WHITER HUNGARIAN MITTELSTAND?

For a centre-right party, for any political party really, to win a democratic election by a two-thirds majority is rare enough (as in 2010). To repeat the experience is unprecedented. One can well imagine the Fidesz-haters – and their number is legion – muttering into their bowls of gruel about the dark arts practised by Fidesz and wondering just how Orbán got hold of Harry Potter’s mobile number.

Yet for all that, while the second two-thirds majority at the end was a close run matter, Fidesz’s overall victory was not in serious doubt before the 6 April 2014 vote. Two years ago, say, the situation was not as clear-cut. The economy had not yet begun to pick up, and the Hungarian government was in constant trouble with the EU Commission. It was repeatedly denounced in the Western press as a fascist, semi-fascist, fascistique, fascistoid, fascisant (take your pick) formation that was, variously, a disgrace to Europe, a danger to democracy and generally in thrall to a far-right peril – the kind that leftwing commentators sketch when they truly want to frighten themselves and, thereby, bask in their own superior virtue.

Indeed, what is extraordinary about the descriptions and analyses of Hungary is how easy it has been for both domestic and foreign commentators to construct a fantasy Hungary on which they can project their own anxieties. Seeing that the European left sees itself as the sole proprietor of Enlightenment rationality – Habermas’s “communicative rationality” being a noteworthy case in point – the way in which this self-same left has so readily moved into an echo chamber and hears only its own amplified narrative fills one with a sense of wonderment. The expression “epistemological closure” was formulated precisely for situations like this.

So we should not be surprised that neither domestic nor foreign observers of Hungary have been able to account for Fidesz’s two-thirds majority the second time round. Some will take refuge in Ágnes Heller’s explanation – which I witnessed in person – that “Hungarians are servile”. But even she and her acolytes will know that there is more to it than servility.This essay discusses the middle class in Hungary, not from a sociologist’s angle, but its present situation and social weight. The title invokes a particular social construct, one that played a key role in the concept as well as in the successful practice of Germany’s Sozialmarktwirtschaft back in the 1950s.

Social market economy differs from other versions of market based socioeconomic system in many aspects; a healthy and socially active propertied middle class equipped with entrepreneurial skills and civic values is one of the features that distinguishes it from several other varieties of successful market economy (“capitalism”). Yes, it is important to underscore, given the widespread misunderstanding about it, that the social market economy was not only a German-accented variety of capitalism (cf. Walter Röpke, Walter Eucken, Konrad Adenauer) but also one that proved to be a very successful version. The adjective “social” does not imply less competition or restrained performance in the original model, quite the contrary: the Ordoliberal school that provided the theoretical underpinning for what became known as the German economic miracle of the 1950s and 1960s called for more competition and in particular more competitors, that is, for a large number of economically active agents. This version of market order is thus called social because it aims at the widest possible inclusion of members of society into economic value generation.

The contrast is stark with a “one third–two thirds” society where just one third of the population have good jobs and taxable incomes, and are the source of welfare subsidies that support the idle two thirds who are hence encouraged not to hinder the efficient one third in performing its productive activities. Needless to say: a social market regime has nothing to do with state socialism either. Socialist regimes, such as the ones we lived through in this part of the world some decades ago, were characterised by a centrally organised production system devoid of the ethics and the values of market economy, and was “social” in name only. It divided society into two blocks: the nomenclature (the party-state bureaucrats) and the governed masses. Such a regime inevitably degenerates into uncompetitive and sluggish bureaucracy over time.

Now you may say that the German concept and particular socio-economic period of the social market economy belongs to the past, however successful it may have been, and you may be right. Still, there are good reasons to revisit it as a concept and to reassess the lessons we can learn from it. One of the reasons is an anniversary: it was a quarter of a century ago that the socialist regime in Hungary, as elsewhere in the region, suddenly collapsed. The Preamble of the new Hungarian Constitution of October 1989 evoked the social market economy as a goal to be achieved during the transformation of the society. Note that this time was perhaps the heyday of what is now called “global neo-liberalism”. This was the time when the advocates of the unfettered free market concept were flushed with self-confidence, and intoxicated with business exuberance; they reacted rather arrogantly even to the slightest reservations about the general applicability of the efficient market hypothesis. Given this background, it took some courage and intellectual prowess for the drafters of the Hungarian Constitution in 1989–1990 to incorporate the very Central European concept of the “social market” into the text.

