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8 March 2020

Hungary Squares The Circle Of Globalisation

"What does a smallish Central European country have to teach the rest of the world about inclusive growth, fighting income inequality, and social cohesion, all while steering clear of protectionism and maintaining an open economy – in short, 'squaring the circle' of globalisation? In the case of Hungary quite a lot, judging by just about any economic metric you care to name."

 

What does a smallish Central European country have to teach the rest of the world about inclusive growth, fighting income inequality, and social cohesion, all while steering clear of protectionism and maintaining an open economy – in short, “squaring the circle” of globalisation? In the case of Hungary quite a lot, judging by just about any economic metric you care to name.

Hungary has received its share of bad press. Prime Minister Viktor Orban’s repeated calls1 for “illiberal democracy” are bound to alarm, and it is not often that EU political parties consider expelling2 national affiliates. On the other hand, the recent surprise defeat3 of Orban’s Fidesz party in local elections in Budapest suggests democracy is alive and kicking in Hungary, as does an active protest culture.4

Moreover the political controversies, while grounded in legitimate concerns, threaten to obscure one of Europe’s economic success stories at a time when much of the rest of the continent is drifting – and might well benefit from policies modelled on Hungary’s economic reforms.

The numbers are clear enough. Hungary’s economy has consistently outperformed its neighbours and the EU at large, posting annual GDP growth of 4.1 per cent in 2017 and 4.9 per cent in 2018,5 with forecast growth of 4.6 per cent in 2019 per the IMF.6 That compares favourably with the EU’s record of 2.5 per cent in 2017 and 2 per cent in 2018,7 and a forecast 1.1 per cent in 2019.8

Nor is this simply a result of juxtaposition with developed countries like France, Germany and the UK, where growth rates over larger bases are naturally lower.

Focusing on more meaningful comparisons with its nearby neighbours, from 2015 to 2019 Hungary’s economy will have expanded 38.5 per cent in current dollar price terms,9 compared to 32.5 per cent for the Czech Republic,10 25.1 per cent for Slovakia,11 and 24.2 per cent for Poland.12

The roots of Hungary’s resurgence go back to the aftermath of the 2008 financial crisis, when it was forced to accept a bailout from the “troika” of the IMF, European Commission and European Central Bank, according to László György, Hungary’s State Secretary at the Ministry for Innovation and Technology, who has chronicled the country’s comeback – and its broader lessons – in a new book, Creating Balance, pitched to a global audience.13 György gave an overview of its success, and the unorthodox economic policies underpinning it, during an interview as part of his book tour in Washington, DC.

György recalled that Hungary (like fellow bailout recipients Greece and Romania) adopted stiff austerity measures in line with the troika’s demands, predictably leading to widespread privation and anger over plummeting social spending from 2009–2010. But unlike in Greece, where the will to undertake structural reforms has lagged and debt remains a crushing burden, after coming to power in 2010 Fidesz (Young Democrats Association) of Prime Minister Viktor Orban was able to implement a far-reaching shakeup of Hungary’s economy, including a major overhaul of taxation and social spending: “We paid back the credit in advance to the IMF and the EC, and then we started following our own reform programme.”

These reforms were not simply following neoliberal prescriptions, György emphasised: “These policies are not ideological; they are neither left nor right. This is pragmatic economic policy. It is based on theory and the current needs, what is best for the citizens.” Many of the theoretical underpinnings were inspired by Western economists like Joseph Stiglitz, a Nobel laureate at Columbia University, and Dean Baker of the Center for Economic and Policy Research in Washington, DC.

The reforms had to steer a careful path if Hungary was to retain the advantages of globalisation while mitigating its negative impacts: “Ten years ago Hungary was one of the most open economies in the world, in terms of foreign investment per GDP. But openness always correlates with vulnerability. What was important for us was to keep our openness, and minimise the vulnerability of the economy.”

Perhaps the biggest changes came in the area of tax policy: while Hungary decreased its corporate tax rate to 9 per cent (the lowest in the EU) to all companies to attract FDI and boost investment, some specific surtaxes were levied temporarily on sectors dominated by “monopolies and oligopolies” (many of which had contributed to the original crisis, for example the financial sector with excessive risk-taking): “The Hungarian government was brave enough to tax these companies. We said, ‘we are in a crisis, we have to manage this crisis somehow’. And we asked them to contribute to the crisis management.”

At the same time the government adopted a flat-rate personal income tax of 15 per cent, a radical measure giving Hungary one of the lowest overall tax burdens in Europe. This let employers reward workers more effectively, increasing competition for labour: “In 2009, if you wanted to increase the wages of an employee with average earnings by $100, $72 were taken away by the government tax, and only $28 went to the employee. That $72 is reduced to $45 today, so $55 goes net to the account of the employee. And if the employee on average wage has three children, only $18 is taken away by the government, so $82 remains with the employee.”

As a result, György boasted that Hungary was able to “create a balanced budget and put state debt on a decreasing path over the last decade”, while also stimulating consumer demand by leaving more money in the pockets of the middle and working classes, thus returning the economy to a growth path: “We favoured all those who could contribute to the prosperity of the sustainability of the Hungarian economy, society and environment: wage earning families having children, foreign direct investors creating jobs, and local small and medium-sized companies.” As part of this “we more than halved our net foreign liabilities ratio, and we will bring it to zero by 2023”.

