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19 July 2018

The Report and the Facts – and Professionalism


 

István Fodor Interviewed on Transparency International Hungary’s 2017 Report*

 
 

FRIENDS OF HUNGARY: The Hungarian branch of Transparency International (TI) recently published its 2017 report, which contained strong statements and allegations regarding corruption, the destruction of the rule of law and crony capitalism. Do they have a factual basis? You were part of the four-member Committee of Wise Men (“Bölcsek Tanácsa”), set up by former Hungarian President László Sólyom, which also dealt with this subject. Why was this body set up back then, in 2008? What were its tasks and what results did it produce?

ISTVÁN FODOR: By 2008, President Sólyom had become greatly perturbed by the inability of his office, even though the highest constitutional authority of the country, to keep in check what he saw as the moral and economic decay of the country. In his eyes, education and corruption were the two areas in the most critical state. Following a practise widely deployed in other countries, he established a four-member so-called Committee of Wise Men, and commissioned it to examine the current situation and outlook for both the education sector and corruption. The Board produced a 220-page volume of studies titled Wings and Burden (“Szárny és teher”), symbolising education as the guarantor of future success and corruption as the great burden of society. Both chapters of the book, that was published in early 2010, provide an accurate snapshot of both education and the corruption situation during the 2002–2009 governmental cycle. I was responsible for the chapter on corruption, which I largely authored myself, although throughout the book our work was assisted by a group of experts. We naturally also approached Transparency International’s Hungarian organisation to make a contribution. Although they accepted our request and even authored some theoretical parts they finally refused that their name be featured in the material, which they claimed was too critical of the left-wing period. This is the point where facts and opinions go separate ways. A neutral opinion can only be expected from an international institution in the case of a financier with a neutral background.

 

FH: As we were approaching April 2018, the end of the 2010–2018 governmental cycle, TI-Hungary, the domestic opposition and the international media were increasingly abuzz with allegations of corruption regarding the incumbent cabinet. Given your knowledge of the corruption situation during both eight-year cycles, what is your opinion of these attacks?

 

IF: The problem should be viewed from further back. The moral state of Hungarian society, in a close correlation to corruption, was catastrophic in 2005, the fourth year of Socialist-Liberal government. As it is difficult to give a clear overview of the findings in Liberal words, let me show you a comparative table from the World Value Survey for 2005, the fourth year of Socialist-Liberal governance. Citizens of various countries were asked for their opinion on how their fellow citizens act in various situations. The answers were the following:



These figures are astounding even if they reflect the perception of the man on the street.
Twelve years later, my first argument is that the situation has changed fundamentally by 2018. In my opinion, none of these indicators now exceeds 30 per cent. Governance during the past two cycles, since 2010, made a major contribution to this development. A detailed analysis of particular corruption allegations is not within my scope here, but a number of factors bear highlighting: actors involved in corruption and unlawful activity affect far broader layers within a country than the government of the day. That is to say, it is a fundamental fact that the damage to the national economy caused by pervasive corruption across numerous facets of society, along with protectionism and the evasion of rules, always significantly exceeds that caused by acts of corruption in a narrow sense, attributed to circles surrounding the government. Hence it also follows that the essential task of fact-based assessments is not only ascertaining the extent to which a government is corrupt but also that of its efforts to reduce the penetration of corruption throughout society. Ensuring compliance with rules through direct and indirect methods is a governmental task. Based on the above, Looking at the figures and the facts, the period between 2002 and 2009 was more corrupt than the governmental cycle between 2010 and 2018. To put it another way: the claim made by various domestic and international entities alleging that Hungary reached unprecedented depths of corruption over the past eight years is unfounded and identifiably deficient; the accusations are not supported by facts and are therefore politically motivated.

FH: Media at home and abroad regularly levels accusations at what it calls the “corrupt” Hungarian government. What is your comment on this?

IF: We either list facts one by one, or point out that opinions in various international assessment processes, such as in TI’s network and system in the case of corruption, are highly subjective and manipulative. In the latter case, consider the fact that for example, such players of the international media as The New York Times, Reuters, Bloomberg, Der Spiegel, Die Welt, Die Presse, Le Monde, Der Standard, Süddeutsche Zeitung, etc. – have been recently loaded with articles on the enrichment of people linked to the Hungarian Prime Minister and their acquisition of EU funding. Let me deal with these allegations in the wider context of corruption generally, in both the Left-Liberal governance beginning in 2002 and the centre-right cycle ensuing 2010. The volume Wings and Burden includes detailed reference to mistakes and shortcomings during the eight-year-long left-wing period. Let us examine some of the abuses that occurred under the Left-Liberal government before 2010 and the legislative efforts of the centre-right to abolish malpractices since 2010.

1. As for financial services and the banking sector, certain financial institutions increasingly committed infringements, inflicting major damage mostly upon the population. For example, in the case of foreign currency-denominated loans banks lured ignorant people with siren-songs featured in intensive advertising without proper reference to the risks involved while the government stood idly by. Furthermore, banks allowed themselves to engage in selling their customers unorthodox financial services that they would never have done with clients of their Western European branches. In itself, this encapsulates the definition of corruption. These practises were abolished by the incoming centre-right cabinet.