True, twenty-five years later, one is forced to conclude that the social and economic development of the country has taken another direction. Some academics claim that the original concept of the Sozialmarktwirtschaft was too German and as such it simply was not applicable ab ovo to the Hungarian conditions of the early 1990s. Others posit that the extremely fragile financial situation in 1990 in Hungary prevented the Antall cabinet from putting into practice its social market ideals, as crisis management necessarily took preference; therefore no one can tell how the concept would have performed had history been kinder to us.

Certainly, the financial room of manoeuvre was very limited in 1990, and the lack of funds simply did not allow the Hungarian government to make good on a major part of its programme. Still, certain key policies in the very early period of transition clearly had social market contours. Thus the policy mix that the Antall government applied significantly diverged from the mainstream policy recommendations of influential political, business and academic circles, so active in the Central and Eastern Europe region. Hence one wonders how the particular social economy model of the Antall government would have fared under friendlier international and financial conditions. Even so, the first freely elected Hungarian government managed to implement important measures using this model such as public support to small and medium-sized domestic businesses through subsidised loans and preferential treatment of domestic entrepreneurs in privatising state assets. Also, it is noteworthy that the Antall government was the most active in the region to create (or rather “re-create”, viewed from a historical perspective) the necessary institutions of market order in the very first years: for example, a banking law, an Act on central banking, accounting and insolvency rules, recapitalisation of the banking industry.

It should be stressed, this was the era of global illusions about the efficiency of selfregulation of business players, around two decades before Federal Reserve chairman Alan Greenspan would admit to being “shocked” that free markets are in fact flawed. These measures fitted well with the German-style social market concept and its theoretical (so-called Ordoliberal) foundation which emphasises the importance of the institutional framework of the market economy and the necessity of enlarging the entrepreneurial classes. It is a pity that more could not have been done, and that the Socialist government which followed Antall failed to retain, let alone carry on, the measures needed to build up the social economy system as laid down in the Constitution.

It may be history, but it can still be useful to recall that heroic period and contrast it with the present. At that time and for some time after, the Hungarian economy was in the vanguard of the region in its drive to modernity, thanks to its superior performance in institution building and triggering an entrepreneurial revolution. The Czech economy, in contrast, failing to clean up banks’ balance sheets or properly set up a market-based institutional framework from the start was back in recession within a decade of the Velvet Revolution. Similarly, the Polish transformation got stuck a decade after the regime change due to inherited structural weaknesses in industry. Unlike in Hungary, the first post-transition Polish governments did not take bold structural measures in the early years. Comparative statistics showed the Hungarian economy performed pretty well in the region, even if many Western analysts and opinion shapers originally declared the Polish “shock therapy” under Balcerowicz and the rapid Czech voucher privatisation scheme of Václav Klaus to be greater successes.

One can reasonably argue that the Hungarian strategy of privatising the oversized state owned enterprise sector proved more successful, or if you prefer, less defective. Hungary also managed to open up the economy in a reasonably efficient way. Hungary attracted by far the most foreign investment to its production sector during the first post-transition decade. Importantly, key policy measures did not mechanically follow external advice in the early years: Hungary’s transformation was deliberately more gradual in terms of macroeconomic adjustment, deregulation and liberalisation than recommended by the “Washington Consensus”. Macroeconomic policies were more gradual than in the Polish, Czech or Russian cases (the latter having particularly grave consequences).

Still, the same data also proves that the early period of the Hungarian regime change was mistakenly classified by many a disapproving analyst as “too gradualist”. True, the economic policy measures right after the political changes did not follow the majority wisdom of the age (it was only later after the so-called “Bokros (stability) package” in 1995 that external circles looked on Hungary as warmly as they did on the activities of Balcerowicz or Klaus). But despite the lukewarm verdict of critics, deep down the real economy had changed drastically in Hungary: high energy intensive sectors quickly receded, while new industries such as the automotive and consumer electronics sectors emerged and blossomed, most notably the new Opel plant in 1991, Suzuki’s in 1992, and Audi in 1993. These plants are to this day critical elements of Hungary’s industrial production and economic growth, a fact which can also indicate sadly that other parts of Hungarian industry have not prospered as well, an aspect that brings us back to the idea and practice of the social market economy.

