of defamilization. In the nations that are champions of economic development, which translates into high levels of income and low rates of income inequality, high levels of women’s employment are essentially characteristic, even though some have more conservative welfare regimes. A good development program aiming to climb the higher league of economic development necessitates higher women integration in society and economy which should be also incorporated into Poland’s welfare policy agenda.

Conclusion The Turkish economy is based on speculative capital, which does not generate employment, where precarious labor is prevalent. As we understand from the share of public expenditures in GDP, the role of public in the economy is relatively low in Türkiye. In comparison to Türkiye,

11

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Table 11.10 Means-tested family/children benefits as a share of total family/children benefits, %, selected EU Countries 2010–2019

Hungary Czechia Denmark Germany Austria Poland Portugal Sweden United Kingdom Spain France Italy Ireland Norway Türkiye

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

4.33 9.12 3.34 33.83 12.15 33.04 77.58 0.00 47.34

4.10 6.49 3.53 35.30 11.62 30.01 72.41 0.00 48.47

3.70 4.90 3.58 36.59 11.43 36.05 73.71 0.00 46.98

5.15 4.86 3.76 38.54 11.11 35.33 76.26 0.00 49.18

2.92 4.76 3.78 39.20 11.12 33.28 75.23 0.00 47.80

3.15 4.54 3.98 40.10 10.44 29.22 72.59 0.00 46.62

2.82 4.07 3.89 41.87 10.29 27.77 70.35 0.00 44.50

3.95 3.39 4.05 42.99 11.03 28.39 69.72 0.00 44.38

5.67 3.70 3.03 2.57 3.98 3.92 43.06 44.10 11.33 11.26 25.30 8.31 68.60 67.83 0.00 0.00 43.53

22.85 21.38 55.06 32.10 7.62 91.09

25.75 20.97 53.45 33.63 7.27 91.29

27.55 21.36 53.42 33.19 7.17 90.91

26.42 21.32 52.78 33.51 6.84 90.51

23.95 21.02 55.25 31.60 6.55 89.11

21.65 20.30 55.02 29.35 6.17 85.73

23.12 20.72 53.49 27.57 5.56 85.48

22.91 20.53 52.65 27.76 5.25 86.81

22.97 20.54 51.95 27.59 5.24 87.26

22.93 19.97 52.42 27.91 5.13 89.00

Source Own construction based on Eurostat (2022) data

Poland’s economic indices are trending more positively. In Türkiye, the low proportion of public expenditures to GDP also had an effect on social expenditures, which fell significantly behind those of Poland. However, Türkiye spends more on unemployment, disability, and the lowest elements of society than Poland. This circumstance generates the appearance that Türkiye’s social expenditures target the most vulnerable members of society. In this context, coal aid, health payments to lowincome groups and home care in the most recent time period stand out as major social aids. Social aid is determined not by rights, but highly by income. In accordance with the World Bank’s anti-poverty program, it targets the poorest, has a centralized structure, provides for basic needs such as food (considering the activities of municipalities), fuel, and is organized with foundations rather than the state, it has a framework that increases human capital in the lowest income group through health expenditures. Social benefits have no clear relationship to employment. Contrary to what Sanyal asserts, the process of primitive accumulation is not reversed, giving the lowest with minimal means of existence. In other

292

A. C. SARAL ET AL.

words, efforts are made to generate human capital that can be incorporated into the reserve army of labor by providing minimal levels of food, education and health care. Contrary to Sanyal, the purpose of state is to sustain life rather than provide self-sufficiency. Poland has a relatively successful approach for job creation, and its social expenditures are larger than Türkiye. In Poland, it is possible to assert that social assistance is family-focused. In Türkiye, social assistance is not provided to all families, only to the most vulnerable members of society. The state’s considerably broader participation in family-based social transfers moves Poland’s welfare regime closer to the conservative welfare regime model in which the role of family is central. Türkiye’s welfare regimes resemble Esping-Andersen’s residual model in that the government offers social support to the lowest income category. Türkiye’s regime is close to the liberal welfare model in this context. As demonstrated by the social security system, employees fund health and retirement costs through premium payments and out-of-pocket spending. Due to informality, the state’s filling of gaps in the social security system is mostly a convenience for employers. Poland is challenging to comprehend using Sanyal’s theoretical framework. Poland’s extremely low unemployment rate may be one of the most important contributing factors. Similarly, Sanyal has created a hypothesis that is more applicable to post-colonial nations. According to Foucault’s theoretical framework, Türkiye is near to anarcho-liberal governmentality, while Poland is close to ordoliberal governmentality. Poland and Türkiye essentially do not fit into the theory’s colorless image. Nonetheless, the theoretical story provides us with insights into reality. In this light, examining the history of social conflict in Poland and Türkiye may assist us to make more practical conclusions to understand the disparities in social policy between these two nations. Regarding the similarities between two welfare practices, the impact of transformative neoliberal policies is evident in both countries’ social policy making from the beginning of 1990s. As the cash transfers of home care assistance in Türkiye and 500 plus in Poland indicate there are also similarities in the view of women’s role in both countries’ social policy construction and hence neglected role of states in providing care services. On a final note, perhaps the role of 500 plus program in the electoral success of Polish government should be interpreted in another fashion. While the program cannot be defined as a fully universalist program, it has universalistic feature in that it provides non-means tested benefits.

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So-called success of the program as a populist policy can be interpreted as a need for social solidarity in that manner. As the neoliberal rhetoric seems exhausted, promising democratic governments should be aware of that, strong alternatives to authoritarian regimes would be the universalistic egalitarian welfare regimes.

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CHAPTER 12

Emergism as Ideology: Zimbabwe’s Ill-Fated Policies for an ‘Emerging’ Upper-Middle-Income Economy Tinashe Nyamunda

Introduction On 14 November 2017, the Zimbabwe military took over the Zimbabwe Broadcasting Corporation (ZBC) the only television station owned by the Zimbabwean government. In an address to the nation, Major General Sibusiso Moyo announced that the military action was not a takeover, but it targeted ‘criminals’ surrounding President Robert Mugabe. These ‘criminals’ Moyo claimed, had caused “social and economic suffering”. Mugabe was detained and forced to resign as President on 21 November and was succeeded by his former vice president and comrade, Emmerson Mnangagwa (Rutherford, 2018, 53). In this chapter, the discourse of

T. Nyamunda (B) Department of Historical and Heritage Studies, University of Pretoria, Pretoria, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_12

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economic suffering is particularly illustrative as it raises questions of exactly what this meant and how it manifested itself. Following Mnangagwa’s succession to power as ZANU PF1 party leader and state President, he championed an open for business and international re-engagement (Nyamunda, 2021). His ‘new dispensation’ lent itself to notions of emerging from authoritarianism and economic collapse towards a vision developing towards an upper-middle-income economy by 2030. This chapter invokes the economic history of post-independence Zimbabwe to critically engage emergist discourses that inform economic thinking, imaginations and conceptualizations that influence policymaking. Mnangagwa’s ‘soft’ coup was greeted with euphoria, goodwill and hope amongst many Zimbabweans. Following his controversial election victory in 2018 which legitimized his rule, he appointed technocrats to critical cabinet positions, particularly an economics professor, Mthuli Ncube who became the country’s Finance Minister from 2018 to date. The idea was to get those people with the best academic and professional credentials to ‘revive’ and ‘resuscitate’ the economy in line with his vision. Appointing such technocrats as Ncube, it was hoped, would restore the economy, pulling it out of over two decades of economic collapse and crisis. Ncube’s main objective was to restore economic fundamentals in the interest of economic stability, growth and development. What follows interrogates Mnangagwa’s ‘new dispensation’ economic strategies informed by the ideology of emergism. The objective of turning Zimbabwe into a middle-income country is in tandem with emergist discourses across the African continent. Mugabe’s authoritarian rule at the turn of the century was triggered by what Patrick Bond and Masimba Manyanya have termed exhausted nationalism and neoliberalism (Bond & Manyanya, 2002). Two decades earlier at the attainment of Zimbabwe’s political independence, Mugabe’s government pronounced objectives similar to those of Mnangagwa, targeting international re-engagement, inclusive economic growth and the ‘transition’ into a prosperous independent African country. Critiquing such emergist discourses, the chapter examines the limitation of neoliberal discourses in the context of the Zimbabwean economy while exploring to what extent such economic

1 ZANU PF is Zimbabwe African National Union—Patriotic Front.

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ideologies have not only stifled the economic imaginations of postindependent policy makers, but also channelled and misled African governments into following policies ill-suited to their contexts.