2. Certain brokerage firms and illegal pyramid schemes wreaked havoc on a vast number of families. Such practices, usually allowed only in Third World countries, operated largely during left-wing governance, again without any action or resistance on the part of the authorities. After 2012, these were ended by the centre-right government once and for all by imposing new regulations and monitoring.

3. As an exclusive practice of the 2002–2010 governance, contracts were made with 20-year maturity periods as PPP investments, often to a value of 400 or 500 billion forints. It has been shown that returns on these amounted to several times the market average and attached services were, on average, overpriced by 30 per cent. Moreover, competition was disregarded in the majority of investments. In a significant share of the some 100 PPP investments, unlawful conduct or irregularities, i.e. corruption, can be detected, providing excessive extra-profits to investors and often also the banks supporting them. In 2010, such PPP investments were halted by the new cabinet. Public funds now cover the burdens of completed facilities and the state is attempting to purchase back the by now generally half-term investments in the hope of a 30 per cent decrease in operation costs.

4. During the eight-year Left-Liberal cycle, Hungarian private individuals and economic actors were able to take advantage of offshore banking and business registration without any obstacles. This alone is highly suspicious, if one recalls the recent global reaction to leaked data on the offshore financial sector. After taking office in 2010, the centre-right government relatively quickly adopted laws abolishing legal tax evasion, rendering the practise viable now only at great risk. Consider banks’ obligation to report transactions between private individuals and enterprises and governmental measures aimed at whitening the economy.

5. It is highly significant that in all of its reports published in the 2000s, Transparency International correctly identified the issue of party financing as one of the main factors behind corruption. In public discourse, corruption became synonymous with party financing. While left-wing cabinets repeatedly pledged to tackle this issue, they did not take action. After 2010, the centre-right government in effect abolished the problem of party financing by bringing in a new electoral law. Oddly enough, TI’s reports fail to make reference to this.

6. When the centre-right government entered into office in 2010, it inherited a precarious fiscal situation. From the transition to democracy onwards, a very low level of tax compliance has been a constant feature of society. Not long ago tax fraud was even seen as downright chic. At the outset of its eight-year period, the centre-right government announced a drastic programme as a result of which during its first term it significantly whitened the economy through the adoption of necessary legislation, successfully introducing electronic technology and setting tax rates at appropriate low levels. This has reduced tax evasion and fraud to a much lower level in a way that has been followed by other countries. Together with tax reforms aimed at whitening the system, tax revenues have been significantly enhanced.

7. From 2003 onwards, longer-term service contracts following the ESCO pattern were concluded in the energy sector in large numbers. Generally due to the large increase in energy prices, the modernisation of heating systems in public institutions was largely covered under a ten-year contract in which the cost of the investment was paid in instalments together with the price of heating. Parties divided the decrease in the price of purchased gas among themselves. Similarly to PPP investments, the fault lay not in the construction but in the implementation. Corrupt elements appeared almost by default in these contracts in a broad, publicly financed institutional field. The traits of embezzlement, irregularities, fraud, etc. are not hard to discover, and resulted in growing prices. At the beginning of the 2002–2100 period, such contracts were purchased in bulk by multinationals, resulting in two or three times larger public utility bills in public institutions compared to market prices. Examples of this can be found even today. In this sector, another variety of corruption is also present. During the early 2000s, largely foreign-owned service providers and suppliers based in Hungary recognised that by identifying a corruptible decision-maker, they can become regular contractors or long-term service providers of state-funded institutions (schools, universities, hospitals, municipalities, etc.) without having to participate in meaningful competition. Under the left-wing governmental administrations, many such contracts were concluded.

8. Public procurements have always been a disputed field with regard to corruption. Beyond legal regulations, the purity of these depends on the extent to which regulations are respected and imposed by authorities. In the two Left-Liberal cycles, irregularities committed with advanced methods at the cost of the public were common. Loopholes in the law, along with questionable levels of monitoring, meant that rules were evaded continually. In order to monitor the operation of higher education institutions and enhance efficiency, the centre-right cabinet introduced the chancellory system. Consequently, the above-mentioned procurement practice is being phased out. A number of external suppliers and service providers were as a result surprised by suddenly having to take part in genuine competition.

9. In more distant corners of the country, official regulations and authorisations occasionally forced even everyday actors into corruption. Permits swiftly, and often unlawfully, gained with a bottle of cognac or box of chocolates were a symbol of a society deeply contaminated by corruption. By continually simplifying administration, cutting deadlines and significantly reducing liabilities, the 2010–2018 governments diminished the opportunities for this type of common but generally lower value irregularity.

10. In the first period of governance, 2002–2010, the method of distribution and allocation of EU cohesion funds implied a vast number of irregularities, and there was no genuine willingness or governmental intent to curtail these. The majority of funding was cast into concrete or large-scale investments. One of the most important differences between the two political cycles is that while the Left did not have a stable, lasting and comprehensive strategy at national level, one was swiftly elaborated by the centre-right government inaugurated in 2010 if only to recover from the initial bankruptcy situation. The utilisation of financial resources was synchronised with this. The central decision stipulating that 60 per cent of funding is to be directed towards the economy and small and medium-sized enterprises in particular has significantly improved the social efficiency of the EU tenders in Hungary. The intention to fully exploit EU cohesion funding frameworks, together with the reorganisation of their distribution, use and efficiency, resulted in the major purification of the tender system.