The centrepiece of the social market economy is a strong small and medium-sized enterprises (SME) sector, and a vibrant middle class. Effective interest harmonisation of labour and capital is also a core part of the concept, see Germany’s practice of Mitbestimmung (co-decision). The new Hungarian government took the first steps in these directions in 1990 but after the change in government in 1994, Hungarian politics changed direction. While the strengthening of the middle stratum remained on paper, in practice the Socialist government relied instead on big foreign investors, and allowed them to purchase public utilities, insurance companies and banks, a policy direction that helped improve macroeconomic statistics but added to distortions in industry and ownership structure. Export-oriented policies, warmly recommended by many, also strengthened the position of larger firms. What developed soon was an excessive duality in the economy consisting of, on the one hand, a limited number of large (mostly foreign-owned) enterprises, and a domestically-owned SME sector that was largely undercapitalised and characterised by low productivity.

Privatisation then came to a halt under the first Orbán cabinet in 1998 as the new government returned to the policy of strengthening Hungarian-owned ventures. The evolution of the interest intermediation institutions, however, got stuck: the policies of both that government, and the second Orbán cabinet eight years later, went against the tenets of the social market economy concept. The Prime Minister and his party instinctively rely on government control rather than on the concerted efforts of the interested social parties. The Socialist–Liberal coalition (2002–2010) meanwhile launched a series of welfare measures that, in consequence, led to a low employment ratio even when economic growth was relatively high. Generous welfare schemes and other public expenditures during that period placed a heavy tax burden on economically active members of the society, particularly on the middle class. Business success depended on the entrepreneur’s closeness to the political class, as a glance at the list of winners of public procurement tenders showed; indeed economic favouritism unfortunately is a phenomenon that has survived the rule of the Left.

It is not difficult to conclude hence that Hungarian economic policy making and social tendencies have gradually turned away from most of the recommendations of the social market economy, and taken, what is in my opinion, an unfortunate direction. The concept of the social market economy appears to have become irrelevant here, despite it having been enshrined as a strategic goal in the Preamble of the Constitution, just as it is, interestingly, in the Polish Constitution.

The new Fundamental Law (Constitution) of 2012 does not mention the term social market, although it is missed, at least by this author. But there is a more important point here: the text of the Fundamental Law is silent on what social model we aspire to, one of the many lacunae and weaknesses of the Act that are a result of the rapid way it was drafted.

So social market economy seems a closed chapter behind us. Yet, what we have before us is a long list of grave problems such as the unhealthy duality of the economy, lack of competition in various sectors, the moribund state of SMEs. I believe these issues would have been better addressed by the logic of social market order, given its emphasis on competition, entrepreneurship and social inclusion. Instead, what has emerged is bloated public ownership and state intervention which is substituting private initiative.

This is the very reason why a debate on the varieties of capitalism is underway. Václav Klaus famously declared in 1990 that “market economy to be real does not need an adjective”. At the time it sounded to me a highly debatable idea. Numerous real life examples of successes and failures have since indicated that the bare term “market economy” is too vague and too general, and needs qualification. Scandinavian capitalism is very different from the Mediterranean version; market order in the three Baltic states differs considerably from that in Bulgaria and Romania. The German economy may have changed from the original Rheinish model, but when today’s German economy is compared with the British and Irish ones, it can be seen that it has preserved a lot of the original concept. These are just European varieties of capitalism; many other versions exist in other continents. The Economist ran a front page story, for instance, about “Crony Capitalism”. This is another version of market economy that is unfortunately virulent in many countries; a market economy inasmuch as the market is the framework for conducting economic activity but the “free market” appears, at best, only in public speeches of politicians. In some countries east and south of the CEE region, market competition is heavily subdued, and political connections count more in matters of business success or failure than do factors like innovation, economic efficiency and product quality. The newspaper quotes numerous examples from the Asian context, but we know that the European semi-periphery is not immune from the danger of capitalism’s social and cultural degeneration.

Thus, it is of utmost importance to ascertain what sort of market economy we have or are aiming to have. Obviously, one cannot just take a model down from the shelf. Whatever you think of the merits of the Scandinavian or American models, or indeed of the Central European social market economy concept, no model can be simply borrowed. Regimes evolve from social structure, the majority value system of a society, traditions of the land and other factors having a bearing on the way things work. Government policies also matter, even if they are of limited impact, since politicians do not diverge much from the given value and belief systems and the expectations of the general public. That said, one should add that a major difference between the populist politician and the statesman is that the former only echoes what people think and want to hear, while the latter directs the public discourse using the numerous instruments of persuasion and education at his or her disposal.

