Good afternoon, Ladies and Gentlemen! Thank you for having me here! As I was preparing for today's presentation, I recalled a 20 years old saying from Ralf Dahrendorf, which we quote quite often: it takes six months to replace a political system, six years to transform an economic system, and 60 years to change a society.
This occured to me because, when observed from a bird's view, our region – contrary to our hopes back at the time – has not been developing along a straight, linear trajectory in the past 22 years since the change of the regime. Each country had its periods of evident growth, interrupted by economic and political disruptions in most cases. Think of Slovakia in the nineties, Poland in the middle of the first decade of the new millenium, or Romania, which had its far share of zig-zags in the past two decades. From the same perspective, my country, Hungary is well into a „zag” – after a rather protracted „zig”. It is re-adjusting its course once again. By saying this, I also want to express my hope and faith that Hungary, like its neighbours and fellow post-socialist countries, will be able to return to the European path of social development that we started to tread on – the path we started to walk in 1990 for not the first time in our history.
Ladies and gentlemen!
Nowadays much can be said about the interests of the nation and how to represent or even defend them. Mass movements on the streets and radicals occupying headquarters arise aroundthis idea; international legal proceedings and economics debates focus on the same subject.
Some wish to defend Hungarian interests vis-a-vis the European Union while others would like to do the same vis-a-vis the government itself. Some agitate against the EU's and IMF's attempts to colonize us, while others - sometimes the very same people - expect the IMF to solve our problems. Maybe they event expect some sort of redemption. One side boasts about great successes and budgets consolidated for the decades to come, while the other side whisper about the threat of state bankrupcy.
It's hard to find our way around in these debates and amid the weave of propaganda and counter-propaganda that obscures our vision. Our best method might be to rely on our common sense and rationality. An American senator once said that everyone is entitled to his own opinion, but not to his own facts.
In fact, identifying the real, factual economic interests of a nation is not difficult at all – it is hardly a subjective matter. Forgive me for reciting banalities, but these days call for a list of even the obvious goals and values . It is important that we pinpoint basic economic principles. One can close down the universities of economics but cannot escape the laws of economics that remain in effect nonetheless and define our lives.
The nation's best interest is to build a strong Hungary with a competitive and successful economy – a growing nation. On the community level – the Hungarian community's – we must aim for a stable, long-term and balanced economic growth. On the level of the citizens’ families and the households, we must achieve a lasting, step-by-step, visible growth, a sustainable, secure growth of welfar for all segments of society.
To cite a few more economic banalities, the most prominent factors of growth are labour, meaning both employment and productivity; capital, including credits; the quality and predictable nature of the institutional and legal environment; and balance, since we have learned through painful ordeals that growth can only be based on balance. Growth depends on these factors, plain and simple. Or at least it looks like it. .
If these factors are in order, political debates may occur about the redistribution of the growing amount of goods: what social philospohy we should follow, what are the exact methods for this, who should benefit from it, and so on. However, we can only distribute what we have produced – that is beyond doubt. We must back our consumption with proper securities. If nothing else, the European economic crisis taught us this lesson .
Therefore, good economic governance must focus on these factors. If we examine with this in mind whether Hungary follows the right path, whether we protect our national interests, we come to a sad conclusion. The first decade of the Millenium have seen a series of bad economic decisions, each resting on the previous one, spanning through governmental periods, causing Hungary to deviate gradually and to an ever greater extent from the possible growth rate and economic balance. It was in this state that Hungary was hit by the first wave of the economic crisis.
However, the government elected in 2010 gained unprecedented political support and made a number of policy decisions directly opposing the principles of socio-economic rationality. As a result, almost all factors of growth have been seriously crippled ever since, hurting the long-term interests of the country. As far as I can tell, the reasons were mostly political considerations in order to gain and preserve power.
Good governance, though, has a tremendous importance in economics, too. If good or bad governance would mean a single percentage of difference in GDP growth, Hungary, after 22 years of the regime change, would still be four places ahead in the per capita GDP ranking of European countries !
For the purpose of our analysis, let’s review the changes in factors governing growth.
Let us start with labour. Labour and employment are and have been the biggest issue for Hungary for the last two decades. The employment rate that was stuck at 56% is beyond doubt the greatest failure of the regime change. The 1.2 million workplaces that disappeared back then, out of which 1.1 million is still missing, led to the fact that currently hardly half of employable population is employed – at least legally.
We have to ask each government of the past two decades if they were able to change this ratio. Has the very government that pledged to mend all the faults of the regime change been able to do anything about this?