Prospects for Zimbabwe’s ‘Emerging Market’ Status Vision by 2030 Many economists take for granted the acceptance and understanding of what ‘emerging economies’ are. According to Investopedia, “An emerging market economy is the economy of a developing nation that is becoming more engaged with global markets as it grows. Countries classified as emerging market economies are those with some, but not all, of the characteristics of a developed market” (Investopedia, 2022). However, the International Monetary Fund (IMF) suggests that “there is no official definition of an emerging market”. Instead, the IMF’s World Economic Outlook has classified about 39 economies as “‘advanced’ [economies], based on such factors as high per capita income, exports of diversified goods and services, and greater integration into the global financial system” (Duttagupta & Pazarbasioglu, 2021). The rest are classified as ‘emerging and or developing markets’. Based on the IMF Fiscal Monitor, about 40 of these countries are regarded as emerging markets and middle-income economies. There are further classifications that rate countries from low income through to lower-middle, middle and uppermiddle income and so forth. It is the aspiration to become classified as an upper-middle-income economy and ‘emerging market’ that Zimbabwean policy makers aspire to. Economists and country risk analysts Meghann Puloc’h and David Chetboun highlight that African leaders from most African countries have adapted their discourse on national economic development plans from “traditional objectives to reduce poverty or to improve socioeconomic indicators [and] gradually given way to this goal of emergence” (Puloc’h & Chetboun, 2021). The expressed policy objective of many African countries’ finance ministries is to grow and modernize their economies as a path towards development. In Zimbabwe, the primary objective of the government is to transcend the lower-middle-income rank towards becoming an emerging economy. As sound as these objectives appear, very few countries have actually achieved and maintained this status. In this section, the case of Zimbabwe’s economic policies and strategies towards making Zimbabwe a middle-income economy are

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examined and scrutinized. They are measured against expert advice and general African commentaries on how best the continent can reach this milestone. The critique can then be used as a way to mirror the African experience, at least in terms of discoursing emergist perspectives. One strategy the Zimbabwean government has deployed is the Zimbabwe Economic Development Conference (ZEDCON) held between 10 and 12 August 2022. The theme of the inaugural ZEDCON was ‘Accelerating economic transformation through evidence-based policy-making’. The conference was designed as a form of consultation and engagement with top civil servants in different government departments and ministries with academics and players from the private sector involved in banking, construction, light manufacturing and other businesses. The findings and recommendations from the conference will be considered in the making of Zimbabwe’s 2023 budget. Beyond 2023, the government of Zimbabwe plans to hold annual ZEDCON’s where the perspectives of selected economists, investors and businesspeople will be considered. Most of the presentations given drew their findings and recommendations on the Ministry of Finance and Economic Development’s policy document—the National Development Strategy 1 (NDS 1). The NDS 1 was drawn up as a successor of the Transitional Stabilisation Plan (TSP). The TSP expressed the philosophy of President Emmerson Mnangagwa’s aspirations for the country contained in the policy of vision 2030. Vision 2030 itself drew on the African Union’s Agenda 2063. The vision 2030 document was launched in September 2018, a year after the coup that resulted in Mnangagwa seizing power. His presidency was then legitimized by the disputed July 2018 elections which Mnangagwa narrowly won. Following the pronouncement of vision 2030, the TSP was introduced for the period between October 2018 and December 2020. Thereafter, the NDS 1 was slated to build on the foundation laid by the TSP. But all of these post-coup policies and strategies were an acknowledgement of the ZANU PF government’s economic policies. In fact, Mnangagwa appears to have captured a feeling that Mugabe’s disengagement from the ‘west’ resulted in the collapse of the country’s economy. As the ZANU PF government became increasingly authoritarian and the electorate failed to remove the government through the ballot, at least an estimated quarter of the population voted with their feet, leading to the emigration of many skilled people (Crush & Tevera, 2010).

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It is easy to conclude that the source of Zimbabwe’s economic decline can be traced to internal causes. The discourse around African state failure has considered numerous factors that include colonial legacies, corruption, conflicts, authoritarianism and so on. The arguments have found full expression in the works of Patrick Chabal and Jean Pascal Daloz, Jean Francois Bayart, Paul Collier, and more recently, Bruce Gilley, amongst others. Chabal and Daloz’s arguments rest on the notion that social, political and cultural factors aspire towards the continuation of patrimony, and in a context of disorder (Chabal & Daloz, 1999). Jean Francois Bayart’s work suggests African politics is characterized by graft and patronage (Bayart, 1993). Paul Collier and Anke Hoeffler looked at resources such as oil, gold and diamonds as a curse where they result in conflicts (Collier & Hoeffler, 2005). Despite having these rich resources, Collier argues, Africa hosts most of the world’s bottom billion (Collier, 2007). For Bruce Gilley, these problems make a compelling case for the recolonization of Africa (Gilley, 2017). As problematic as the studies of Chabal and Daloz, Bayart, Collier, Gilley and others are—there are cases they can draw on to make their point. Following independence in 1980, Mugabe’s government sponsored fifth brigade massacred an estimated 20,000 people in the Midlands and Matabeleland provinces for supporting the opposition, PF—ZAPU (Phimister, 2008).2 The conflict only ended when its leader, Joshua Nkomo was forced to sign a unity agreement with Mugabe’s ZANU— PF in December 1987 which resulted in the weakening of PF—ZAPU. Moreover, in the 1990s, numerous corruption cases and scandals were exposed. By the turn of the 2000s, the economy had collapsed leading to the rise of strong political opposition in the form of the Morgan Tsvangirai-led Movement for Democratic Change established in 1999 and challenging ZANU PF in the post-2000s. Any analysis that draws on these experiences to explain Zimbabwe’s economic collapse feeds into negative interpretations of African experiences. While these interpretations are not incorrect, they are generally misleading and provide insufficient analysis of Africa’s underdevelopment. Following the election violence and the rapid and chaotic implementation of what would have been an overdue and necessary land reform programme post-2000, the European Union (EU) and the United States

2 PF—ZAPU is an acronym for Patriotic Front—Zimbabwe African People’s Union.

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(US) decided to intervene in Zimbabwean (Mlambo & Chitando, 2015). The US passed the ominously titled Zimbabwe Democracy and Economic Recovery Act (ZIDERA) in 2001 which included travel bans as well as financial sanctions against Zimbabwean companies, including the policy of vetoing any of Zimbabwe’s requests to access loans from the International Monetary fund (IMF) and World Bank. Led by Britain, the EU suspended various forms of Aid, lines of credit and issued travel bans in 2002. The sanctions were designed, not only to force Zimbabwe to restore or compensate white farmers and implement a host of electoral reforms as well as work on its human rights violations, but these changes would have likely created a path towards regime change (Ndakaripa, 2021). This democratic option worked against the ZANU PF’s power retention agenda, leading it to shift towards increasing authoritarian control and patronage politics. With these sanctions in place, Mugabe responded by withdrawing Zimbabwe from the commonwealth. Thereafter, Mugabe pronounced how he would look east and disengaged from the western countries that had imposed sanctions on his government (The Guardian, 2005). Looking East meant trying to establish economic and other relations with countries in Eastern Europe and Asia, especially Russia and China. Many political economy analyses have explained how Zimbabwe descended into crisis in the 2000s. Even as Mugabe held on to power until the coup in 2017, this disengagement with the west became the convenient explanation of Zimbabwe’s plunge. Whatever fiscal and monetary policies Zimbabwe tried to implement were dismissed as shifting away from economic fundamentals and accelerating economic decline. When Mnangagwa came to power in 2017, he sought to build upon significant local and international good will to project an image of restoring relations. Although he was careful not to explicitly condemn Mugabe verbally, strategically because he had been part of his government since independence, his approach was to express this through moving away from Mugabe’s policies. He announced that Zimbabwe would pursue an open economy through his “open for business” and international re-engagement campaign (Nyamunda, 2021). Mnangwagwa’s attempts to attract investment and lead Zimbabwe back towards a developmental path have so far failed. But by 2022, the projected outcomes of his policies contained in the TSP and NDS1 have not been met (Transitional Stabilisation Programme 2018; National Development Strategy 1 2020). The outbreak of COVID-19 may have

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contributed, but it was already clear even before then that these targets would have been impossible to attain. The argument can be made that even with the departure from the Mugabe regime’s economic approach, the open-for-business policies have not yielded results. In any case, some of the political economy explanations have not fully explored other possibilities of why the economy has been unstable. The crisis narratives are inadequate in explaining Zimbabwe’s economic challenges. Yet, it is these kinds of discourses that the Mnangagwa government subtly hinted at as marking their shift towards a new dispensation. Yet despite these challenges, Mthuli Ncube’s Ministry of Finance and Economic Development’s policies are still heavily informed by emergist approaches.

Ideologizing Emergism in African Economic Thinking What follows is a discussion of the origins of and application of the concept of ‘emergence’ in African economic thought. The term ‘emerging markets’ was coined by a World Bank employee Antoine van Agtmael in 1981. The term evolved into wide ideological application. According to the Merriam Webster dictionary, the word ideology, as a noun, refers “to a manner or the content of thinking characteristic of an individual, group, or culture” or “the integrated assertions, theories and aims that constitute a sociopolitical program” or “a systematic body of concepts especially about human life or culture”. It also refers to “visionary theorizing”.3 But in the social sciences, John Gerring observes, the concept of ideology is a highly flexible conceptual tool (Gerring, 1997, 957). He notes that To some, ideology is dogmatic, while to others it carries connotations of political sophistication; to some it carries dominant modes of thought, and to others it refers to those most alienated by the status quo…. To some it is based on the concrete interests of a social class, while to others it is characterized by an absence of economic self-interest. One could continue, but the point is apparent: not only is ideology far flung, it also encompasses a good many definitional traits which are directly at odds with one another. (Gerring, 1997, 957)

3 https://www.merriam-webster.com/dictionary/ideology.

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Having provided a sample of 13 definitions, Gerring identifies five common approaches to the meanings of ideology before mapping out new ways of considering what makes up an ideology. The common approaches are operationalization, terminological reshuffling, intellectual history, etymology and multivocality (Gerring, 1997, 959–960). The very diverse definitions emanating from these approaches have meant that the term ideology has become so overladen with meaning that “it is no longer stable enough to be of much use…. It now means too much”. If any term can be ideologized, then the concept loses its appeal. But to confront this problem, Gerring suggests a set of procedures to define what can be conceptualized as an ideology. An ideology must have a minimal core definition, be differentiated from neighbouring terms or synonyms and be context-specific (Gerring, 1997, 979). For the purpose of situating emergism as an ideology, I borrow from one of the 13 definitions in Gerring’s sample, which defines ideology as “a system of collectively held normative and reputedly factual ideas and beliefs and attitudes advocating a particular pattern of social relationships and arrangements, and/or aimed at justifying a particular pattern of conduct, which its proponents seek to promote, realize, pursue or maintain” (Hamilton, 1987, 39). This Hamilton definitional element will be deployed to demonstrate how the noun “emerging” was transformed by Agtmael and his colleagues at the World Bank. The International Finance Corporation (IFC), founded by Robert Garner in 1956 and part of the World Bank Group influenced the etymology of the concept of ‘emerging’ (International Finance Corporation, 2016). By 1980, as African countries were attaining political independence from colonial rule, the World Bank was worried about how investments could be made there. Foreign investment was minimal despite its perceived importance in supporting growth and modernization. To stimulate private sector international interest and investment, the IFC provided new data and attempted to change the perception of what was then referred to as the “Third World”. The total-investments data tracked in 1980 was for 10 local stock markets. The countries that were tracked were Argentina, Brazil, Chile, Greece, India, Jordan, Korea, Mexico, Thailand and interestingly, Zimbabwe. As part of IFC’s aspirations, it sent its representative, van Agtmael to New York to a meeting at an investment bank called Salomon brothers to propose setting up a new global investment fund called “Third World Equity” for stock markets in developing countries. However, as observed by a banker from J.P Morgan, the name of the fund would attract investors. Van Agtmael subsequently came up with the term “emerging markets”. Whereas “‘Third World’ was a term

