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17 March 2017

Closing the Gap? The Western Community and Hungary

This is an edited version of the speech presented on 21 April 2016 at Corvinus University as part of the conference organised by Ottó Hieronymi of Webster University, Geneva, and Péter Ákos Bod of Corvinus University, Budapest, under the title “Hungary, Central Eastern Europe and the Future of the Western Community”.




Convergence of less advanced member states to some statistical average is one of the declared policies of the European Union (EU), and a significant portion of the EU budget has traditionally been spent to promote this goal since the first enlargement. All new member states in Central and Eastern Europe (CEE 10: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) are recipients of sizeable transfer flows from this budget. Net funding was as large as three to four per cent of GDP of the countries involved under the 2007 to 2013 fiscal plan, and funds of similar proportion serve the socio-economic convergence of these member states in the 2014–2020 planning period.

But convergence is much more than an issue of fund transfers, GDP growth differentials, and similar technicalities of economic growth. Catch-up with richer Western neighbours has long been a mindset of nations of this particular region. What follows is an exposition of the particular social and political importance of the hoped-for income convergence for the peoples and political classes of the region. It is quite natural to compare your wealth, income and living standards to others; families and governments as a rule mark their achievements against some chosen benchmark. The present analysis aims at explaining why catch-up to rich Western neighbours has become an overstrained driver of social behaviour and policy actions in new member states – Hungary being no exception. Perception is as important as anything in this matter: the general public’s scepticism concerning veritable convergence explains a lot of the decline in support for the EU and the West in general, in the public opinion of net recipient countries.

It is more to it, however, than simply perception and emotion. A quarter of century of transition from the bankrupt state socialist regime to open market economy is a long enough period to provide hard facts about underlying trends and to identify particularities. Hungary, a one-time frontrunner in transition, and lately a disputed case, is unique in some respect, but being in the European periphery among a dozen similarly small and open economies, the country offers lessons of wider significance.




It may seem too much to go back in time to the Habsburg Empire to set the scene for the analysis of Hungary’s present socio-economic tendencies, but the historical fact that market economy (“capitalism”) emerged in Hungary during the 19th century when the Kingdom was part of a greater entity, the Habsburg Monarchy, is relevant in this context. Hungarian business life evolved in a province deprived of full national sovereignty, situated in secondary position to Vienna and the hereditary provinces of the Monarchy.

Lack of full sovereignty is a handicap, but this historical situation also involved a plus as far as Hungarian socio-economic progress is concerned: the Hungarian Kingdom was part of a sort of “common market” in the decades that followed the Great Compromise of 1867 between the Crown in Vienna and the Hungarian body politic when inter-empire trade barriers came down. The half a century between the transformation of the empire into Austro-Hungarian Monarchy and the Great War turned out to be the golden era for Hungarian capitalism, if judged by economic growth rates. Budapest emerged as an industrial, trade and administrative centre second only to Vienna. Competitive big domestic firms such as Ganz (cranes, engines, heavy industry), Weiss (from canned food to ammunition), Richter (drugs), Kühne (agricultural machinery), Törley (champagne), Pick (processed food), the state-owned MÁVAG (steam and electric locomotives), Goldberger (textile), the highly developed mills and food processing businesses supplied not just the Hungarian Kingdom but also other parts of the Monarchy, as well as markets further away. Economic development indicators (income, wealth, living standards) had placed the Hungarian Kingdom at roughly 70 per cent of those of the Empire’s core provinces by the end of this era – a significant achievement for sure.

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