Putting aside emotions and focusing on facts, the answer is no. On the contrary, Hungary’s situation in terms of employment is worse than it was two years ago. Self-destructive processes have been set into motion. The unfortunate measures of the government have raised the cost of low qualified labour, despite the fact that Hungary's labour reserves consist of almost exclusively this segment. The changes administered in tax system two years ago and recently have resulted in a higher tax burden than it was during the previous government, thus “the government of tax decrease” in fact levies more taxes than its predecessor. What is possibly even worse, due to the changes in the income tax, more than 4.5 million people live currently in households of decreased income, thus two-thirds of all employees have a decreased net income! This results in a dramatic decrease in sectoral labourmarket demand, while the supply soars – in accordance with the conscious governmental decisions and some otherwise reasonable goals. Just recall reducing the duration of the unemployment benefit to three months forcing tens of thousands of unemployed to act rashly, taking jobs well beneath their qualification!
It is as if the government was sending ever more Eskimos to hunt out in the cold while at the same time reducing the seal population extensively... Our calculations suggest that Hungary will lose 50,000 workplaces in the low-qualified segment in the next two years due to the drastic increase of the minimum wage. We can all remember the memorable and obviously unfulfilled promise of “one million new workplaces” but there is a far bigger problem: this measure does not benefit anyone. It hurts the economy and of course those who lose their jobs because of it.
Nothing is new under the sun. 2001-2002 also saw a radical increase in minimum wages. Those who got a raise were of course happy, but those 100-120 thousand people who were sacked because of this measure probably blamed their employers, not the government. We should learn from past mistakes.
When I talk about those 4.5 million people who live in households of decreased income because of the changes in taxation, we have to take note that they, despite governmental statements, make up the BULK of the Hungarian middle class! This social class was small and weak to begin with, and is now threatened by losing its frail current status. They are the real middle class, not those that the government calls the winners of its political decisions. That small favoured layer of Hungarian society consists of the upper middle class and above, a few hundred thousand people who have actually benefited from the past two years.
The middle class for the most part has been nothing more but an excuse for introducing new legislation – they have gained nothing by it. The government acts in their name, but to their detriment.
The Hungarian labour market, and thus the middle class, had to endure another blow. Make no mistake, this is not due to a natural disaster but more governmental decisions.
Let's take the case of higher education, considered to be the most effective channel of social mobility. The new legislation closes down, narrows and withers this channel. The number of students will decrease yet the demand for university-level qualification will rise. The transformation of public education, higher education and vocational training will lock poorer children in their inherited social status and the more affluent upper middle- and high class students are driven to leave their homeland.
The vast majority of Hungarian youths – unlike their European counterparts – do not choose to study abroad to see the world and return with new experiences and a more competitive knowledge. They increasingly tend to think that their homeland offers little or no promises for the future. According to a poetic but painfully true statement it is the fourth time in 100 years that Hungary drives away the to-be elite of its society, the intellectuals of tomorrow. Our students leave the country not to study abroad but to live abroad .They say it so in the media I hear it from them in person.
Another factor of growth is capital. Hungary had a tremendous deficit of capital after the change of the regime. The rapid inflow of capital was the main drive behind the development of the past two decades. The influx of foreign capital is not a problem in and of itself; the issue is rather the failure of the successive governments of the last 20 years to effectively link SMEs with the imported modern capital. This led to an economy with dual structure. The current government seems to have found an “answer” to this: ousting all foreign investors. While our region experiences a continuous increase in capital inflow with investors carefully considering the most cost-effective investment environments, the level of investments in Hungary has fallen to that of the year 1997. This is the lowest rate in the region. Our country wages a war against foreign capital despite the fact that the level of export is at an all-time high, amounting to 93% of the GDP. Since internal growth, consumption and investments are declining, exports are the only thing to keep the Hungarian economy from drowning.
The other issue related to capital is the question of credit. It is beyond doubt that before the crisis a number of Hungarian banks acted unprofessionally and unethically. Seeing this modern “Wild East” characterized by lack of regulations and respect for such, I myself called for the introduction of a code of ethics for banking institution. Nevertheless, the recent call to arms against the banks once again led to a quick recession. The level of enterprise crediting is above the pre-crisis levels in all countries of the region except for Hungary, where it is at 83% of the pre-crisis level and steadily decreasing! If you recall the numbers of the Banking Association from back in the growth period: 1% of economic growth can be achieved by 4-5% increase in bank crediting. In Hungary, the dramatic decrease in crediting has without a doubt had a major role in attaining the worst growth rate in the Central-European region. Make no mistake, this will leave corporations and multinationals untouched: it will hurt the local SMEs' chances to grow or to stay in business instead.
The third prerequisite for growth is a system of predictable and high-quality institutions and laws. A lot could be said about this but I will mainly focus on two aspects.