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that connoted extreme poverty, shoddy goods and hopelessness to many at the time”, the term “‘emerging markets’ … suggested progress, uplift and dynamism” (International Finance Corporation, 2022). Although countries such as Zimbabwe were removed from the classification of ‘emerging markets’ over time, the term reframed perceptions about Africa and was universally adapted in the financial world to describe developing country investments. The IFC even created the Emerging Markets Data Base (EMDB) and established teams for ‘emerging market’ stocks to inform investors and mutual fund managers in the global north. Van Agtmeal himself wrote about emerging markets and became Chairman and Chief Investment Officer of Emerging Markets Management LLC, managing over US$10 billion in emerging market investments by 2009. He has continued to champion and write about the prospects of “emerging markets” such as Brazil, Russia, India and China, but curiously left out any African country in this list of the most progressive (van Agtmael, 2009, 127). He has even suggested that by 2040, China will overtake the US as the world’s anchor economy (van Agtamel, 2009, 129). Constituting a third of stocks on the Morgan Stanley Capital International (MCSI) index, it is difficult to see how China could still be regarded as ‘emerging’. Many African countries aspire to the growth experienced by China, the biggest of the so-called “emerging markets” despite its economy being far bigger than that of the “developed one” such as Portugal, Spain, Italy, among ‘developed’ others in Western Europe. Reminiscent of the moment in the 1980s when emergence was conceptualized for economies, economists in the 2000 and beyond began flirting with the Africa rising narrative. Some even viewed Africa as the next growth market, suggesting that South African Twana language cries of “Ke nako [Its time]” during the 2010 world cup tournament “reverberated across the world like a cacophony of a million vuvuzelas, announcing that Africa’s time had come. Economists, consultants and executives all suggested that the African economy, which had languished during the last two decades of the twentieth century, was finally stirring” (Chironga et al., 2011). Despite the IFC’s confidence, many investors still doubted the rising of Africa, citing poor infrastructure, ‘scarce talent’ and other afflictions such as famine and disease. In any effort to reveal the size of Africa’s market potential, McKinsey and Company commissioned a study (Chironga et al., 2011).

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The study found that in 2008, Africa’s Gross Domestic Product (GDP) growth driven was by new business opportunities in consumer industries, resources, agriculture and infrastructure collectively amounting to US$1.6 trillion dollars. This was equivalent to that of Russia or Brazil and projected to grow to US$2.6 trillion by 2020 (Roxburgh et al., 2010). Despite the effects of the Arab spring, for instance, GDP growth was projected to grow by an average of 5% per annum. Multinationals that had invested in Africa, for example, Nokia and Coca-Cola which had distribution networks in nearly every African country; Unilever and its presence in 20 African nations, Nestlé in 19, Standard Chartered Bank in 14, Barclays in 12 and Société Générale in 15 were called smart as they were ahead of the pack in recognizing this potential. Homegrown giants, alongside these multinationals, were also expanding: Ecobank and South African Breweries each operate in over 30 African countries, while MTN and Shoprite are in 16 African countries each (Chironga et al., 2011). Moreover, commodity prices were firming and two factors explained the growth spate. The first was the establishment of political stability and the halting of deadly hostilities in places like Angola and Mozambique. The second was the decrease of budget deficits, reduction of foreign debt and decline in inflation. Since 2000, African countries cut their combined foreign debt from 82% of GDP to 59% and reduced budget deficits from 4.6% of GDP to 1.8%, which sent inflation rates tumbling from 22 to 8% by 2010 (Chironga et al., 2011). If the prospects offered by emergism were sustained and the projections met, Africa would earn US$2.6 trillion by 2022. However, in their 2017 report, McKinsey and company reported that Africa’s GDP had actually decreased by about US$200 billion from the 2010 average to US$1.4 trillion in 2015, with half of the total continuation coming from South Africa, Nigeria and Egypt. This was caused by devaluation, a decline in commodity prices and slowing down consumption (Hattingh et al.,2017). Yet the reports were still positive, projecting that by 2025, consumer spending would reach US$2.1 trillion owing to a young and growing population, rapid urbanization in which over 45% would have been urbanized, rising income and widespread technology. Companies were encouraged to be more sophisticated to understand the African economy, including its informal sectors and to exploit big data and advanced analytics to understand African consumers if they were to

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take advantage of this market (Hattingh et al.,2017). Yet by 2022, the combined impact of the COVID-19 pandemic and the Russian invasion of Ukraine negatively impacted growth and forced economists to review their projections. Discussing the impact of COVID-19, the managing director of the IMF, Kristalina Georgieva argued that Africa faced a two-track pandemic as it was “falling behind in terms of growth prospects. It is a human tragedy and an economic calamity” (The Guardian, 2021). Even as the global economy was projected to grow by 6%, according to IMF projections, that of Africa was revised to a maximum of 3.2%, but this was before the outbreak of hostilities between Russia and Ukraine. This would result, Nic Cheeseman argued, in disrupting democracies, increasing struggles with unsustainable debt and reducing income (Cheeseman quoted in The Guardian, 2021). Added to that, global wheat, sunflower and crude oil prices soared owing to the Russia-Ukraine conflict (Sacko & Mayayi, 2022). In short, Africa would become increasingly politically, economically and socially unstable. Yet emergist perspectives continue to re-project Africa, pointing towards opportunities that can be exploited. The concept of ‘emerging markets’, a product of an IFC official tasked with marketing African markets to private sector investors has become so central to economic thinking and planning and widely adopted across African countries as a blueprint of steps towards development. In 2015, The President of Ivory Coast, Alassane Quattara launched a biennial conference “aiming to ‘support capacity building to prepare and implement emergence plans’ on the continent” (Puloc’h & Chetboun, 2021). Thereafter, Africa has broadened beyond just the BRICS (Brazil, Russia, India, China, South Africa4 ) nations classified in 2001 to broaden the definition and establish a new typology for emergence to include groups of countries such as the BENIVM (Bangladesh, Ethiopia, Nigeria, Indonesia, Vietnam and Mexico) and AKNEEM (South Africa, Kenya, Nigeria, Egypt, Ethiopia and Morocco) for instance (Daziano, 2014; Ithurbide & Bellaiche, 2019). As a result, an emerging market index for Africa, especially on the heels of the establishment of the African Continental Free Trade Area (AfCFTA) has been established (Puloc’h & David Chetboun, 2021). Lately, it has been suggested that the African

4 South Africa only joined BRIC in 2011.

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continent may emerge even before individual countries do. But like development, the whole idea of ‘emerging markets’ has gained unquestioned faith amongst African economists, experts, development practitioners and policy makers (Rist, 2009). Just like the concept of development, whose etymology can be traced back to Truman’s 1949 inauguration speech but evolved into a buzzword for everything that ultimately means little, emergism has entrenched itself as a promise of ‘development’. Nations such as Zimbabwe that have endured economic decline base their economic plans on Africa’s agenda 63 aspirations based on emergist and developmentalist discourses. Despite repeated economic failures, their policies into the future are based on pursuing upper-middle-income status by 2030. This harks back to the original consideration of the extent to which emergism has become, not just a marketing term, but evolved into an ideology. The term ‘emergence’ was conceptualized as a departure from cold war global differentiating terms of first, second and third worldism to remove the baggage it carried. It became a very context-specific ideology defined by metric classifications. It was defined through a set of core characteristics such as having upper-middle-income status, democracy, developed infrastructure, higher wages and advanced technology to qualify as emerging country that only few ascended to and the rest aspired for. So influential is the emergist ideology that it now influences investor imaginations about African markets and governments of the continent about how to formulate policies that influence growth.

Zimbabwe: The Limits of Emergism The latest manifestation of emergism in Zimbabwe followed the 2017 coup. But how many times can countries emerge? What do they emerge from? Evidence presented in what follows demonstrates that many African economies oscillate between emerging and declining. But more critically, if their performance is so unstable as to fail to meet the projections required for ‘emerging markets’ how useful is the concept? What follows uses the Zimbabwean experience to interrogate the emergism ideology as it applies to Africa. Zimbabwe is important in the discussion of emergism as it was the first African country to be an ‘emerging market’ by Agtmeal in 1981. Yet it no longer features in subsequent ratings of the BRICS, BENIVM and AKNEEM countries. Despite this, its policies have been largely

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geared towards growing an inclusive, globalized economy. If the latest Mnangagwa-era policy regimes of international re-engagement represent a kind of re-emergence, then the attainment of independence which saw Mugabe’s election in 1980 represents an earlier form of emerging. After all, the first dispensation attracted the attention of Agtmael. The critical consideration here being what the economic experiences of the Mugabe and Mnangagwa dispensations reveal about emergism. Zimbabwe attained its independence on 18 April 1980 after 15 years of a protracted liberation struggle against Ian Smith’s Rhodesian Front. The liberation struggle had been necessitated by Smith’s Unilateral Declaration of Independence (UDI) from Britain on 11 November 1965. The impasse between the Rhodesian Front government and its imperial overloads stemmed from the colony’s refusal to recognize the inevitability of majority rule. UDI attracted international isolation and ostracism, United Nations sanctions as well as an African liberation war at home. The sanctions that were passed against Rhodesia included, among others, expulsion from the sterling area, removal of commonwealth preferences, freezing of international investments largely derived from the London and other stock markets, trade embargoes of tobacco, sugar and oil and other measures (Nyamunda, 2017a). The sanctions were designed to force Rhodesia’s capitulation in a matter of weeks rather than months (Woods, 2008), but its economy thrived so buoyantly as to finance its rebellion for 15 years. The removal of sanctions as Zimbabwe attained its independence may have influenced Agtmeal to consider it as emerging. Its impressive economic performance under sanctions between 1965 and 1979, what opportunities lay ahead made post-sanctions Zimbabwe appealing. Settler colonial legacies affected post-colonial economic planning. At independence in 1980, 6000 white farmers owned the most fertile freehold land mass of over 33 million acres of an average size of more than 5000 acres, while over a million Africans were crammed into unproductive ‘communally’ held reserves where average land-holdings were less than ten acres. What further complicated the conditions for black people was the differential development of infrastructure such as roads, electricity, irrigation, water services, health care, and schools, for example, which predominantly favoured the whites. (Clarke, 1975, 4–5)

