14 January 2015

Under Western Eyes – Perceptions of the Hungarian Economy


The performance of a national economy can be explained by a variety of “hard” production factors such as the size and quality of the labour force and the amount of capital. Adam Smith regarded land and other natural resources as a third factor of production but their significance has greatly diminished in modern diversified economies. Still, there is a third factor with broad contours: some call it technology, others call it knowledge. Another explanation gaining weight is a factor labelled by some as institutions. This factor of production is, admittedly, softer than labour and capital. It covers such disparate areas as taxpayers’ morale, cultural norms regarding punctuality and reliability, social indicators such as transparency of public procurement, ease of doing business, quality of public administration. And one of these “soft” components is the external perception of a country and its economy.
 
Perception can be an asset – or a liability. The image of things German being reliable is a trade-promoting factor for German products while producers of some other nations suffer from long-lasting negative national stereotypes. In business, it certainly matters how others feel about us. What is at stake is not just the highly subjective perception, whether false or accurate. Overall country image is known to be a key factor of demand for the tourist industry, sovereign risk is a price-determining factor in financial markets, the views of professionals, business practitioners and analysts can be translated into dollars in the world of investment decisions.
 
The economy, society and politics of Hungary do not normally appear on front pages in the global press, given the relatively modest size and strategic importance of the land. Lately, however, some political events and declarations have put Hungary in the limelight. Extensive media coverage is, at best, of dubious value for the Hungarian economy even if professional decision makers normally rely on other sources. And there are numerous channels of information: what follows here is a review of opinions of Western professional stakeholders who know the country well, some from close or even from inside.
 
One such valuable source of information about the conditions of the Hungarian economy is the poll of business executives under the auspices of the German–Hungarian Chamber of Commerce (DUIHK).1  Similar surveys are conducted in all countries of the region where German-owned businesses operate. Thus we have at our disposal a rather authoritative survey about the Hungarian economy, placed in the regional context. Cross-national frameworks are highly relevant since investors and analysts form their judgement about Hungary by comparing it with other nations in the CEE region or with emerging economies elsewhere. Let us start by looking at investors’ perceptions of the factor of production that is of utmost importance for cross-border trade and investment in Hungary: the quality, qualifications and skills of the labour force.
 
The message of the data is clear: most of the employers polled have been at least satisfied with what Hungary offers as far as the skills and professional qualification of the labour force are concerned. In a regional context: German businesses rate the whole region positively from this respect, and particularly the Lithuanian, Polish, Slovenian and Hungarian labour pools.
 
What is also perceived positively in the Hungarian case is infrastructure: only 21 per cent of those polled were “unsatisfied” or “very unsatisfied” with the state of the infrastructure in Hungary. Hungary is judged to be the fourth best out of sixteen nations surveyed.
 
But there are problem areas, too. One of the aspects that stands out is the transparency of public procurement. Only five per cent of the executives interviewed are satisfied with the way public funds are spent on procurement in Hungary, while 69 per cent of the sample expressed dissatisfaction to varying degrees on that topic.
 
The general perception is rather negative. What is worrying: the perception of this important aspect of doing business has not improved for the executives of German-owned companies who are mostly Hungarians or expats knowing well local rules, habits and practices. One would expect gradual improvement over time in a key area of public sector efficiency such as public procurement and the competent agencies become more knowledgeable and professional – but this is not the case, or at least this is not the perception.
 
Poor transparency is invitation to waste, favouritism and outright corruption. In fact, the questionnaire on crime and corruption does not cheer up the reader. Most observers and business leaders expected a marked improvement in this respect after 2010, the year of departure from power of the Socialist-Liberal parties who had been in office for 12 years out of the first 20 years of transition. They were perceived to be soft on corruption, to put it mildly, and their tainted image was one of the main reasons for their fall from power. The expectations of a cleaner Hungary were thus high following the demise of the Left in 2010. Yet, what happened afterwards betrayed expectations. Over 70 per cent of the respondents were unsatisfied to various degrees with the situation concerning corruption and crime in Hungary under the 2014 survey.
 
A similarly high share of unhappy responses relates to the predictability of economic policy measures.
 
TheresultsshowHungaryisoneoftheunder-performersintheregion.One would expect2009 to be the worst year in this respect since it was the year when the financial crisis shook the region, and hit Hungary particularly hard. But in fact 2012 turned out to be even more erratic, certainly more unpredictable for the businesses interviewed. This was the period of various unconventional (in the Hungarianparlance:unorthodox)policymeasuresincludingseveralsurprising tax increases, some even retrospectively, the renationalisation of the second (semi- private) pillar of the pension funds, suspension of the IMF programme, and the declaration of a not clearly-defined “financial freedom fight to regain sovereignty”.
 
There has been some improvement since then, but the overall picture remains dim in 2014: 11 satisfied to 69 dissatisfied is a dismal rate. Still, the majority of the businesses interviewed reacted positively to the hypothetical but meaningful question “Would you invest again in Hungary?” This is an important vote of confidence for the Hungarian economy by business decision makers who know the country well. Still, the share of those already present here but who would not come again has noticeably increased – which is a sign that should be taken seriously.
 
