The political economy of environmental technological change with a case study of the power sector in Vietnam John Sawdon Submitted for PhD in Development Studies School of International Development, University of East Anglia February 2014 This copy of the dissertation has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests with the author and that use of any information derived there-from must be in accordance with current UK Copyright Law. In addition, any quotation or extract must include full attribution. Word count: 102,080 ii Abstract The escalating imperative of climate change mitigation implies a substantial change in the technologies of electricity generation and supply in industrialised and industrialising countries alike. Understanding how to effect this technological change is therefore imperative if the challenge of climate change is to be addressed. The literature is replete with technology and policy studies investigating technologies, policy instruments and processes of technological change, however, surprisingly little research has addressed the broader political economy context within which any technological change will need to be realised. This research investigates linkages between the sort of systematic environmental technological change implied by the imperative of climate change mitigation and the broader political economy context. Firstly, considering evolutionary economics approaches to understanding technological change, we argue that evolutionary micro-foundations lend themselves to an analysis of political economy processes. Moreover, it is a direct consequence of evolutionary micro- foundations that technological change, and particularly that linked with structural change in an economy, is likely to have important political economy implications. Secondly, we show how heterodox approaches to understanding structural change and development in economic systems are consistent with evolutionary micro-foundations and allow the development of an analytical framework based upon an understanding of the process of economic rent creation and preservation. Thirdly, we apply these insights to a critical reconstruction of the evidence on the development of the electricity services industry (ESI), illustrating the importance of political economy considerations in understanding technological and institutional change in that sector. Finally, we apply these insights to a detailed case study of the ESI in Vietnam, investigating the ways in which political economy factors have influenced the broader development of the sector, and examining how the choice of specific technologies is likely to be affected by political economy of the sector. iii Table of contents 1. Introduction 1 1.1 Climate change GHG emissions and environmental technological change 1 1.2 Identifying the research gap 2 1.3 Overview of the argument 3 2. Getting the micro-foundations right: A critical reconstruction of the literature on technological change 6 2.1 Introduction 6 2.2 Evolutionary economics approaches to technological change 8 2.2.1 Bounded rationality and its implications 9 2.2.2 Hierachical complexity 12 2.2.3 Implications of the evolutionary account 13 2.2.4 Co-evolution of institutions 20 2.2.5 The multi-level sustainability transitions perspective 23 2.2.6 Implications for policy 27 2.3 Are the micro-foundations right? Criticisms of evolutionary approaches 28 2.4 Distribution, vested interests and politics 33 2.4.1 Theorising politics in the process of technological change 33 2.4.2 The emergence of political economy 37 2.4.3 Two important criticisms and two responses 41 2.4.4 Political economy and technological change in economic history 43 2.5 Conclusion 44 3. Catch-up, industrial policy, institutions and political economy 47 3.1 Introduction 47 3.2 The ‘institutional turn’ and the (re)emergence of political economy 49 3.2.1 From institutions to good governance 51 3.2.2 A critical review of the empirical evidence 55 3.2.3 Embracing the political economy 60 3.3 A conceptual framework for understanding political economy of economic growth and technological change 62 3.3.1 Technology and political economy 63 3.3.2 Drawing on the experience of developmental states 69 3.4 Conclusion: political economy, technology and environment 75 iv 4. Political economy and technological change in the electricity supply industry 79 4.1 Introduction 79 4.2 Understanding the dynamics of power sector development 84 4.2.1 Electrical utilities and the emergence of a techno-economic paradigm 84 4.2.2 Co-evolution of institutions: ownership and control of power systems 96 4.2.3 Politics and the coevolution of institutions 102 4.2.4 Development of the ESI in developing countries 106 4.2.5 A universal techno-economic paradigm? 