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White farmers made up 13% of the total proportion of white who constituted less than 6% of the entire country’s population. Moreover, “white workers earned at least ten times more than their African counterparts” (Clarke, 1975, 3). In 1975, Duncan Clarke concluded that “these patterns of wealth inequality”, Duncan Clarke observed in 1975, “have repercussions for the future growth of income inequality in Rhodesia. Because capital inequalities are large and discrimination works to widen capital asset inequalities, there is a built-in force in the economic system working to perpetuate income inequalities” (Clarke, 1975, 5–6). These colonial and structural inequalities complicated post-colonial planning economic planning and policy-making. Racial inequalities were a product of the colonial dispensation. For some anthropologists in the 1950s, colonialism was benevolent, with European imperial centres facilitating the transitioning of African colonies towards modernization. For example, Paul Bohannan argued that colonial rule facilitated “modern money” (Bohanan, 1959, 501; Latham, 1971). “The shift to gold in Europe”, Antony Hopkins suggested in the case of the colonial West Africa, “also carried implications for the underdeveloped world as a result of the penetration of Western technology and trade in the period following the industrial revolution” (Hopkins, 1970, 101). Going by accepted conventions of the 1970s, Hopkins argued that western nations sought to ensure that colonial currencies were soundly based and readily convertible if they were to engage in international trade. As such colonial administrations overhauled what they viewed as “diverse and antiquated monetary systems” and imposed imperial currencies fully backed by imperial blocks such as sterling, the franc and escudo (Hopkins, 1970). The case of Southern Rhodesia points to a different conclusion about the impact of European ‘benevolence’. “It is in many ways” Alois Mlambo argued “a story of how a small immigrant white minority arrogated to themselves the right to determine the pace and direction of the nation’s development at the expense of the majority and how the African majority struggled to ascertain their rights” (Mlambo, 2002, 3). Jane Guyer and Karin Pallaver convincingly challenge evolutionary theories as “the externally provoked changes coming from centres of power to the peripheries” (Guyer & Pallaver, 2018, 3). The imposition of colonial currencies was motivated by economic reasons, “including the reduction of transaction costs, the construction of colonial economies, and the increase in control over macroeconomic conditions” (Pallaver, 2015, 271). Colonial legal

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tender was never about “which [exchange systems were] more efficient and modern” but their function was for exploitative “expanded trade… a function of imperial power. The whole point of colonialism was to secure certain strategic markets and the imposition of imperial block currencies facilitated the extraction of resources” (Nyamunda, 2022, 133). What was presented as modernizing really was exploitative colonial capitalism. It would not be far-fetched to argue that the same principle that informed colonial benevolence inspired the ‘emerging economies’ concept from 1981 onwards. But unlike the 1980s when emergism came to be widely embraced, colonialism was generally resisted and ultimately led to struggles for political independence. If the discourse of European colonial economic benevolence has been widely challenged and treated with suspicion, the factors explaining the wide acceptance of emergism must be explored. Historicising the economic experiences of the Zimbabwean economy and the economic thinking behind its policies is illustrative. At independence, Mugabe appointed Enos Nkala as Minister of Finance between 1980 and 1983 and Bernard Chidzero as Minister of Economic Planning. Chidzero succeeded Nkala in 1983 as Minister of Finance until 1995. Zimbabwe inherited an economy burdened by a debt of over US$700 million from the Smith regime, requiring an annual repayment of US$65 million per year and claiming 35% of export revenue by 1987 (Openshaw & Terry, 2014, 44–45). Despite having promised to pursue a communist model of development through its growth equity policy, the government followed what it called pragmatism and introduced a Transitional National Development Plan. This had strong neoliberal elements that de-emphasized radical transformation. Ruth Weiss aptly characterized this as ‘Zimbabwe’s reconciliation with Rhodesia’ (Weiss, 1994). Instead, the economy was to be stimulated through external aid which found expression through a conference organized by Chidzero in March 1981 called the Zimbabwe Conference for Reconstruction and Development (ZIMCORD). Organized to mobilize the support of the international community to assist the Government and people of an independent Zimbabwe with financial and technical resources’ ZIMCORD was an outcome of the 1979 Lancaster House talks at Zimbabwe’s independence negotiations (ZIMCORD, 1981, 51–52). It considered to what extent UDI Rhodesia’s economic growth of an average rate of over 15% between 1965 and 1979 could be sustained after independence. Policy makers resolved that economic transformation was “enormous and well beyond the capacity

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of Zimbabwe and/or a single donor” (ZIMCORD, 1981, Preface). Although diversified with a variety of revenue capacities, the inherited economy was designed only to sustain a colonial white minority of under 250,000 people (Brownell, 2010). To expand capacity without altering the economy’s institutions and productive structure, ZIMCORD quantified the capital requirements of about US$2.3 billion needed to jump- starting the post-colonial economy. “Blessed with abundant resources” Chidzero forecasted that Zimbabwe would be “able to finance its own development after a transitional period of about three years” (ZIMCORD, 1981, Preface). Yet by 1990 debt had risen to US$3.4 billion (Bracking & Sachikonye, 2009, 5–6). With the radical transformation agenda abandoned, Africans had unequal access land, industrial, public sector and commercial opportunities leaving them exposed to the vagaries of economic decline (Dashwood, 2000; Masocha, 2021). While it is easy to cite corruption, graft and maladministration as causes of this failure (Dawson & Kelsal, 2012) many scholars never considered to what extent ill-fitting policies contributed to the false start to post-colonial Zimbabwe’s economy. The story of Zimbabwe’s neoliberal dissent into what scholars have termed crisis has been well told (Mlambo, 1997; Raftopoulos, 2009). But as people became increasingly fractious over inequality in the context of economic decline, the government was forced to abandon emergist policies. It shifted towards a radical but poorly planned land reform programme from 2000 onwards, resulting in the imposition of US and European Union sanctions, hyperinflation, de-industrialization, record unemployment and rapid informalization (Mlambo, 2017). Following the 2017 coup, the so-called ‘new [ZANU PF] dispensation’ re-ignited emergist thinking. Its attempts at re-engagement, accompanied by talk of restoring economic fundamentals for an open economy are not dissimilar from those of the 1980s. The critical difference is that in the 1980s, Zimbabwe had just regained its independence, sanctions were lifted and there was much international good will. Chidzero did not need to convince the international community of the promise Zimbabwe held. Fast forward to post-2017, Finance Minister Mthuli Ncube had a monumental task convincing the US and Europe that Zimbabwe was breaking with the past to restore democracy and other fundamentals necessary for economic growth and therefore needed to attract investment. He and President Mnangagwa went on state visits to countries in Asia, Eastern Europe (especially Russia) and the Davos summits in attempts to unlock

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mega investments for Zimbabwe’s economic restoration (Business Day, 2019). As a gesture of goodwill, Mnangagwa even offered to compensate white farmers whose land had been seized during the land reform exercise (Reuters, 2020). Moreover, the government has introduced its TSP and NDS economic policies in line with vision 2030 to attain an upper-middle-income economy. In the latest round of emergist policies however, Zimbabwe is classified as a low-income country with limited access to lines of credit. The IMF doesn’t need to do much to convince Zimbabwe to follow neoliberal programmes such as its staff monitoring programmes. Despite all of these attempts, economic decline continues to affect the welfare of many Zimbabweans. Yet Ncube presents his policies as quite novel and certain to pull the Zimbabwean economy out of its rut (TechZim, 2019). This is a clear display of the failure of economic thinking, especially the ability to imagine policies and strategies that are not informed by the interests of western capital whose primary motive is extracting profit at any cost. A number of scholars have attempted to explain this lack of imagination and what influences the narrow thinking of many economistic and neoliberal thinkers and policy makers. Alden Young, for instance, demonstrates how officials in late colonial and early independent Sudan managed the economy as a particular, measurable phenomenon (Young, 2018). He draws attention to the influence of developmental logics of bureaucrats, not unlike Chidzero or Ncube, and the structures they established through schemes of development leading to calamitous consequences. Policy makers, including those involved in adapting and re-framing discourses of ‘emerging markets’ for African economies are informed by certain cognitive rigidities. As Young has observed, the economic devises that produce their knowledge and shape decisions are so powerful as to conceal the pitfalls of historical prejudices and interests that inform them (Young, 2018, 10). Decolonial scholars have identified how some philosophies from the global north conceive of Africa as having a catalogue of lacks, including that of knowledge, agency, and even history. African cultures, politics, economies and histories have always been subjected to over-bearing EuroAmerican interpretations (Ndlovu-Gatsheni, 2013). Ignoring long and fascinating pre-colonial histories, European travelers, adventurers and intellectuals perpetuated very narrow and prejudiced depictions of the continent as backward, savage and “dark”. These conceptions of Africa as dark, as backward or behind in development and needing to ‘catch