However, social structures are strong constraints. With a strong and self-assured middle class, there is limited room for the state and the political class to assume practical organisational tasks in the economic life; should overactive politicians aspire to take control of the state, voters can send them away through free elections. In contrast, when the middle class is weak, when there are too many who feel they are in danger of going down, people may turn to the state for protection. By doing so, they help perpetuate a regime with a bureaucracy supplementing civic initiatives as well as with market substitution policies and managed trade instead of competitive markets.

Where do we stand now? Is the Hungarian middle class capable of growth? What has happened to the Hungarian Mittelstand? Have we ever had one? Let us cast a quick glance at our history: if we never had healthy middle classes, it would then be a-historic and illogical to expect the emergence of social market economy as a real life socio-economic order.

Well, the historically belated modernisation of contemporary Hungary is partly exemplified and partly caused by the relative weakness of the middle class, measured against Western standards. The concept of a propertied middle class is not simply about people in a medium position on wealth and income hierarchy – this would be a too mechanical stratification of society. Statistical analyses such as Thomas Piketty’s much discussed volume on long term trends in income and wealth (Capital in the Twenty-First Century) take the middle 40 per cent of the population, below the well-to-do 10 per cent and above the bottom 50 per cent, as a practical proxy for middle class. This may be good for cross-country comparison but not for what we are discussing here. What is at stake is the existence and size of a social construct that comprises societal status based on property and economic functions, entrepreneurial and professional skills, and a sense of purpose. It may not be a class in the Marxian sense but a social body distinct from the “elite”, and also from the “masses”.

Such a class quite successfully evolved in Hungary in the second half of the 19th century, during the emergence of the Hungarian capitalist order. The promising trends were, however, tragically broken by the First World War and the trauma following it. Despite the tremendous loss of life, wealth and territories, the relative size of the bourgeoisie, the level of urbanisation, among other contributing factors of capitalist market development were actually higher in the new Hungary, born on the ruins of the Monarchy, than in the pre-Trianon period greater Hungary. The new nation state performed surprisingly well in economic and social terms by Central European standards. This is not the way official Marxist economic history books treat the interwar decades, yet historical data shows that corporate development, industrial modernisation, agrarian transformation and the emergence of modern finance all took place during this period against all odds and external shocks.

It should not then come as a surprise that a thought-provoking book on market economy principles written by Wilhelm Röpke, the leading German academic, later member of the Mont Pelerin Society of pro-market intellectuals under the chairmanship of Hayek, was immediately translated into Hungarian and sold out in Hungary during the last years of the Second World War: social thinkers, intellectuals, politicians and the interested public were looking for models of market-based reconstruction of a managed economy.

Then followed between March April 1944 and 1945 tragic year. Hungarian society, and disproportionally Hungarian Jewry, suffered a terrible loss in blood, in addition to the damage to financial and real assets. Hungarian Jews were not all part of the middle class, but a large part of them were. The short but brutal period of National Socialist rule hence left behind by 1945 the ruins of a much weakened Hungarian society, and particularly a weakened Hungarian middle class.


The chances of taking Röpke’s Ordoliberal path after the war would have been meagre even if Hungary had ended the war allied to the Western powers. Stalin however did not allow Hungary to be involved in any way in market type reconstruction via the Marshall Aid. The country was cut off from both Western trade flows and intellectual trends. The economy was nationalised and society fell under central control. The communist ideology implied a class war between capital and labour; the Party’s social policy aimed at breaking the middle class: the regime forced owner-entrepreneurs into external or internal emigration, and farmers, artisans, and small business owners into public sector employee status. The same happened to most of the intellectuals. One of the legacies of four decades under state socialism rather than on a Western type development path was that in 1990 what remained of a middle class was in bad shape.

Weren’t then those who raised the issue of social market economy as a realistic option for Hungary in 1990 utterly naive? There certainly existed some unjustified illusions about society’s capacity to uphold civic values even after long decades of hibernation in a hostile environment. Many had high hopes that the industrial traditions, the skills of the former smallholders, and the business knowledge all buried deep within middle-class families could be easily mobilised once the repressive regime was gone. Though the legendary Hungarian dexterity (“A Hungarian is he who enters a revolving door behind you but leaves it before you”) was known to be a myth, still one could imagine that a historical reset might rejuvenate society and its dormant would-be entrepreneurial strata. Well, hard data indicates that while Hungary did indeed experience an entrepreneurial revival at the start of its market-based transformation, the momentum did not last long, particularly when measured against peers in the region.