This approach has also allowed Hungary to fund a generous pro-family policy through tax breaks, intended to counter the same demographic trend now threatening developed and developing countries alike (although as in other countries with pro-natal policies, it remains to be seen how effective tax breaks are in altering social and cultural phenomena). Looking ahead, the government is considering further lowering the flat personal income tax rate to 9 per cent in 2021.

This multipronged strategy was carefully thought out to address the harmful effects of globalisation, focusing on employment to boost demand, György emphasised. For example, while courting “foreign direct investment that creates workplaces in Hungary”, the government has also worked to “create a favourable environment for domestic companies, small and medium-sized enterprises who give jobs to the middle and working classes”. Towards that end, the average tax on value added by SMEs has “fallen from 54 per cent in 2009 to 36 per cent in 2019, is still decreasing and will be 30 per cent by 2023”.

Lower costs and a favourable investment environment mean Hungary is well-positioned to benefit from its proximity to Germany and its high-end manufacturing supply chains: last year Mercedes, Audi and others produced over 500,000 cars and 2.5 million engines in Hungary, and BMW recently revealed plans for a new plant that will manufacture 150,000 vehicles a year by 2023. With the fiscal crisis past, the government plans to continue unwinding the higher corporate tax rates to encourage continued foreign and local investment.

It will not necessarily be smooth sailing on the Danube in the near future. Hungary’s involvement in regional and global supply chains means it is still unavoidably exposed to the negative economic currents now circling the globe. With Germany’s export sector slowing14 sharply amid continuing uncertainty due to Brexit and the US–China trade war, the chill is now being felt in Central Europe: the IMF forecasts15 Hungarian GDP growth will slow to 3.3 per cent in 2020 (still slightly ahead of 2.5 per cent for the Czech Republic and 3.1 per cent for Poland). But the policies implemented over the last decade should help cushion the impact and make Hungary a source of stability – rather than a liability – for the EU in years to come.

(The article is a courtesy of Erik Sass, Editor-in-Chief of The Economic Standard based in Washington, DC, published on 25 November 2019. See online at https://theeconomicstandard.com/hungary-squares-the-circle-of-globalisation/.)


 

 

Notes:


1 Darko Janjevic, “Viktor Orbán: Era of ‘Liberal Democracy’ Is Over”, Deutsche Welle, dw.com, 10 May 2018, www.dw.com/en/viktor-orban-era-of-liberal-democracy-is-over/a-43732540

2Hungary Orbán: Europe’s Centre-right EPP Suspends Fidesz”, BBC.com, BBC News Service, 20 Mar. 2019, www.bbc.com/news/world-europe-47622921

3 Gergely Szakács and Márton Dunai, “Hungary’s Opposition Wins Budapest Election, Makes Gains in Other Cities”, Reuters, 13 Oct. 2019, www.reuters.com/article/us-hungary-local-election-budapest-resul/hungarys-opposition-wins-budapest-election-makes-gains-in-other-cities- idUSKBN1WS0QM.

4 Fanni Kaszás, “Opposition Parties Protest against Erdogan Visit”, Hungary Today, 7 Nov. 2019, https://hungarytoday.hu/opposition-parties-protest-against-erdogan-visit/

5Hungary – Gross Domestic Product in Constant Prices Growth Rate”, Knoema, knoema.com, 2019, https://knoema.com/atlas/Hungary/Real-GDP-growth

6IMF Raises GDP Growth Forecast for Hungary”, Budapest Business Journal, 16 Oct. 2019, https:// bbj .hu/economy/imf-raises-gdp-growth-forecast-for-hungary_172716.

7 The World Bank, “GDP Growth Annual (%) – European Union”, World Bank Group, 2018, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=EU

8 European Commission, “Autumn 2019 Economic Forecast: A Challenging Road Ahead”, 7 Nov. 2019, https://ec.europa.eu/commission/presscorner/detail/en/IP_19_6215

9 H. Plecher, “Hungary: Gross Domestic Product (GDP) in Current Prices, from 1984 to 2024”, 6 Nov. 2019, Statista, www.statista.com/statistics/339869/gross-domestic-product-gdp-in-hungary/

13 László György, “Creating Balance – The Mission of Economic Policy”, Roundtable at the Los Angeles World Affairs Council & Town Hall, 14 Nov. 2019, www.lawac.org/EventDetail/eventid/30669. For the Hungarian original see László György, Egyensúlyteremtés – A gazdaságpolitika missziója, Századvég Kiadó, 2017; for the English language edition see László György, Creating Balance – The Mission of Economic Policy. Why Unorthodox Economic Policy, Századvég, 2019.

14 Craig Sterling, “Global Economy on Thin Ice with Frail Trio from China to Germany”, Bloomberg, 14 Nov. 2019, www.bloomberg.com/news/articles/2019-11-14/global-economy-on-thin-ice-with-frail-trio-from-china-to-germany

15 IMF Data Mapper, “Real GDP Growth – World Economic Outlook 2019”, International Monetary Fund, Oct. 2019, www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD.

 


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