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up’—to be modernized is not so divorced from Hegel’s cultural framework and conception of History (Adegbindin, 2015). The idea that Africa lags centuries behind developed nations and is emerging is ahistorical and highly problematic. This explains why it is easy to relegate African sluggish ‘growth’ simply to African failure narratives, ignoring the material and historical structures, institutions and processes that produced these legacies. In British colonial Africa, the colonial economy was transacted through a sterling currency network. That was the form through which colonial exploitation was facilitated, reducing transaction costs for the Imperial centre while exploiting the colony (Nyamunda, 2017b). But following the Second World War which saw British fortunes reverse under the weight of funding two world wars and the economic consequences of a global depression, the role of managing an anchor currency shifted to the US which had a significantly smaller imperial presence. The shift from territorial imperialism has produced what can be termed, to reconfigure Robinson and Gallagher’s phrase, ‘the imperialism of free trade’ (Robinson & Gallagher, 1953). The post-Second World War context that established institutions such as the UN, the IMF and the International Bank of Reconstruction and Development (IBRD) was connected to the rise of liberal democracy. As Daniel Speich has shown, the work of Colin Clark, Simon Kuznets and others whose techniques have been developed into what constitutes national income accounting were always so cautious as to warn of the limitations of such approaches, noting how world scale comparisons were difficult, if not impossible (Speich, 2011). Phylis Dean, who tried to collect national accounts’ data for colonial central Africa pointed to the fact that national accounting was impossible because of a number of structural elements such as barter and informal exchange. Not everything in African economies can be measured as standardized by the Bretton Woods institutions. However, economists have adapted national income accounting at world level to establish inaccurate and problematic metrics such as gross domestic product, income per capita among others. By 1947, the UN attempted to create standardized income accounts for all its members for comparison and by 1953, Richard Stone and the Statistical Office of the UN established the system of national accounts. Economist Douglass Seers was concerned, arguing that the system could be widely abused and could “mislead more than they instruct, causing a net reduction in human knowledge” (Speich, 2011, 17).

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Despite the objections of Kuznets, Clark and other pioneers of these abstractions who argued for normative use for comparative purposes across the world, they were flatly applied, creating a number of challenges. These included, for example, producing a ‘one fits for all’ type of norm in a very diverse global system. African economies, mostly colonies at the time, were expected to comply with the system as a precondition to joining the UN with all the necessary conditionality for accessing loans from the IMF and World Bank. As Speich has argued, “[i]t incorporated different forms of economic activity within one nation and produced links between different economies. Furthermore, it intrinsically tied economic theory production to the design of statistical inquiries” (Speich, 2011, 20). Another by-product was linking economic expertise to the state. One had to be able to read the complex quantitative data and make sense of it, produce regression analyses and projections for the state. Ultimately, this led to the uniformization of economic policy-making, for example privatization (by economistic quantitative experts) of economic advice. As Speich observed, even if abstractions created a “global economic order of knowledge… a fundamental demarcation between developed and underdeveloped entities still prevailed, which ran parallel to the old dichotomy between ‘civilized’ social groups and their ‘others’” (Speich, 2011, 20). But what he could have added is how subsequent modernist theories influenced economists such as W. Arthur Lewis to prescribe normative and flattened policy advise on steps towards development (Arthur-Lewis, 1954). By the 1980s this conception of the world, along with the training of economists and economic technocrats for newly independent countries was well in tow. By the time Agtmael coined the term “emerging markets” the system of national accounting and its pitfalls that had caused the collapse of Sudan in the 1950s had been adopted by the thinkers and planners of different African countries. Chidzero was initiated into this national accounting discourse through courses in economics taken at Oxford University and then he himself taught them as an employee of the United Nations Economic Commission for Africa in the 1970s. Ncube’s Ph.D. study on stochastic volatility and his work at the African Development Bank, at Oxford and elsewhere in Europe has also informed his very orthodox and “market fundamentalist” approach to economic thinking which lacks qualitative and important historical knowledge (Nyamunda & Sibanda, 2020, 9). His approach to the economy is temporal and anyone he considers to be an expert shares

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his approach. It is these logics and reasoning that have developed adherence to emergist scholarships and proponents who now inform African policy-making and economic knowledge creation. Like the example of Sudan in the 1950s, their adherence to emergism has neglected crucial historical knowledge. Unlike projections based on assumptions of an ideal world in which important factors are either reduced to dummy variables or controlled for to suit models, history reminds us that human development is not linear. It is dynamic and experiences, like history, never follow a straight line. History teaches us that it is very messy, moves backwards and forwards, up and down, and never moves in a linear straight line. The most certain aspect of life and development is its unpredictability. All of the projections made of African progress have fallen far short of expectations with convenient explanations such as unexpected droughts, famines, pandemics, conflicts, authoritarian states, collapsing global prices. If the work of improving the welfare of African people and their economies is to be pursued in any meaningful way, the reality of African history and its complexities and dynamics should inform an economic thinking and planning and policy makers and scholars must not be trapped by rigid ideologies and can be limiting when improperly applied.

Conclusion Emergism is problematic and misleading. It is in many ways an expression of a liberal democratic order that is being challenged in the wake of growing US–China tensions and accelerated by the Russia–Ukraine conflict. If anything, all of the tensions have demonstrated how much stronger China’s economy has become compared to most European economies and what amount of influence Russia has in global politics (see e.g., Wade’s chapter in this volume). The language of “emerging” leaves many questions unanswered. Emerging from what? It harks back to expressions of a world existing in the same timeline but others’ levels of development are deemed to be centuries behind and they need to be modernized to catch up. It is reminiscent of discourses used to justify imperialism, that Africa needed to be civilized and modernized thus concealing the real intention of empires to exploit it. This is where African economies need to reject such Hegelian conceptions of history. They need to move away from structural and other explanations of what caused their

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so-called backwardness and consider what made the “developed” nations so ‘prosperous’. The recent ZEDCON held in Zimbabwe between 10 and 12 August misses this very important point. Most of the presentations were informed by attempts to fit into and supplement Zimbabwe’s policy aspirations. Few of them were barely critical of how they were conceptualized and failed to consider alternative thinking. As this chapter has demonstrated, the economic thinking influencing presenters at the inaugural ZEDCON is informed by problematic notions of emergism. Their presentation aimed at making Zimbabwe marketable to investors as a solution to attaining upper-middle-income ‘emerging market’ status without any real interrogation of what this implies. Yet the biggest beneficiaries from the marketing (read selling) of African countries to developed countries’ private capital comes at a price. Africans should consider the benefits derived by those western countries’ investors promoting the idea and conditions for qualifying to such status. For example, Agtmael, the man responsible for coming up with the term became the Chief Investment Officer of a company that controls over US$10 billion of ‘emerging markets’ investments. It has created platforms for capital accumulation where investors can profit and a logic of indifference where they cannot. Like the fate of Sudan in the 1950s and afterwards, Zimbabwe’s prospects continue to diminish ahead of 2030. If anything is certain, as Grieve Chelwa has argued, “Economics has an Africa problem” (Chelwa, 2021). If the countries of the continent don’t consider heterodox perspectives that challenge and interrogate orthodox conceptions of economic thinking and planning, then even its Agenda 2063 may fall short of its intended targets. This is especially important when one considers what African countries are constantly ‘emerging’ from and for what purpose. Given the rate of political change and transitions, will Africa forever be emerging? If emergism is used in this way, then to what extent is it useful? Acknowledgements The author would like to thank Professor Alois Mlambo and Professor Godfrey Maringira for their valuable feedback on this chapter.

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CHAPTER 13

Conclusion: The Contradictions of Dependent Development in Hegemonic Transition Tamás Ger˝ocs

This volume contains a collection of selected work from several authors around the world some of whom presented their papers at the 7th ‘The Role of State in Varieties of Capitalism’ (SVOC) Conference in Budapest

A study prepared in the research project “From developmental states to new protectionism: changing repertoire of state interventions to promote development in an unfolding new world order” (NKFI FK_124573). T. Ger˝ ocs (B) Centre for Economic and Regional Studies, Institute of World Economics, Budapest, Hungary e-mail: [email protected] Institute of World Economics, Center for Economic and Regional Studies, SUNY Binghamton, USA

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0_13

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in 2021 organized by the Institute of World Economics of the Centre for Economic and Regional Studies (in collaboration with the Democracy Institute of Central European University). Following the tradition of the SVOC series, this volume is the third in a row in this collaborative research project that aims to combine different methodological approaches within the realm of international political economy (IPE) as well as collect lesser-known empirical evidence for comparative regional studies. The purpose of the first volume, Market Liberalism and Economic Patriotism in the Capitalist World-System (Ger˝ ocs & Szanyi, 2019) was to make timely contribution to the Varieties of Capitalism (VoC) literature by identifying new trends in economic patriotism that had the potential to reshape national models for capitalist development. Our second volume, The Post-Crisis Developmental State, Perspectives from the Global Periphery (Ger˝ ocs & Ricz, 2021) exhibited a collection of studies from Pakistan to Brazil and Ethiopia that all illustrated the potentials and limitation of a new developmental paradigm from the perspective of the Global South. In the final volume of this series, we depart from those classical developmental models; our aim is to take a deeper look into the experience of relatively underexplored modernization efforts in different mixed economies in the Global East and South in order to scrutinize their successes and failures in the period following the global financial crisis in 2008. Our hope is to learn from these lessons and help academics, students and teachers, and policymakers to consider the historical record we present here for future inquiries. As mentioned in the Introduction of this volume by my co-editor colleague, Judit Ricz, our focus on the state and state intervention in the economy is reconsidered throughout the volume with the purpose of extending the narrowly defined state-centric methodology to a broader developmental framework. It does not mean we want to downplay the role of the state in social and economic affairs, in fact we want to open up the debate on that role in order to reformulate even the very concept of the state; its internal structural embeddedness and external dependencies. We are fully aware of the fact that discussion about the state is one of the most thoroughly studied epistemological sources, either in economics or any other social sciences (see e.g., Clarke, 1991; Jessop, 2010; Miliband, 1970; Poulantzas, 1969; Smith et al., 1999; Szanyi, 2019; van der Pijl, 1989). Nevertheless, without claiming to revolutionize this historical debate, we still hope to contribute to the better understanding of states in their interconnected global and historical evolution, using examples

