Hungary: a future growth leader or a European assembly plant? The economy according to Orbán

15.11.2018 | By Dominik Héjj

In his expose, which preceded his current term of office, Viktor Orbán presented the vision of Hungary in 2030. According to the expose, Hungary is to become one of the top ten most competitive countries in the world. Currently, the state is at the 60th place in this ranking – moving up by 9 places since Fidesz took power in 2010. Orbán’s objective is thus aiming to move up 50 seats within the period of a little over one decade. However, the Hungarian economy faces real challenges. The biggest one, in addition to an increasing level of corruption, is the high dependency on foreign direct investments, as well as reduced productivity levels, which decreased from the EU average of 73% to 68% over the seven years of Viktor Orbán’s rule.

In Hungary, an unprecedented inflow of investment has been reported. It could be said that the influx is inversely proportional to the allegations that the Hungarian government breaches the principles of democracy. The entrepreneurs and investors like stability, which is, without any doubt, ensured by the Orbán’s government.

What was achieved? How much did it cost?

The Coalition of Fidesz and KNDP (The Christian Democratic People’s Party), which rules since 2010, is gradually rebuilding the Hungarian economy after a collapse. On the one hand, the crisis resulted from a global economic crisis and on the other hand, from an irresponsible fiscal policy of previous governments.

One of the most important successes of Viktor Orbán’s government is reducing the public debt from 80,7% in 2011 to 73,6% by the end of 2017.  Mihály Varga, the current Minister of Finance, postulates that the public debt should be further reduced to 60% during the term of 2018-2022. As for the external debt, it is decreasing, but in a non-linear fashion. It may be said to come “one step forward and two steps back”. Currently, it exceeds 10,5 billion euro.

The liabilities to the International Monetary Fund had been paid off, and it was thus “forced to leave” from Budapest. It was a sort of punishment for the fact that the IMF was criticising the Hungarian authorities’ monetary policy. The IMF has noted that the Orbán’s political style could bring the country to the brink of bankruptcy.

Back in 2008, the socialist-liberal government of Hungary went into debt of 20 billion euro to the IMF. The loan was paid off before the deadline. As a result, in 2013 Hungary told the IMF to close down their office in Budapest. Interestingly, in 2015 the report of the IMF indicated that the Hungarian economic policy was reasonable and effective. In the same year, the European Commission closed an excessive deficit procedure against Hungary.

The country has been characterised by strong GDP growth. In the first two quarters, it reached 4,4%, as reported by the Central Statistical Office (KSH). Currently, the figure stands at 4,8%. It should be noted that household debt to GDP has been decreasing.

Since 2010, Fidesz and KNDP introduced some new taxes – such as a bank tax or a tax on the retail establishment. Furthermore, the coalition raised VAT on basic food items to 27%. However, following the earlier declarations, these new taxes were used exclusively to pay off debt.

In 2017, the income tax was reduced. The flat Personal Income Tax rate amounts to 15%. The flat-rate corporate tax stands at 9%. The progressive tax, at the rates of 10% and 19% respectively, depending on the annual income, was eliminated. It was one of the factors, which was supposed to attract mainly foreign investors to Hungary.

A business set-up procedure was also simplified – currently, it takes seven days, similarly to, for example, Slovenia. Just to show a comparison, according to data of the World Bank, starting a company in Poland takes 37 days. The extensive network of motorways, exceeding 1884 km, as well as the localisation and the connection to major transport routes, also attracts investors.

Ambitious plans

At a meeting with the Turkish president Recep Tayyip Erdogan, the Hungarian Prime Minister once again emphasised the fact, that there is a strong correlation between robust, stable and legitimate governance and economic success.

In his expose, which preceded his current term of office, Viktor Orbán presented the vision of Hungary in 2030, which is described as the critical time of his leadership. According to this expose, Hungary is to be one of the top ten most competitive countries in the world. Currently, Hungary is placed 60th out of 137 countries. Since Fidesz began its rule, Hungary moved up by merely 9 places. The objective stated by Orbán means moving up by another 50 seats within a period of a little over one decade. This would mean bringing about the state of affairs in which Hungarian economy would be equally or more competitive than the Swiss, US, Singaporean, Dutch, German, Swedish, British, Japanese, or Finnish. Hungary is also to be found among the best European countries where one would like to live.

Potential risks

What challenges are facing the Hungarian economy? First of all, it is a problem of corruption. In the last decade, 46th was the highest position in the report on the matter compiled by Transparency International. Recently, Hungary dropped down to a 66th position.

There is a real risk that the economic growth rate will slow down. The Hungarian Prime Minister likes to state, that economic progress is achieved by “one’s own hands”. Current GDP, according to estimates of analysts, largely depends on domestic demand, fostered by decreasing unemployment, real wage increases, as well as the growth of investments. However, even if new investments are related to an increase in export, mainly to the countries of the EU, the increase in wages may affect the competitiveness of the country.

Another problem is the productivity rate, which decreased from the EU average of 73% to 68% over the seven years of Viktor Orbán’s rule. This indicator is related, among other things, to the technological advancement of businesses. This is clearly connected to the types of investments which are undertaken in Hungary.

Hungarian GDP depends on direct foreign investments. In 2017, they accounted for 67% of Hungarian GDP. The largest investors in Hungary are Germany (since 2014, 63 investments have been made), as well as The United States and South Korea. Berlin is Budapest’s largest trading partner. Germany receives 27% of Hungarian exports. Meanwhile, the export to another two countries, that is to Romania and Italy is five times lower and amounts to 5,1%.

According to the report published by Site Selection, Hungary achieved the 8th position concerning investment attractiveness ratings (Poland got the 5th place). Furthermore, the Hungarian Investment Promotion Agency (HIPA), which is managed by the Ministry of Foreign Affairs and Trade, received an award and was named the region’s best investment promotion agency.

In 2017, 17 021 new jobs have been created due to new investment projects. The invested capital amounted to 3,5 billion Euro.

Hungary as an assembly plant

Investors are interested mainly in the production of cars. Worth mentioning are functioning plants which are under further development, such as Mercedes factory in Kecskemét, Audi’s in Győr, Suzuki’s in Esztergom, as well as the announced BMW facility in Debreczyn. The first plant build in post-communist Hungary was the Opel plant, opened in 1991. Primary investments in Hungary were accurately described by Piotr Wojcik (in his article for the Political Critique) to constitute the “Hungarian assembly plant”. Investors are also engaged in some projects connected with sectors such as the food sector, electronics and pharmaceuticals.

The factor conducive to investments, besides preferential credit conditions, is the number of direct support schemes. Such subsidies can amount even to 35% of value if one is to invest in Eastern Hungary. The aid from national or EU funds for creating new jobs amounts to 20 million euro. Some other support schemes include tax reliefs, the possibility of receiving land free of charge, or, finally, the investments supporting the development of access roads or airports.

Another vital element is the employment law, adapted in particular to the needs of the automotive industry. It is not only about the possibility of de facto exclusion of strike action, but also about extension the settlement period from 12 to 36 months, which would be more compatible with the car production cycle. The most prominent union organisations in Hungary insist that the government has not been consulting them for the last eight years concerning the changes in the employment law, affecting the employees’ interests. However, looking at it from the investors’ perspective, the current state of affairs is beneficial.

All in all, the high rate of investment is not only the critical element of the Hungarian economic progress but also of the Hungarian Prime Minister’s policy. Thanks to it, Orbán may legitimise other, often unpopular operations. It indicates that the “strong arm government” brings tangible benefits. What is more, it is also supposed to be the litmus test of the political situation.

Translation from Polish: Daria Walczak

 

This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.

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