108 4.2.6 Dynamics of ESI liberalization in the industrialized world 110 4.2.7 Dynamics of ESI liberalization in developing countries 121 4.2.8 Distilling the implications for technological change 132 4.3 Conclusion: Political settlements, holding power, rents and the ESI 134 5. Introducing the Vietnam case study 141 5.1 Introduction 141 5.2 Vietnam as a case study 142 5.3 Vietnam’s evolving political economy context 142 5.3.1 Characterising the political economy of the reform period 144 5.3.2 Understanding Vietnam as a developmental state 147 5.3.3 Competitive clientism and the weak state 149 5.4 Conclusions: Implications for the ESI 156 6. The political economy of the power sector in Vietnam 158 6.1 Introduction 158 6.2 The development of the ESI in Vietnam 160 6.2.1 Post-war reconstruction and central planning 1976 – 1986 160 6.2.2 Building socialism, building a techno-economic paradigm 163 6.2.3 Rapid growth of the ESI in the reform period 1986 – 2010 166 6.3 Institutional development and reform 173 6.3.1 Institutional arrangements prior to Doi Moi 174 6.3.2 The material drivers of ESI reform 175 6.3.3 The first wave of reform: formation of EVN and the energy parastatals 180 6.3.4 The faltering entry of FDI 186 6.3.5 Continuing pressure to reform 196 v 6.3.6 The second wave of reforms 201 6.3.7 The search for capital 209 6.3.8 EVN threatens the whole show 224 6.4 The tariff rises 229 6.5 Conclusion 232 7. Analysis and conclusions. The political economy of technology choice in Vietnam’s power sector 237 7.1 Introduction 237 7.2 The political economy of technology choice in Vietnam’s ESI 238 7.2.2 Ownership profile and technologies 239 7.2.3 Hydropower 243 7.2.4 Coal 246 7.2.5 Natural Gas 249 7.2.6 Renewables 252 7.2.7 Nuclear 253 7.3 Conclusions on the political economy of technology choice in Vietnam 255 7.4 Holding power, political settlements and rents in the Vietnamese power sector 256 7.5 Implications for climate change mitigation in Vietnam 259 7.6 Caveats and limitations 260 7.7 Recommendations for future study 261 Bibliography 263 Annexes 311 A2 Annexes to Chapter 2 311 A2.1 Linear accounts of technological change from ‘supply-push’ to ‘demand-pull’ 311 A2.2 Review of empirical evidence on induced innovation 317 A2.2.1 The empirical evidence on induced innovation 318 A2.2.2 Empirical evidence on induced innovation and environmental technological change 319 A3 Annexes to Chapter 3 326 A3.1 Technological catch-up: ‘Hard-slog’ or ‘Leap-frog’? 326 A3.1.1 Neoclassical growth theory 330 A3.1.2 A heterodox approach to development: National Innovation Systems 338 A3.1.3 What does all this tell us about technological catch-up? 342 A4 Annexes to Chapter 4 345 vi A4.1 Emerging political imperatives, emerging energy imperatives? 348 A5 Annexes to Chapter 5 355 A5.1 Case study methodology 355 A5.2 Sources of empirical evidence 356 A5.3 Vietnam’s economic context and the prelude to reform 358 A5.3.1 Recent economic performance and perceptions of future prospects 358 A5.3.2 The context for economic reform 360 A5.4 Vietnam’s energy resources and prospects 363 A5.4.1 Energy sector development 363 A5.4.2 Energy resources 366 A6 Annexes to Chapter 6 372 A6.1 Early development of the ESI in Vietnam 1892 – 1975 372 A6.2 Images of electrification in state propaganda 375 A6.3 Additional data 377 Tables 3.1. Rents and the rights sustaining them 74 4.1. Capital output ratios for selected utilities and manufacturing industry in the USA 1900 – 1937 98 4.2. “Standard textbook model” for electricity reform 120 4.3. Developing countries taking key reform steps in the ESI 1998 124 4.4. Main economic rents associated with the ESI, technologies and groups 140 5.1. Key social and economic indicators for Vietnam 1990 and 2010 144 6.2. Foreign private investment in captive generation in Vietnam 1990 – 2005 188 6.3. Foreign BOT power projects being developed in Vietnam December 2001 189 6.4. EVN IPOs 2005 – 2010 213 6.5. Power plants developed by TKV, PVN and Song Da 2000 – 2012 217 6.6. Foreign generation project pipeline in June 2013 223 6.7. Main economic rents associated with the ESI in Vietnam, technologies and groups 234 7.1. Installed capacity by ownership and type December 2011 241 A2.1. Kondratiev long waves and techno-economic paradigms 325 vii A3.1. Early examples of catch-up (proportion of GDP per capita of world leader) 326 A3.2. Later instances of catch-up in East Asia (proportion GDP per capita of world leader) 327 A3.3. Catch-up in selected countries since 1820 329 A4.2. Foreign ownership of electric utilities for selected countries: percent of a country’s capacity, output or assets of electric utilities owned and controlled by foreign firms 1913 – 1972 345 A4.2.