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of social struggles with the “contradictions” of modernization in the semi-periphery of the Global East and South. As explained in the Introduction, our starting point is the recurring debate on state capitalism as a peculiar model for development in the global semi-periphery. The origin of this debate traces back to western Marxist scholarship about the historical experience of the Soviet Union and its allies in the 1960s and ’70s (Bettelheim & Dobb, 1965, Cliff, 1974, Mandel & Harman, 1991). What was at stake in their early debates was whether the self-designed socialist regimes were to be understood in the context of historical capitalism or alternatively, representing a separate model delinked from the structures of capitalist development; or somewhere in between: as constitutive parts of the capitalist system their co-evolution was embedded in the transformation of the post-World War regime (Lane, 1976; Leather, 2012; Szigeti, 2007). They argued that state socialism was a separate model for development, but it did not cut off its ties entirely with the rest of the world, therefore interdependencies re-emerged around the 1970s which also marked the beginning of the long hegemonic downturn identified by some Marxist scholars (Brenner, 2006; Roberts, 2016). These discussions were political as well as methodological at the same time: the question they raised was whether Eastern European regimes followed a state capitalist or state socialist modernization path, what became the long-term historical consequence of their policy choices; whether they reproduced their historical pathdependencies or were able to overcome these to catch up with more advanced industrialized nations in the West. Contrary to more classical developmental paradigms, the emphasis was put on the relational aspect between the capitalist system as a whole and the variety of its constitutive parts (Chase-Dunn, 1980). Some argued that Eastern European socialist modernization reproduced older forms of structural dependencies, hence this model was a peculiar type of state capitalism under the auspices of semi-peripheral dependent development despite its unique institutional features (e.g., the unregulated forms of private property in the informal economy). These early debates on state socialism vis-á-vis state capitalism were informed by the emerging dependency scholarship in Latin America and the world-systems’ analysis originating in Western academic discussion on decolonization (Amin et al., 1982; Cardoso, 1972; Frank, 1966). These schools of thought reflected on the “dark side” of modernization in the context of uneven and combined development within historical capitalism

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and elaborated on the hierarchical and interdependent structures of the world economy, such as the core-periphery relationship (Arrighi, 1990; Gereffi & Evans, 1981). Their focus shifted from the classical Rostowian unilinear take-off model to the post-colonial experiences in the Global South after independence. As these critical scholarships already highlighted at the time, state capitalism, hence the increasing role of the state in industrialization, urbanization, infrastructure-building and even mediation between social classes was a peculiar feature in the semi-periphery, thus they theorized it as semi-peripheral dependent development which they argued could have been applied to the socialist regimes in Eastern Europe too (Böröcz, 1999; Martin, 1990; Wallerstein, 1976). It is interesting to revisit those debates retrospectively with more current historical evidences; although as we have argued elsewhere, the new stream of literature which we present here is not the revival of the old dependency scholarship, let alone the modernization approach of the developmental state paradigm, but a broader framework that seeks to recapture the historical contradictions in a more informed contemporary discussion (Ger˝ ocs & Ricz, 2021). One example for a breakthrough attempt for a new paradigm has been the recently extended theoretical framework of the Varieties of Capitalism (VoC) which included politics and social embeddedness into the discussion.1 VoC scholars argue that it is the political agency which might contribute to institutional change, and in this context institutional formation depends on the struggle between different social classes (Bohle & Greskovits, 2012; Hall & Soskice, 2001; Smith, 2015). It is also the intention of recent VoC research to incorporate the demand side into the analysis, which means, that hybrid regimes (and along with this the economic and production systems) do not only depend on domestic institutions but the global economic integration plays a pivotal role in the development of their prevailing institutional and economic environment. The periodic rediscovery of state capitalism is not coincidental but comes with the boom-and-bust cycles of global waves and their repercussions in economic thinking and planning. Academic technocrats can revisit those well-known historical references when the time comes for reformulating their theories. From this observation we can discern an important element: during global expansion the hegemonic paradigm

1 See our first volume in this series (Ger˝ ocs & Szanyi 2019).

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tends to embrace openness towards world-economic integration and the free flow of capital, which is represented by liberal democracies, especially in the Anglo-Saxon countries (Nölke – May 2019). Contrary to the liberal model, shifting paradigms come with economic bust and readjustment during the long downturn before a new cycle begins. The current rediscovery of state capitalism (Alami & Dixon, 2020) is induced by a well-defined hegemonic transition in which we live today: shifting balance of power opens the space not only for more intervention in the economy and rent-seeking behaviour of political entrepreneurs but as a result there is a shift towards a rejuvenated understanding of the states’ role in the promotion of development. Such paradigmatic shift occurs in a lot of the cases studied in this volume: István Benczes in Chapter 4 discusses the relationship between the rise of economic populism and the new developmentalist wave in Central and Eastern Europe, while new forms of rent seeking as part of the illiberal institutional development is well illustrated by the comparison between the Hungarian and the Iranian regimes in Chapter 8 written by Miklós Szanyi and Somayeh Sedighi. As for example in Iran, the lack of institutional experience with open society or with the competition state for that matter, the natural resource rent is becoming the dominant exposure that leads to periodic moments of collapses, whereas the Hungarian system is more rigid in the sense of the rule of law mechanisms are still imposed by European authorities. However, the irony is that—as the authors show—the large influx of EU transfers is a contributing factor to the reallocation of quasi-rents upon which the Hungarian illiberal regime can consolidate power. The broader geopolitical transition is explained by Professor Robert Wade in Chapter 2 on the changing US-China relations and their impact on the possibility of war in the future or—as Professor Wade argues— there is still a potential for peaceful coexistence under the auspices of the multipolar world-system. Whether multipolarity is an elevated new balance of power or the opposite, it is the disintegration of the old hegemonic regime, is an important subject that still needs more extensive analyses in future research. Increasing tension among the military powers in the multipolar world-system can result in imperialistic endeavours, such as the one we witness today in the battlefields of Ukraine. No surprise that current debates on state capitalism are centred around China’s post-1978 emergence, along the line of the shifting world hegemonic order, but it also includes other major emerging giants from the Global East and South, such as Russia, Turkey, Brazil and India.

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In our volume we picked a few lesser-known examples of some mixed economies to enhance our notion with important modifications and exemptions. Discussion on the current Belarussian model, for instance, is to be understood in this context, as Piotr Kozarzewski and Aliaksandr Papko highlighted in Chapter 7 the hybrid nature of the Belarussian economic integration, which regime is neither state capitalist nor state socialist in any pure textbook form. This analysis emphasizes geopolitical dynamics too, thus the external (global) forces become important elements in typifying institutional peculiarities of the hybrid regime based on mixed economic structures. Taking stock of this approach the authors explained that the Belarusian institutional rigidity may lead to the middleincome trap and reinforce path-dependency, an experience upon which Szanyi and Sedighi sheds some new lights too in the case of Hungary. In contrast to the literary mainstream, Tinashe Nyamunda’s paper, Chapter 12, is challenging the application of the concept of ‘emergence’ with respect to the post-colonial experience of African countries, demonstrating the eurocentric origin of the notion of what he calls “emergism”. As he promptly asks the polemic question: ‘emerging from what? Colonialism?’ Similarly, to emergism, we could also critically scrutinize the notion of catching up in the African as well as Eastern European economic thinking: ‘catching up with whom?’ The issue Nyamunda addresses in his chapter is that individual countries cannot be methodologically separated from one another in the developmental framework (methodological nationalism), as the betterment of one often comes at the expense of others. In the post-colonial African context this could be illustrated by the historically embedded relationship between, for example, Belgium and the Democratic Republic of Congo. The advancement of the small Benelux state was heavily contingent upon the violent exploitation of the Congo basin pushing the latter into a desperate situation of underdevelopment. Tinashe Nyamunda is using the example of postcolonial Zimbabwe to illustrate that African economies are anything but emerging, hence he is reopening the old debate about the development of underdevelopment with the help of the world-systems’ and dependency scholars. The main point in his argument is that the development of underdevelopment is not just a moment in the distant past, but an ongoing historical process in the evolution of the world-economic structures, hence the underdevelopment of Africa is not simply the legacy of colonialism, but the result of more current neocolonial practices backed by ideological narratives, such as “emergence” or “catching up”. Conclusively, his emphasis is on pathdependency that mirrors the fact that governments’ capacities remain limited in comparison to the promises they make to the popular masses.

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Professor Tomasz Mickiewicz, on the other hand, investigates in Chapter 3 the roots of the middle-income trap in his chapter exemplified among others by the cases of Poland and Hungary. Although he is relying on the concept of path dependency too, his analysis is more informed by state capacity and the consequent framework of good (or bad) governance. This discussion is important too because it provides a critical re-reading of the developmentalist illusion which the newly rising illiberal regimes try to use for justifying their authoritarian style of governance (Ricz, 2021). Does this type of developmentalism lead to catching up or is this exactly the trap that both Professor Benczes and Professor Mickiewicz are warning about? One common aspect in their discussion is the relationship between authoritarianism and industrialization. As it is well known among IPE scholars, state capitalist regimes are obsessed with industrialization and a lot of their economic interventions are reminiscences of controversial industrial policies. For those who know the historical parallel, this shall not come as a surprise, dependency scholars from Latin America had long studied the consequences of import-substitution industrialization in places like Brazil (Evans, 1995; Tavares, 1964). The intimate link between the military dictatorship, populist authoritarian governments and industrial expansion are all evidences in their writings, and worth to contrast with the reindustrialization efforts of other semi-peripheral authoritarian regimes in the recent post-crisis trend. Mina Toksoz’s argument in Chapter 9 about Turkey’s new industrial policy after the failed experiment with import-substitution industrialization fits well into this tradition by providing some new evidence for linking the rise of authoritarianism with industrial endeavour. Toksoz gives insightful examples for how political centralization in Turkey, particularly the introduction of the presidential system after the global financial crisis was combined with a new growth model that was based on feeding the national industrialists. Turkey as a semi-peripheral role model appears in another comparison in this volume as well, though from a different analytical angle: Asli and her co-authors examine in Chapter 11 emerging economies’ welfare practices, which are fundamental to the alignment of this model with the social reproduction process. By looking at Turkey and Poland their comparative analysis reveals some similarities, as the impact of transformative neoliberal policies is evident in both countries’ social policy making from the beginning of 1990s. Still differences dominate and are consequential for the divergent trajectories in social indicators and labour market developments. According to Asli et al.’s analysis Poland’s