Following the crisis, a general agreement emerged that competitive markets need outside supervision because if left unchecked, the market can devour itself, ruining in the main advantages of capitalism. For instance, harmful monopolies can appear. Since the audience here today mostly consists of economists, let me ask you to think this over for a second. If we consider democracy as a form of competitive political market, it also needs independent supervision or in other words, some kind of checks and balances! This is necessary to prevent a situation where the winner of the political competition prevents fair competition on the political market. How is it, then, that in Hungary the government acts as there were no unacceptable instruments to restrict the market yet no acceptable ways to restrict its own power?
Just like the capital and labour markets need regulation, so does the market of political power. This regulated political competition is called the rule of law, maintained by checks and balances built in the system.
Independent, but state-financed institutions such as a fully functional Constitutional Court, State Audit Office, National Bank, Budget Council or independent courts should fulfill this role
The system of checks and balances also includes free press. Without such institutions and the mutually respected restrictions of political power can become as inhumane and counterproductive as monopoly capitalism.
Today's Hungary is indeed threatened by the emergence of political monopoly capitalism. The competition free in theory, restricted in practice. We must put an end to this, and not simply for moral reasons – although that would be more than enough of a motivation too. Stopping this is in our best interests. After all, democracy at its core is a peaceful and quick opportunity to make changes in bad leadership. This opportunity must be preserved on the long run for the sake of everyone.
I am not saying there is no logic behind the government's policy but I do think that it does not regard the welfare of the entire population as a priority. Instead, it is attempting to solidify personal and institutional powers and to make a tight but committed electorate and an even smaller ring of political and economic cronies benefit from it.
This is the point where I have to raise another popular word of the political chorus: corruption. In fact, I think it is not a coincidence that the antagonistic duo of “national interests” and “corruption” rules the current political agenda.
Corruption has been ever-present in the past 22, or even 220 years, of Hungary, just like in all the post-communist countries. Corruption has done serious damage to the country thus far. Yet it looks like that the winner of the elections has decided to put an end to this ineffective, chaotic system, ruled by vying lobby groups. It puts an end to it only to build a new, more effective framework, a “central power field”, governed single-handedly – just like it has done in many other fields already. What was labeled by Transparency International as the “capture” of the Hungarian state appears to be a centrally controlled system where based on a growing number of publicly available information the state's legislative, controlling and sanctioning bodies, resource distribution and public procurement departments and those awarding concessions are all steered by one hand. The other hand of the same body is funneling the ever growing amount of public funds into private profit through a vast network of private companies. Decisions are not made by those who assume the responsibility and those decisions reflect private rather than public interests.
This has a negative impact on local SMEs since they cannot take part in public procurements and tenders; it hurts all present and future foreign investors, not to mention Hungarian and European taxpayers. Not to mention instances when 100 units of public interest is misguided just to satisfy 1 unit's worth of private interest.
This antagonism between public and narrow political interests also means that our ongoing struggle with the EU and IMF is not about public interests at all. By what twisted logic could we call it a national interest to superannuate hundreds of judges ahead of time, thereby attempting to put an end of the independence of the judiciary? Why would decreasing the independence of the National Bank count as national interest? No matter what the governmental communications call it this is also merely a question of political power struggle.
In 2008, at the outbreak of the economic crisis, the government negotiated and came to an agreement with the IMF. Back then, the entire process, from beginning to the end, took approximately 4 weeks. This time it took 8 months to consider the previously mocked the organization of “three letters” as an eagerly awaited partner yet the negotiations have not even started yet let along the conclusion of an agreement.
Given this situation, speculations at home and abroad are abound as to whether the government of Hungary only wants to negotiate or they want to reach an agreement as well.
It is true that the mere chance of negotiations can stabilize the forint temporarily. Yet it is also true that no agreement is possible without admitting that the current economic policy is a failure and making substantial corrections is inevitable.
Is the current government of Hungary willing to go that far? Is it in their interest to do? It would be in Hungary's best interests, but do the interests of the country and that of the government and the actors behind it overlap?
Since many people talk about the IMF as the solution, I would like to make something clear. The IMF is a moment's respite, a second chance. It is our second chance to gain time in order to correct previous mistakes. The solution is in the hands of the government in power. Talking about solutions, I am of the opinion that the continuous postponing of the agreement and the uncertainty around it can be attributed to the fact that the government is not looking to correct the current economic policy but instead is trying to achieve the preservation of the current one by making minimal compromises and tactical concessions while being aware of the fact that it needs the IMF’s safety net. This is the reason behind all the uncertainty and this is why time goes by without an agreement.
What are the fundamental changes necessary in the Hungarian economic policy? Allow me to remind you of a few things I said regarding the factors of growth since the steps to be taken immediately follow those.
The institutional and legislative system must be amended. The power, honor, and independence of the independent institutions must be restored.
