The focus of the global economy is heading towards the east
Interview with György Matolcsy, Governor of Magyar Nemzeti Bank (MNB), the central bank of Hungary
The focus of the global economy is heading towards the east
The Economics of Geography

The focus of the global economy is heading towards the east

MNB supports the transition to long-term sustainability with a number of instruments, according to Governor György Matolcsy (Photo: MNB)
Tamás Nánási - Kézdy 15/02/2023 05:00

Sooner or later the West will have to realize that China’s continuous rise can no longer be halted, said the Governor of Magyar Nemzeti Bank (MNB), the central bank of Hungary in an interview with our journal. György Matolcsy also pointed out that the shift in the world’s center of gravity is a long-term, non-linear process, but at the same time the multipolar arrangement is clearly taking shape with the rise of the Asian power centers. According to the head of the Hungarian central bank: Hungary is now at the forefront of the map of Asian hubs, which puts it in a unique position to connect the two halves of Eurasia.

- Mr. Governor, you have often expressed your ideas about the changing world order and the rise of Eurasia over the past decade. How do you now see this geopolitical transformation in light of the serious consequences of the pandemic?

- The shift of the world’s center of gravity in terms of power and economy has been a long-term and non-linear process that is not happening all at the same time in areas such as technology, financial systems, spheres of influence and military capabilities. For example, the global financial dominance of the United States seems to be permanent, although China is showing quick progress in revaluing segments such as artificial intelligence, digitization of production and services — in other words hybrid systems — and in the field of renewable energies. The rise of Eurasia remains a determining process of our century. This will put an end to the Atlantic era, which has lasted for five hundred years during which Western Europe and later the United States built a unilateral world order through their economic, technological and military advantage. Globalization as we know it reflects American hegemony and the values of Western liberalism, but recently other civilizations have also gained ground on the world stage. With the rise of China, India and other Asian power centers, a multipolar system is clearly taking shape today. Classical inter-state diplomacy is being replaced by complex networks of relations involving a wide range of stakeholders.

- What are the tangible signs of this process?

- The fact that China has gained the position of the world’s largest capital exporter should be emphasized. The country’s annual foreign direct investments (FDI) expanded by 12.3 percent in 2020 and exceeded USD 153 billion. Chinese capital has already reached every country and is increasingly serving the financing demands in the regions covered by the Belt and Road Initiative. The reason I bring up capital as an example is because our age is again dominated by capital-intensive business models. Today, the capital requirements of digital developments are increasing as our future is determined by complex fusion systems that combine smart solutions with physical infrastructure and manufacturing processes.

An elegant place on the map

- How is Hungary affected by capital flows in East and Southeast Asia?

- Chinese capital is also knocking on Hungary’s door. China was the largest foreign investor in Hungary in 2020. The value of Chinese investment exceeds more than USD 5 billion in Hungary and it helps provide employment for more than 16,000 people.

But it is not only about China. In 2019, South Korea was the largest investor in Hungary. The recent visit of South Korean President Moon Jae-in was a clear indication of the revaluation of the strategic partnership between the two countries. Corporate investments worth USD 4 billion are currently under way in Hungary. South Korea’s interests in Hungary include leading companies in the electronic and automotive industry. Knowledge transfers will soon be realized not only in these companies’ plants, but also at a Korean university to be established in Hungary. Last year, South Korea announced an ambitious economic strategy program entitled the Korean New Deal, of which the foundation stones (green economy, digitization and social safety net) are also trendsetting for Hungary. Singapore, a city-state the forefront of economic competitiveness in many areas (Smart Nation and Green Plan) for a long time, should also be mentioned in this context. . Hungary has been strengthening cooperation with Singapore, including in the field of digital finances. So Eastern Partnership is more and more about knowledge transfer both in Hungary and in our region.

- What role can Hungary play in cooperation with Eurasia?

- It has now become clear that the last few decades of success in Central and Eastern Europe bear a close resemblance to the development patterns of the Asian tigers and then China’s large cities. Similarly to the Asian model, our region also relies on a highly skilled workforce and the excellence of its processing industry. Also, a regional cluster has been established in Central Europe, which is currently linked to the world economy predominantly via Germany’s export mechanism. At the same time, our capabilities make us suitable for connecting directly to the eastern nodes as well. Hungary has come a long way in this direction with its Eastern Opening program, which has strengthened our economic ties with Central Asia, the Middle East and with the Chinese giant of course. The leading Asian centers and their investors and decision-makers have already dropped a pin on the map of Hungary and Budapest, which puts them in a unique position in connecting the two parts of Eurasia, the European Union and China.

- What common interests do the European Union and China have in today’s complex, fraught environment?

- The European Union is in a special position as it is seeking its place within the Atlantic Alliance, not only in relation to China, but in relation to the United States as well. As far as China is concerned, sooner or later the western world will have to realize that its relentless onward growth and progress can no longer be halted. Instead, efforts should rather focus on drawing from historical patterns. Eurasia has always been one of the world’s dominant continental regions and it has already experienced various phases of the migration of the global economic center of gravity. This center of gravity is now shifting to the east again, as it used to be for centuries before the 1500s. Europe should recall the successful cooperation patterns of that time, embodied in the flow of goods, knowledge, culture and technology along the old Silk Road. Obviously the world has become much more complex since then, but this is why we should be thinking more in terms of networking.