Now let us hear what a Japanese–Hungarian businessman has said about doing business in Hungary. Tsuneo Morita is a Japanese economist who first came to Hungary in 1978 to study the planned economy in operation at that time, and later returned to Budapest just in time to witness the regime change in 1990. He settled, married, learnt the language and went native. But his Japanese value system is an interesting benchmark for gauging the way the Hungarian economy works. Morita at present is a business executive who also writes on economics and much else. His recent book of essays was published in Hungarian this year: its subtitle claims that Hungary has fallen into the trap of a “fiscal economy”.2
 
His criticism of the present Hungarian market order is uncharacteristically harsh for someone from the Far East. Morita claims that Hungary has not become a fully fledged market economy, and it should not be called a capitalist system since “Hungary does not have genuine capitalists”. What you have here instead is a “fiscal (or treasury) economy” driven by “borrowed capital”.
 
The fact that Hungary, like all new member states of the EU, depends greatly on foreign capital is, of course, well known. Morita adds, however, that the Hungarian state is much too active, and the share of the public sector in the economy is very high. Hence his term of fiscal (or treasury) economy. This is not clearly defined in the book; it alludes to a situation in which the state budget and the public sector have a disproportionately massive presence in economic processes, stifling the proper functioning of the markets.
 
His book, published in 2013, is very critical of the economic policies of the years preceding the 2010 political changes, but he is similarly outspoken about the policies of the Fidesz government. He labels the Socialists who were in office before 2010 as “vulgar opportunists” applying populist policies to please the lazy voter. But his verdict on Fidesz is also harsh: the party may sound strongly anti-communist but its leaders believe in socialist type overcentralisation and nationalisation. Its organising ideology, Morita claims, is too nationalistic, and its recent measures point to the creation of an ideology-based authoritarian regime.
 
His highly critical opinion may be partly due to a personal disappointment of someone who had witnessed here the dramatic yet promising first years of transition, and expected a similarly dynamic modernisation period in the second decade – which unfortunately did not transpire. He may be too demanding in his expectations – still a critical view like his is not something that can be easily dismissed.
 
The terms and expressions differ, but some of the statements made by Roderick Martin, a former professor at the Central European University, are similar in his recent book titled Constructing Capitalisms.3 Since his research was mostly closed in year 2012, it did not react in detail to recent policy changes in Hungary, but he also notes that state activity exceeds the level one experiences in mature market economies. But as his research covers the region (in particular the Czech, Polish, Romanian and Hungarian cases), his verdicts are more balanced: what we here, in Hungary, consider as a shocking malfunctioning in our social progress may instead be a simple variation of some common regional tendency. Still, he notices the pronounced critical attitude of the Orbán government to EU, IMF and to most foreign big businesses. Interestingly enough, the author quotes Orbán’s statement from as early as 2012 declaring a strategic alliance with Russia (reported by BBC News Europe).
 
The large Hungarian public sector is a unique case in the context of regional trends – and Martin notes that the larger the state is, the more likely the chances for increased corruption are. Well, no one has proper statistics on the extent of corrupt practices. The NGO Transparency International, with a mandate to fight corrupt practices rates Hungary as well as most other nations of the globe. Its findings are in line with what German businesses report about the same issue. Both statistics are about perception, obviously. Still, the perception index of Transparency International is based on a rather detailed methodology, and therefore it should be regarded as reliable. Business analysts and media commentators certainly use them extensively. This is why it is worthwhile to finish this tour with noting the recent ranking of Hungary. Well, Hungary’s rank is 47th (out of 175 countries ranked globally) – which puts the country in the least clean third of the EU. Our perception is still better than that of the Czechs or Romanians but is behind that of Estonia, Poland, Lithuania, Slovenia and Latvia.4

What can be concluded from these quantitative and qualitative perceptions of doing business in Hungary? Soft indicators they may be; yet they express views and judgements and they might influence serious business decisions. It would be therefore highly important to leave behind stigmas and bad images as fast as possible, and be rather associated with successfully emerging and converging nations of the regions – again. If only it were so simple to improve a country’s general image. What can be easier is improving professional perceptions which are less driven by media hype and more by the facts and experiences of stakeholders. Their expectations are realistic, the benchmarks are known, and compliance with international best practice is, in fact, in our own interest. But the very first step to correct the image is to realise that perception can be an asset – or a costly liability.
 
 
 
 
1 German-Hungarian Chamber of Commerce (2104): A DUIHK 20. konjunktúra-felmérésének eredményei [The Result of the 20th Business Survey of DUIHK].
2 Morita Tsuneo (2014): Változás és örökség – a kincstári gazdaság csapdájában [Change and Legacy. In the Trap of Fiscal Economy]. Budapest. Balassi Publishing.
3 Martin,Roderick(2013):ConstructingCapitalismsTransformingBusinessSystemsinCentraland Eastern Europe. Oxford University Press.
4 Transparency International (2014): Corruption Perceptions Index, 2014.



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