The long-term viability of governance crisis management capacity must be restored. This could be done for instance by modifying those acts that govern the everyday aspects of our lives – such as the law on taxation – that now require the two-third majority of the Parliament to be changed. Hungary will not be able to respond to future crises without that.
We must regain the trust of foreign and national creditors and restore legal certainty. Maybe you have seen it too, I read it on the web portal Index.hu, that last year the Parliament modified the law on taxation on average every two weeks. Well, if such frequent amendments are necessary, it is quite pointless to bind this law to two-thirds majority...
Making the corrections in the institutional system alone is not sufficient. We have to restore the ability to produce economic growth. According to recent surveys, Hungary's medium-term potential growth rate is around 2%. This is not the actual extent of growth but the maximum rate attainable in the best of circumstances. This is however far from enough. In a phase where, Hungary is seeking the close the gap between herself and the EU and looking to establish stability within the society, its growth rate should be 2% above the average potential growth rate of the European Union in order to take part in visible and demonstrated socio-economic and political progress.
This means that the Hungarian economy's potential growth rate must be improved to 3-4%.
To this end, as the very first step, the current disproportions and errors of the labour market must be corrected: the low-qualified labour must be brought back, let back, and incentivize back to work. On the other hand, medium-term measures must be implemented to transform the system of education and vocational training in order to produce a workforce with competitive knowledge, capable to produce high added value.
Obviously, restoring our ability to attract or at least keep capital in the country by regaining the trust of the Hungarian and foreign entrepreneurs is also of extreme urgency. So is a new agreement with banks in Hungary in order to provide Hungarian SMEs with credit as soon as possible. This also requires a fundamental change in policy.
Needless to say, maintaining budgetary balance and ensuring its sustainability is also a requirement for such a correctional program. Hungary must attain a permanent primary budget surplus of around 2% to be able to reach the (otherwise appropriate) goal of decreasing the national debt.
All in all, there are a lot of doubts about whether Hungary wants to reach an agreement or not. I think we have no other opinion. Still, I do understand the uncertainty and the expressed doubts. The suspicions of the skeptics may be further reinforced by the new-found anti-EU sentiments expressed occasionally by government officials. The advocates of this want to make this fight a self-fulfilling prophecy. The reason why they allude to this and speak about it so often is not because there is a predominantly anti-EU sentiment in Hungary but so that there is one. . If there is an enemy to fight, the domestic shortcomings and mistakes become less visible.
As an all-time supporter of the incumbent Hungarian governments, I would like to warn all decision-makers that even if it is a rewarding strategy to make our closest allies scapegoats for our problems in the short run, on medium- and long-term it endangers our own future.
The adage that “better turn Hungary against Europe than being replaced by another government tomorrow” can ruin the nation's economy, and divert Hungary from the right path. We need an agreement because it is true – now more than ever – that he who gains time gains everything. Figuratively speaking, the most important thing for us now is to swim near the lifeboat. At the same time, maybe we should not try to dictate the conditions to the oarsman of the boat. We should get into the boat, dry ourselves with a blanket and then get to the nearest port.
Yet we must preserve our common sense. We have to be able to tell the difference between reaching a temporary respite or getting to a permanent resting point. In other words, there is a difference between dragging time for growth and gaining time for victory.
Deceiving others and ourselves – this malady of Hungarian policy-making going back to way past the last two years must be cured. Not only because it is dishonourable but also because it will ruin us.
Ladies and Gentlemen!
Us Hungarians, no matter of what ideology or political preference, are rooting for the incumbent Hungarian government – sometimes only out of necessity. So we are rooting for the current one as well since our future is in its hands.
This is why I am telling you we need change. By change I do not mean reverting to the state we were in two years ago. Things were not going well back then either and a lot of things had to be changed and still need to be changed.
The Hungary of the post-crisis era cannot and should not be like the pre-crisis Hungary was. Hungary has been in recession way longer than other countries. If you think of it, the first austerity measures were introduced in 2006! Today, an exhausted and harrowed society is facing a seemingly unending series of restrictions. In such a situation the incumbent government has three important obligations at minimum.
First, the sacrifices must be kept minimal and should do not go beyond what is strictly necessary to manage the crisis.
The second is a difficult political task: the government must explain the reasons and the objectives of the sacrifices to those who are suffering from them; to make them understand and accept those measures. .
Third – this may be the most important of them all – it is the responsibility of the government to make sure that the sacrifices made by the citizens are not in vain; to eventually guide the country out of this situation, and ensure that the point we reach makes for a definitely better situation than the one we are in right now.
That is why I urge fundamental, all-encompassing, elemental change in Hungary as soon as possible.
Thank you for your attention!
Last Updated on Friday, 30 August 2013 09:11