Diverging Developmental Pathways on the Margins of the EU The Case of the Hungarian and Polish Dairy Sectors David G. Karas Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Florence, September 2015 (submission) European University Institute Department of Political and Social Sciences Diverging Developmental Pathways on the Margins of the EU The Case of the Hungarian and Polish Dairy Sectors David G. Karas Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Examining Board Dr. László Bruszt, European University Institute Dr. Sven Steinmo, European University Institute Dr. Dorothee Bohle, Central European University Dr. Iván Szelényi, NYU Abu Dhabi © David G. Karas, 2015 No part of this thesis may be copied, reproduced or transmitted without prior permission of the author Abstract This thesis seeks to understand why similar semi-peripheral developing economies might benefit differently from transnational market integration. It wishes to establish a dialogue with a current debate, marked by very different interpretations regarding the economic and developmental performance of Central and Eastern European (CEE) countries. It argues that from similar starting positions, individual sectors in CEE economies could follow widely different modes of transnationalization in sectors where access to technology was cheap – yet domestic actors needed to secure capital, which neither the state nor domestic private banking sectors could offer them. Contrary to technology-intensive sectors where proprietary technologies might “force” developing economies to adopt an integrationist strategy relying on MNCs to secure financial assets and technology, in less technology-intensive sectors, different pathways of transnationalization remained open, yielding different developmental outcomes. For illustrating this argument, the thesis uses the case of the dairy sector’s post-Socialist restructuring in Hungary and Poland: Hungary experienced the developmental failure of an integrationist strategy, while Poland illustrates the unforeseen benefits of an autonomist pathway. The thesis argues that different policy choices in the two countries reflected differences in the resources and organization of state and non-state actors, the types of linkages tying them, and different institutional legacies stretching back to the Socialist period. In so doing, it seeks to show that even for small and open economies, the diversity of developmental pathways is substantially wider than usually assumed: neither too deterministic theories such as dependent underdevelopment, nor too general typologies such as the Varieties of Capitalism framework can grasp the actual diversity of developmental experiences, which exist at a sector level, especially in less technology-intensive sectors where a wide scope for variation exists. On the other hand, this thesis also shows that particular modes of transnationalization can also be abandoned for alternative strategies when they fail to secure tangible benefits to domestic actors. Modes of transnationalization for developing economies are more diverse but also more transient than often assumed. i Acknowledgments I wish to thank all the people who helped and assisted me along this journey: My family, to whom I owe everything, my grandfather Pista, for his endless anecdotes about peasant life in pre-war Hungary, which planted the seeds of my interest for history and societies, my grandfather Imre for teaching me to think, and my mother Diana especially, who showed me what it meant to be an exemplary human being and an outstanding social scientist. I would like to thank the numerous people who helped me in Budapest and in Warsaw: Anikó Juhász and Péter Tóth for their comments, recommendations and contacts in the early phase of this work, the researchers and staff of the Hungarian Institute of Agricultural Economics (AKI), the Polish Institute of Agricultural Economics (IERIGZ) and the kind attention at FAPA in Warsaw, where I had the opportunity to consult the archives thanks to Barbara Kucharska. I am very grateful to Ireneusz Krause for his help during my stay in Poland, and to the Natolin Centre of the College of Europe in Warsaw for the Paderewski research grant as well as for the fantastic accommodation. This work owes to my supervisor, László Bruszt, more than to anyone else: I am eternally grateful not only for his comments, direction and help, but also for his endless patience, bearing with me throughout the process without giving up on me even when I lost hope. I would also like to thank Beran, Pierre, Zsófia, Raphael, and all my friends for helping me survive this long journey. Finally, a last thought to all the cows that made it happen. ii List of Figures Figure 1.1. Inward FDI Stocks in Poland and Hungary in % of GDP ......................................... 12 Figure 1.2. Outward FDI Stock in Poland and Hungary in % of GDP ........................................ 12 Figure 1.3. Inward FDI Stocks in CEE in % of GDP ............................................................................ 13 Figure 1.5. GDP per capita in CEE and EU15 Countries .................................................................. 17 Figure 1.6. Böröcz’ Matrix of Developmental Pathways in CEE .................................................. 19 Figure 1.7. Labor Productivity in CEE and EU15 countries .......................................................... 24 Figure 1.8. Relative Share of Different Forms of Networks Between Domestic Firms and MNCs in Hungary Between 1987 and 2001 ............................................................................... 27 Figure 3.1. Share of Milk Complying with EU Standards in Hungary ....................................... 81 Figure 3.2. Hungary’s Trade Balance in Dairy Products 2004-2012 ........................................ 83 Figure 3.3. Composition of Hungarian Dairy Exports by Product Category .......................... 84 Figure 3.4. Hungary’s Trade Balance in Dairy Products by Product Category ..................... 85 Figure 3.5. Hungary’s Trade Balance in Dairy Products by Value Added Categories ........ 86 Figure 3.6. Hungary’s Trade Balance in Dairy Products with Poland by Category ............. 87 Figure 3.7. Hungary’s Dairy Exports to Italy ....................................................................................... 88 Figure 3.8. Registered Dairy Farms by Cattle Size in Hungary .................................................... 90 Figure 3.9. Concentration of Dairy Farm Size in CEE ....................................................................... 92 Figure 3.10. Hungarian Gross Foreign Debt 1980-1994 ............................................................. 102 Figure 3.11. Hungary’s Current Account Deficit 1995-2003 ..................................................... 103 Figure 3.12. Hungary’s Beef and Milking Cow Herd 1950-2000 ............................................. 113 Figure 4.1. Dairy Farms by Number of Cows in Poland in 2010 .............................................. 153 Figure 4.2. The Share of Milk in Total Agricultural Output and in Value in Poland ........ 155 Figure 4.3. Cow Herd and Milk Production in Poland 1995-2011 .......................................... 156 Figure 4. 4. Production of Fresh Milk and Higher Value Added Dairy Products ............... 159 Figure 4.5. Share of Milk Complying with EU Standards in Poland ........................................ 162 Figure 4.6. Dairy Trade Balance in Poland 1995-2014 ................................................................ 164 Figure 4.7. Dairy Exports by Value Added Product Type in Poland ....................................... 165 Figure 4.8. Polish Dairy Exports by Three Main Product Types .............................................. 165 Figure 4.9. Total Government Debt in % of GDP in Poland and Hungary 1991-2010 .... 172 iii List of Tables Table 1.1. CEE’s Catching-Up Scenarios with EU15 Economies .................................................. 16 Table 2.1. David Greenaway’s typology of Trade Related Investment Measures ............... 66 Table 3.1. Food Retail Chains in Hungary by Rank in 2014 .......................................................... 80 Table 3.2. Dairy Farms and Cow Herd in Hungary 1989-2002 ................................................... 89 Table 3.3. The Structure of Registered Dairy Farms by Cattle Size in Hungary ................... 90 Table 3.4. Evolution of Polish Dairy Farm Size Structure in the 1990s (thousands of farms) ......................................................................................................................................................... 91 Table 3.5. Number of Registered Dairies in CEE (‘000) .................................................................. 91 Table 3.6. Average Number of Cows Per Dairy Farm in CEE ........................................................ 92 Table 3.7. CEE Dairy Production in 1000 tons .................................................................................... 93 Table 3.8. Milk Yields in CEE after EU Accession (Average liter per cow per year) ........... 93 Table 3.9. Privatization of Agricultural Land in Hungary ........................................................... 111 Table 4.1. Dairy Producers in Poland 1996-2005 .........................................................................