Between hybrid systems

- What are the key characteristics of modern networks?

- The old networks also supported knowledge sharing, but this feature has become crucial in the new era. If we look at the innovation ecosystems in Asia or even the spread of mobile payment solutions in Africa, we should see that it has never been easier to make a technological leap and exponential progress than with the networks available to us today. These networks create hybrid systems in which the digital and physical worlds and even the human body and existence are intertwined. The integration of smart cities, nanotechnology, robots, the human brain and computers all sound futuristic but most of them are already in progress.

Hungary is in a unique position to connect the two halves of Eurasia, Governor György Matolcsy says (Photo: MNB)

- As Governor of the National Bank of Hungary, you are deeply involved in these developments and megatrends. Does this mean that central banks also have to take the transformation in the areas of technology, geopolitics and other areas into consideration?

- Naturally. If we look at the issue in a narrower sense, the basic function of central banks, that is the mandate to control inflation and maintain financial stability, requires us to take these factors into consideration. On top of inflation becoming a problem again right now, we have also had to talk a lot about factors such as the global shortage of containers, the shortage of microchips and the turbulence on the energy market, which is also linked to the actions being taken against climate change. Since the industrial revolution, the financial system, including central banks, has played a crucial role in financing innovation and socio-economic transition. This is also true in respect of today’s megatrends. For example, political will would not be enough to tackle climate change, but rather an entire new green financing system is required. Financial institutions and governments will have to enter into strategic partnerships to stimulate future investments not only in the area of environmental sustainability but also for the turning points of innovation and technology.

- In what ways can the National Bank of Hungary take part in this partnership?

- Thanks to its new green mandate, the National Bank of Hungary is already supporting the transition to long-term sustainability with a number of instruments such as the Green Monetary Policy Instrument Strategy and the Green Home Program. As a matter of fact, Parliament amended our mandate in the Central Bank Act this year, as a result of which we have been granted the authorization to support policies related to environmental sustainability without jeopardizing the primary objective of the bank. In addition, the creation of a new type of competitiveness has recently been supported by the Growth Loan Programs and our financial innovation initiatives (Innovation Hub and Innovation Finance Test Environment, better known as the Regulatory Sandbox).

- How is the mission of the Hungarian central bank to strengthen relations with Eurasia related to all this?

- Megatrends of sustainability and technology are inseparable from geopolitical transformation. For this reason, the National Bank of Hungary has been treating the expansion of its complex international partnership network as a priority issue, with special emphasis on eastern relations. This is one of the reasons why we created our event entitled the Budapest Eurasia Forum within the framework of which we have been strengthening the exchange of knowledge and experiences both west to east and east to west for three years. It is remarkable that participating in the forum was considered important for Asian decision-makers at the highest level this year as well: the world’s leading central bank managers, Yi Gang, Governor of the People’s Bank of China, Tian Gouli, Governor of the China Construction Bank (which opened a branch in Hungary recently), Liu Zhenmin, UN Deputy Secretary-General and Yang Su Park, Executive Director responsible for economic research at the Central Bank of Korea all participated.

Eurasia also means new thinking

- What achievements are linked to the names and institutions of the speakers in the field of central banking and finance you just mentioned?

- The major central banks in Asia have recognized the importance of using targeted instruments and the significance of balances and sustainable economic paths in general. Many examples could be cited, but in relation to the featured speaker of the Budapest Eurasia Forum, Yi Gang, Governor of the Chinese central bank and the topic of digital central bank liquidity is the most obvious to mention. China has obtained the most practical experience in developing and testing this among major economies. There are several indications that the future Chinese digital central bank liquidity, the digital Renminbi, combined with the fusion of technology and financial assets and the Belt and Road initiative, will give further impetus to the Eurasian era.

- Many different predictions and opinions are circulating in relation to digital banknotes. How one can grasp the essence of this development?

- Indeed, global public discourse tends to interpret the development of digital central bank liquidity as a race for life and death that takes place both between the states and as a result of the pressure from cryptocurrencies and big tech companies. In fact, first and foremost there are important theoretical and practical experiments taking place inside central banks that could lead to a new type of digital currency. This financial asset will result in a money revolution, but one in which control does not slip out of the hands of central banks.

Above all, central banks will have to use this new asset to finance investments in the sustainable and digital economy and the creation of new industries. In this way, digital central bank liquidity can strengthen the supply side of the economy rather than amplifying the perceived inflationary effects.

- How can we ensure that Eurasia, as a new pole, truly emerges from these processes as the winner of the century?

- The key to success lies in changing the way of thinking. Economic sciences still need renewal built on intellectual resources, sustainability and the principle of life (the principle of maximum impact). But it is not just economics that needs a shift in attitudes. In general, we have to move to a different way of thinking, rather than clinging to the one that has led to the world’s current socio-economic problems. This truth is well-expressed in the ancient Chinese wisdom from Confucius: “Learning without reflection is a waste of time; reflection without learning is dangerous”.

This article was originally published in our Hungarian-language magazine Eurázsia in 2022.

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