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welfare regime is closer to the conservative welfare model mainly due to the state’s relatively broad participation in family-based social transfers. In contrast to this Turkey resembles Esping-Andersen’s (1990) residual model in which the government offers social support to the most vulnerable members of society.2 As we mentioned in the beginning of this volume, in order to avoid an utterly state-centric approach, we supplemented our discussion on semiperipheral dependent development with firm-level analysis: Anita Pelle and Gabriella Tabajdi investigated the role of manufacturing in Central and Eastern Europe in light of the European integration (Chapter 6). Using the concept of Dependent Market Economies (DME), adopted from the VoC framework, and combined with a value-chain analysis (Czabán & Henderson, 2003; Nölke & Vliegenthart, 2009), the authors collected and periodized important industrial statistics including the share of manufacturing in export, Gross Value Added (GVA), productivity and employment data in a long time series applied to a number of countries in their CEE database. Their findings are in line with earlier remarks from Drahokoupil and Piasna (2019) in the first volume of our series. As both Drahokoupil and Piasna as well as Pelle and Tabajdi in this volume demonstrate with their in-depth empirical research, several socioeconomic factors determined the conditions of reindustrialization after these countries’ EU accession. Due to the nature of industrial relocation from the European core to the newly integrated semi-peripheries, it has usually been the lower value-added assembly production with small share of domestic appropriation that has been locally utilized by multinational manufacturers. According to Pelle and Tabajdi, the relocation strategies are also enhanced by deregulating local labour markets leading to sluggish productivity rates with the resultant asymmetrical interdependencies between the headquarter of those companies and the factory economies in the semi-periphery. As a potential counterbalancing force to the domination of multinationals, Magdolna Sass in Chapter 5 continues the firm-level investigation with examining state-owned enterprises’ prospect to internationalize in the CEE region. In doing so, the author highlights an interesting linkage between global aspirations and domestic (state) ownership, hence domestic companies’ aspiration for internationalization often comes at the

2 Placing Turkey closer to the liberal welfare model in this regard.

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cost of changing owners which was the bitter lesson from the privatization process during the post-socialist transition. Sass argues that many of the internationalized companies are often in hybrid state ownership, where the share of the state does not determine the companies’ aspirations. Sass compares examples amongst the Visegrad countries3 and draws important conclusions with regard to the differences in regulation and state intervention, in the forms of subsidies, special taxes or influencing policy making. In addition, Sass finds that the few companies falling into the category of state-owned multinationals from the CEE are in-between developed countries and emerging countries’ stateowned multinationals, which we can interpret as a micro-level evidence for the special type of semi-peripheral dependency which other countries, like Zimbabwe, do not necessarily share. Other than the role of state ownership, Sass emphasizes the importance of sectoral differences: the most typical case being energy-oil-gas companies’ international operation, expanding sometimes even beyond the CEE region. However, as Sass points out, existing structural constraints limit the scope of internationalization especially for manufacturing exporters where local states are rarely having significant stakes in companies. As already mentioned, the local export sectors—similarly to Latin America and Turkey—are dominated by foreign multinationals in the CEE. Hence, domestic companies often remain dependent on the states’ intervention capacity and domestic infrastructure which reliance feeds back to the centralized, sometimes authoritarian form of industrial governance. As a result, internationalized companies from this region are still associated with service provisioning, financial institutions, or construction enterprises. Finally, in contrast to the lessons from industry and dependency, György Csáki selected a number of successful cases of newly industrialized countries from Asia (Chapter 10). He takes the examples of South Korea, Taiwan and Singapore to explain the industrial successes of these countries which he convincingly attributes to the massive investment in education, research and innovation-oriented public and private services. In addition, the author demonstrates how education planning was integral part of the economic planning in the build-up of these classical developmental states. Moreover, the education system became deeply integrated, both in terms of content and structure, into the industrialization pattern

3 Poland, Hungary, Czechia and Slovakia.

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of the respective economies. Consequently, Csáki argues that education is in fact a key component in any industrial policy-toolkit in addition to labour reforms because education created the institutional conditions for the establishment of knowledge-based economies, an important lesson that Csáki suggests translating into a wider institutional context. With this more optimistic note at the end, we hope that this collection of studies on state capitalism, combining states, firms and policy makers’ experiences can help reconsider the roles of the respective actors in a multi-scalar framework that builds upon the interconnectedness of global and historical narratives. Our aim with this volume was to inspire IPE scholars to continue discussing the role of the state and state interventions in a non-state-centric approach, using existing knowledge of dependency scholarship, the developmentalist paradigm and the renewed queries within the VoC tradition to better understand the potentials and limitations of state capitalist mixed-economies and hybrid regimes in the Global East and South in the post-crises cycle.

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Clarke, S. (1991). The state debate. Palgrave. Cliff, T. (1974). State capitalism in Russia. Pluto Press. Czabán, L., & Henderson, J. (2003). Commodity chains, foreign investment, and labour issues in Eastern Europe. Global Networks, 3(1), 171–196. Drahokoupil, J., & Piasna, A. (2019). Dependent market economies and wage competition in Central and Eastern Europe. In T. Ger˝ ocs & M. Szanyi (Eds.), Market liberalism and economic patriotism in the capitalist world-systems (pp. 43–66). Palgrave. Esping-Andersen, G. (1990). The three worlds of welfare capitalism. Princeton University Press. Evans, P. (1995). Embedded autonomy: States and industrial transformation. Princeton University Press. Frank, A. G. (1966). The development of underdevelopment. Monthly Review Press. Gereffi, G., & Evans, P. (1981). Transnational corporations, dependent development, and state policy in the semiperiphery: A comparison of Brazil and Mexico. Latin American Research Review, 16, 31–64. Ger˝ ocs, T., & Szanyi, M. (Eds.). (2019). Market liberalism and economic patriotism in the capitalist world-system. Palgrave Macmillan. Ger˝ ocs, T., & Ricz, J. (Eds.). (2021). The post-crisis developmental state: Perspectives from the global periphery. Palgrave Macmillan. Hall, P., & Soskice, D. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press. Jessop, B. (2010). The ‘return’ of the national state in the current crisis of the world market. Capital & Class, 34(1), 38–43. Lane, D. (1976). The socialist industrial state: Toward a political sociology of state socialism. George Allen & Unwin. Leather, A. (2012). State capitalism: Why the USSR wasn’t socialist. El˝ oadás, Marxism Annual Workshop. https://www.youtube.com/watch?v=J0NmhF O31Y8 Mandel, E., & Harman, C. (1991). Fallacies of state capitalism: Ernest Mandel and Chris Harman debate the USSR. Socialist Outlook. Martin, W. G. (Ed.). (1990). Semiperipheral states in the world-economy. Greenwood Press. Miliband, R. (1970). The capitalist state: Reply to Nicos Poulantzas. New Left Review, 1(59), 53–60. Nölke, A., & Vliegenthart, A. (2009). Enlarging the variety of capitalism: The emergence of dependant market economies in East Central Europe. World Politics, 61(4), 670–702. Nölke, A., & May, C. (2019). Liberal versus organised capitalism: A historicalcomparative perspective. In T. Ger˝ ocs & M. Szanyi (Eds.), Market liberalism and economic patriotism in the capitalist world-systems (pp. 21–42). Palgrave.

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Poulantzas, N. (1969). The problem of the capitalist state. New Left Review, 1(58), 67–78. Ricz, J. (2021). The anatomy of the newly emerging illiberal model of state capitalism: a developmental dead end? International Journal of Public Administration, 44(14), 1253–1263. Roberts, M. (2016). The long depression: Marxism and the global crisis of capitalism. Haymarket Book. Smith, D. A, Solinger, D. J., & S. C. Topik (Eds.). (1999). States and sovereignty in the global economy. Routledge. Smith, A. (2015). The state, institutional frameworks and the dynamics of capital in global production networks. Progress in Human Geography, 39(3), 290– 315. Szanyi, M. (2019). The emergence of the patronage state in Central Europe: The case of FDI-related policies in Hungary since 2010. In T. Ger˝ ocs & M. Szanyi (Eds.), Market liberalism and economic patriotism in the capitalist world-systems (pp. 99–126). Palgrave. Szigeti, P. (2007). Államszocialista kísérletek – történelmi tanulságok. In T. Krausz & P. Szigeti (Eds.), Államszocializmus: Értelmezések – viták – tanulságok (pp. 13–52). L’Harmattan and Eszmélet Alapítvány. Tavares, M. D. C. (1964). The growth and decline of import substitution in Brazil. Economic Bulletin for Latin America, 9(1), 1–59. van der Pijl, K. (1989). Ruling classes, hegemony, and the state system: Theoretical and historical considerations. International Journal of Political Economy, 3(19), 7–35. Wallerstein, I. (1976). Semi-peripheral countries and the contemporary world crisis. Theory and Society, 3(4), 461–483.