Fast-forwarding to 2014, the many unresolved problems mean the present generation still has to define its particular version of economic system it wants to have. Part of this exercise is to take stock of the middle class as it exists, and as we would like it to exist, and then the measures needed to advance such a middle class. The present government has declared the support of the social middle, as well as the importance of strengthening the SME sector. The catch is that the government cannot simply create a middle class. Should the state manage to create one, it will be like that: a state managed class. That should not be the goal; still the government has at its disposal a vast variety of instruments that can be put to various uses.

Let us take the Hungarian tax measures in 2010 and after: they aimed at reinvigorating the economy, but they were also meant to strengthen the position of the national middle. While sympathetic with the underlying goals, the policy community debated the modalities of the tax reforms, concerning the efficiency of achieving the declared goals above. I consider it imperative that a professional test and thorough analysis of the consequences of tax measures on social structure and on growth impact is done before the government decides to continue on any course of tax reform. What is clear so far is that the upper 10 per cent of the families have gained a lot out of the reduced flat tax on incomes (PIT), at the expense of practically all other income groups – such a disproportionate income shift is highly problematic. As for the growth enhancing impact of the fiscal policies: the Hungarian economy has been growing by less than one per cent annually over the last four years, a disappointing result, not only measured against the government’s own growth targets (multiples of these modest figures), but also compared to the peer nations in the region.

The middle class is hard to define but it is certainly much wider than the top 10 per cent. How much wider it really is and how to make it stronger in a sustainable way is again a topic that should be seriously discussed in Hungary. A recent study by the GfK Research Hungary and the Political Institute of the Hungarian Academy of Sciences reveals that instead of a homogenous middle class below the “elite”, we have a fragmented set of social groups consisting of a 10 per cent wide upper middle, a small emerging (mostly young) stratum (6% of the population), white collar professions (7%) but also a significant (17%) so-called “Kadarian” middle class – a reference to those with the value system and lifestyle rooted in the “Goulash Communism” of the communist period under János Kádár. Further down on income and connectivity hierarchy you find many “drifting” (18%), workers (16%) and an underclass of 23 per cent of the total. Such a social composition does not suggest a successful modernisation process and the much wanted catch-up with richer neighbours is taking place.

A lot has been said about the strengthening of the entrepreneurial sector in recent decades. Still, the unhealthy duality of Hungarian business life has become an incontestable social fact. Lately, the central bank has granted credit incentives to small and medium businesses. The government has taken powerful, if highly disputed, measures to shift the balance in various markets in favour of local business circles at the expense of foreign-owned big business. Experience tells us however that what helps businesses accumulate assets and grow fastest is a stable and predictable environment.

A middle class, just like a civic society, will not emerge by government decree. An authority can dispense offices and dole out contracts – but this only perpetuates pre-capitalist social standards. This is why fair competition is of utmost importance. Competition is a centrepiece of the social market economy concept but it has a much wider relevance as a proven elementary precondition of efficiency of market activities. In this respect, the present situation in Hungary does not look promising. We have heard a lot lately about the allegedly shady deals concerning the reallocation of tobacco shop licences: what colloquially is referred to as dohány-mutyi. I find disturbing, to start with, the language used in this case: what the Hungarian slang implies is something of a prank rather than an offence. But this blurs the real issue: whether what we have here is an irregularity, a less than perfectly even playing field or just hype. If party organs meddle into government decisions directly, choosing winners from party supporters as some sources claim, it is a serious matter, potentially violating the principle of the separation of the state and the ruling party. If, however, as the language indicates, it is just “the way we do it” within the legal frameworks, then the noises against the alleged shenanigans are simply hype. Still, the social consequences of the latter reading of the story is even worse, since the moral of the story then is that this is the way deals are generally done here. Such a social attitude provides a moral acquittal for cases like these and for those that may come in the future.

To conclude: most successful economic modernisation models require a strong and self-confident national middle class. The re-emergence of one in the Hungarian context constitutes a hard challenge given the historical antecedents. The success or failure of the response of society to this challenge is mostly beyond the government, but what the government does and what it does not do is critical in the process. The German Mittelstand cannot be reproduced under our circumstances; it would be pointless to attempt it. Still, its Hungarian equivalent, mutatis mutandis, is much needed if we are to take aim at feasible models of efficient market economy.

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