Index

A Africa, 8, 20, 39, 42, 301, 305–308, 313, 314, 316, 317, 328 alternative development, 2–4, 8–11, 78, 81 asymmetric interdependence, 122, 137, 138 B Belarus, 5, 32, 106, 110, 145, 149–153, 155, 158–160, 163, 164 Belt Road Initiative (BRI), 20, 22, 32 C Central and Eastern Europe (CEE), 1, 6, 8, 62, 63, 75, 77–81, 87, 89, 90, 95, 100, 105, 107, 119–128, 130–138, 327, 330, 331 China, 2–5, 10, 14–17, 19–33, 39–41, 48, 56, 57, 90, 93, 106, 108, 110, 151, 175, 210, 212,

215, 232, 233, 247, 252, 253, 302, 305, 316, 327 closed society, 195 cold war, 3, 4, 10, 13–15, 17, 18, 23, 24, 26, 27, 30, 31, 308 competitive authoritarianism, 74 corruption, 66, 160, 172, 182, 184, 186, 189, 192, 193, 206, 222, 301, 312 COVID-19, 3, 4, 8, 14, 88, 89, 102, 120, 123, 124, 135, 137, 194, 204, 205, 211, 213, 216, 280, 285, 302, 307 crisis, 6, 33, 52, 68, 73, 76, 88, 89, 94, 99, 100, 121, 123–125, 131, 132, 135, 137, 143, 147, 150, 164, 206, 207, 210, 218, 222, 223, 237, 259, 264, 267, 268, 278, 280, 282, 285, 298, 302, 303, 312, 329 critical political economy, 9, 10 cyberwar, 15

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J. Ricz and T. Ger˝ ocs (eds.), The Political Economy of Emerging Markets and Alternative Development Paths, International Political Economy Series, https://doi.org/10.1007/978-3-031-20702-0

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336

INDEX

D democracy, 2, 4, 10, 17, 18, 27, 50, 52–55, 74, 187, 188, 238, 308, 312, 314 Democratic Republic of Congo (DRC), 39, 41–43, 328 dependent development, 8, 9, 323, 325, 326, 330 dependent market economy (DME), 6, 122–124, 132, 133, 137, 138, 330 development, 1–11, 19, 26, 33, 37–47, 49–53, 55–58, 62, 64, 65, 69, 70, 72, 77, 79–81, 91, 106, 123, 132, 144, 146, 147, 156–158, 164, 172, 174, 177, 179–181, 185, 186, 188, 189, 193–195, 197, 205–207, 211, 219, 222, 229–232, 235–237, 240, 241, 244, 246–248, 250–253, 258, 259, 261–263, 267, 280, 290, 298, 299, 307–313, 315, 316, 324–328 developmentalism, 10, 61–63, 72, 73, 77, 79–81, 329 developmental state (DS), 1, 4, 6–8, 78, 79, 81, 175, 196, 204, 230, 231, 246, 251, 253, 326, 331 E East Asia, 4–6, 11, 42, 64, 78, 204, 214, 230, 231, 246, 248, 251–253 economic thinking, 2, 4, 206, 298, 303, 307, 311, 313, 315–317, 326, 328 educational developmentalism, 11, 251 emerging economies, 2, 3, 5, 7–10, 88, 90, 91, 93, 299, 311, 329 emergism, 11, 298, 303, 304, 306, 308, 309, 311, 316, 317, 328

employment, 10, 47, 50, 67, 96–98, 100, 125, 130–132, 136, 154, 157, 160, 245, 263, 268, 270, 277, 279, 285, 287, 290, 291, 330 European Union (EU), 15, 24–26, 62, 75, 77, 94, 103, 112, 120–127, 130–132, 135–137, 151, 153, 185–190, 192, 193, 197, 207, 208, 210–212, 214–216, 222, 223, 280, 282, 283, 285, 301, 302, 312, 327, 330 export, 3, 23, 26, 64, 65, 67, 98, 103, 104, 133, 135, 149–153, 156–158, 163, 176, 177, 180, 190, 204, 206, 209, 211–213, 217, 219, 222, 230, 311, 330, 331

F factory economies, 120–123, 137, 330

G geopolitics, 13, 15, 17, 32, 163, 175, 185, 188, 192, 193, 196, 197, 210, 222, 327, 328 Global East, 10, 324, 325, 327, 332 global financial crisis (GFC), 3, 4, 8, 77, 120, 123, 137, 145, 203, 204, 208–210, 212, 222, 324, 329 Global South, 14, 324, 326 governmentality, 258, 261–263, 292 gross domestic product (GDP), 2, 15, 21, 22, 30, 33, 39, 40, 42–46, 48, 54, 94, 119, 143, 147, 149, 151–153, 155–157, 177, 179, 181, 193–196, 209, 217–220,

INDEX

245–247, 264, 280, 283, 285, 290, 291, 306, 314 gross value added (GVA), 125–128, 131, 136, 137, 155, 330 H headquarter economies, 120–123, 137 Hegemony, 9, 14, 15, 70, 75, 185 Hungary, 5, 9, 49, 57, 78–80, 94–104, 107–109, 111, 112, 120, 126, 127, 130, 135, 146, 160, 175, 186, 188–197, 290, 328, 329, 331 hybrid regime, 3, 4, 165, 326, 328, 332 hybrid state-owned companies, 112, 331 I ideational approach, 71 import, 16, 23, 26, 48, 55, 64, 65, 67, 70, 74, 81, 133–136, 151, 153, 159, 182, 183, 205, 208, 209, 211–213, 215, 222–224, 230, 234, 329 industrial policy, 204–214, 220, 221, 329, 332 industry, 19, 47, 49, 55, 64, 98, 101, 104, 109–111, 124–128, 130–132, 136, 137, 149, 155, 156, 158, 173, 177, 181–183, 193, 196, 203, 206–210, 212, 213, 215–218, 221, 224, 230, 236, 252, 331 institutional state capacity, 4 institutions, 5, 8, 10, 18, 19, 38, 45, 50–53, 56, 57, 63, 64, 66, 69, 71–75, 80, 81, 101, 107, 122, 164, 174, 177, 179–182, 185–189, 191, 192, 195–197, 204, 207, 210, 219, 221, 223,

337

224, 238, 239, 241, 245, 246, 252, 259, 268, 279, 312, 314, 326, 331 internationalisation of firms, 103 international political economy (IPE), 4, 324, 329, 332 Iran, 16, 28, 175, 177–184, 195, 196, 225, 327

L labour productivity, 73, 100, 131, 132, 136 Latin America, 1, 3, 20, 39, 40, 61–71, 73–77, 80, 267, 325, 329, 331

M manufacturing, 11, 18, 23, 49, 64–66, 76, 97, 98, 100, 101, 107, 119–121, 124–126, 128, 131, 132, 136, 154, 173, 177, 181–183, 209, 213, 217, 231, 235, 236, 253, 300, 330, 331 middle-income trap (MIT), 7, 9, 10, 37–39, 41, 43, 49–53, 55, 56, 122, 197, 225, 328, 329 multinational companies, 15, 92, 98, 103, 104, 106, 190, 191 multipolarity, 327

N neocolonialism, 328 new developmentalism, 62, 78

O open society, 195, 327

338

INDEX

P pandemic, 3, 4, 8, 14, 88, 89, 102, 113, 120, 124, 135–137, 194, 211, 213, 307, 316 path-dependence, 53, 57 PENN World Tables, 39, 44, 54 performance of state-owned multinationals, 90 Poland, 5, 11, 57, 78–80, 93–99, 102–112, 120, 126, 130, 131, 135, 146, 160, 164, 216, 218–220, 258, 264, 270, 280, 282–285, 290–292, 329, 331 political strategy, 63, 69, 71, 72, 74, 75, 80 populism, 8, 10, 17, 18, 61–77, 80, 147, 164, 327 post-communist economies, 144, 146, 147 public education, 231, 232, 234–236, 239–243, 247, 248, 252

Q quasi rent, 173, 175, 182, 188, 189, 193, 194, 196, 197, 327

R regulatory rent, 173, 175, 176, 181, 184, 185, 188, 191, 192, 194, 196, 197 regulatory role of state-owned companies, 181 rent, 10, 11, 147, 164, 171–177, 179, 181, 184–186, 188–197, 210, 222, 327 rent seeking, 81, 147, 160, 176, 181, 182, 184, 185, 189, 190, 196, 197, 206, 222, 327 rent space, 176, 177, 181, 188, 192, 195–197

rent stream, 172, 173, 185, 188, 195, 196 Russia, 8, 10, 13–17, 19, 20, 22, 23, 25, 28–33, 42, 46, 78, 91, 105, 106, 109, 110, 122, 148–153, 155, 163, 164, 177, 188, 194, 210, 211, 215, 225, 302, 305–307, 312, 316, 327

S semi-periphery, 6, 9, 185, 325, 326, 330 services, 16, 23, 48, 88, 96, 97, 99, 106, 107, 109, 124, 125, 128, 133–136, 151, 152, 155, 159, 163, 176, 177, 180, 184, 189–191, 194, 197, 213, 267–269, 279, 282, 292, 299, 309, 331 Singapore, 4, 21, 22, 231–241, 251, 253, 331 Social expenditures, 264, 291, 292 social policies, 8, 158, 264, 267, 270, 280, 282, 292, 329 social protection structures, 258 South Korea, 4, 19, 22, 26, 38, 39, 53, 55, 219, 232, 233, 241–246, 251–253, 331 Soviet Block, 38, 48, 49, 57 state capitalism, 2, 3, 5, 6, 8, 10, 11, 80, 91, 144–146, 164, 165, 325–327, 332 state interventionism, 146, 162 state-owned enterprises (SOEs), 11, 65, 74, 87–105, 107, 108, 110, 146–152, 154–160, 162–164, 173, 181, 196, 330 state-owned multinationals, 88, 92, 104, 106, 108, 109, 111–113, 331 state socialism, 325

INDEX

T Taiwan, 4, 19, 22, 31, 39–41, 45, 55, 231–234, 246–253, 331 tech war, 26 trade war, 4 Turkey, 5, 11, 104, 109, 204, 206–210, 212–221, 223, 225, 327, 329–331

U United States of America (USA), 4, 5, 10, 13–30, 32, 44, 46, 48, 62, 75, 110, 177, 179, 212, 215, 258, 259, 261, 262, 301, 314

339

V Varieties of Capitalism (VoC), 4, 6–9, 120, 121, 123, 145, 146, 164, 258–260, 324, 326, 330, 332 Visegrad countries, 88, 90, 93–97, 99–102, 107–110, 112, 120, 125, 331 W Washington consensus, 2, 4, 69, 73, 77, 182, 206, 212 Welfare capitalism, 258, 260 world-system, 19, 65, 325, 327, 328 Z Zimbabwe, 11, 297–305, 308, 309, 311–313, 317, 328, 331