11. Beyond those already listed above, several anti-corruption measures were implemented by the government, the impact of which can be measured empirically. Let us not forget that rather than a fully-fledged solution, we are discussing the difference and development between the two eight-year cycles.

The extent of corruption and evasion of rules within law enforcement authorities reduced significantly.

New laws and regulations resulted in increased transparency and improved planning within the court system.

In higher education, the practice of “buying” examinations and degrees, which was widespread in the 2000s, has been practically eliminated.

In the field of gratuity payments to health care workers, the agreement concluded with a large number of young doctors is a minor but tangible improvement.

The digitalisation of the pharmaceutical budget in effect eliminates the possibility of unnecessary public expenditure and irresponsible medicine use.

Criticism of someone or something should be preceded by outlining what the target of criticism has done well: that is what I learned during my two decades’ relationship with Scandinavian industrial culture. Only then can one voice criticism about dissatisfaction. What is the explanation for the Hungarian branch of Transparency International, an organisation that lays claim to being a professional organisation, failing to take into account or even mention these factually based accomplishments in its annual reports? Society’s overall moral level has improved also in a broader sense just take a look at the present rate of tax fraud, littering and speeding in comparison with the findings of the expert poll conducted in 2005. Could corruption be the only factor that has worsened instead of improved? This is the message implied by TI-Hungary’s annual report-while the social value indexes of 2005 have improved 5–10 points in fact.

12. Finally: massive state investments (motorways, railways, roads, metro line 4, etc.) took place during both eight-year governent periods. In hindsight, if we were to disregard the vast scale of corruption in the construction of metro line 4, the two eight-year periods could even be equated. It was mostly foreign companies who benefited during the left-wing period, while domestic capital also gained ground in the centre-right era. For example, in the period between 2002 and 2009, the domestic construction sector was abundant with rumours of foreign prime contractors “messing” with Hungarian subcontractors, using them to produce extra-profits. This resulted in the bankruptcy of several small enterprises and widespread debt chains. Today, word has it that there is no such “messing” with domestic prime contractors and the government has promptly eliminated debt chains with appropriate legislation. In the eyes of TI, economic patriotism is unacceptable only in the case of V4 countries but fully natural in, for example, France, where foreign entrepreneurs can only succeed when there is no French competitor. Another seldom voiced argument is that cohesion funds are meant to serve the development of Hungary; the more of these that find their way back to Western European countries, the less they fulfil their purpose.

FH: Is it correct to narrow down the issue of corruption in Hungary to these two eight-year government cycles?

IF: Well, just to be sure, the Left had already failed to deal with corruption between 1994 and 1998. The privatisation of public utility companies commanding a monopoly situation carried major elements of corruption in the way it was carried out, through the various contracts and authorisations. The supply of water, sewage, gas and electricity, which is profitable enough on its own, was corrupted with various irregular and occasionally unlawful agreements, thus providing foreigners with extra-profit. The contracts in question still operate today. These concessional contracts resulted in a loss of hundreds of billions of public funds and such money continues to be taken out of the country in this way.

FH: What can explain TI’s failure to take these facts into account in any part of its report?

IF: Corruption is a poison that may occur in general to both left-wing and centre-right political spheres as well as to society as a whole. Consequently, an NGO that genuinely seeks to serve the benefit of wider society should take note of facts, as these may be the basis of solutions. However, an impartial respect for all the facts cannot be expected when a civil society organisation becomes a political instrument. In this case, I believe that by misleading less well-informed people, TI’s operations are especially unfair and damaging.

FH: However, it is impossible not to comment on the statement on page 16 of the TI report, claiming that corruption has become a fundamental characteristic of the system since 2010.

IF: I see this as an entirely political statement. While the centre-right cabinet did make mistakes between 2010 and 2018, it did more against corruption than all of its predecessors combined in the previous twenty years since the transition to democracy began in 1990. In the above, I have pointed out a whole number of these particular anti-corruption moves in the legislation. Declining corruption and various forms of legal evasion, coupled with an improvement in society’s moral standards, have brought a greater social value than the consequences of much harangued errors, overdue measures and individual cases of corruption, when summing up the 2010–2018 period.

FH: On page 7 of the TI report, I read the following: “Business people named the insufficiently skilled workforce and corruption as the chief barriers to successfully concluding business.”

IF: This is a highly revealing sentence. What do industrial investors arriving in Hungary in ever greater numbers say? They come here because of the presence of a well-educated workforce, although in declining numbers; only the shortage of skilled workers may possibly constitute a problem. Over the past years, the number of state-of-the-art, foreign-owned industrial production investments has increased substantially. The rapid decline of unemployment and the fast-paced development of the economy both indicate growing competitiveness. Well-known international companies that are already present are unlikely to decide on their investments based on TI-Hungary’s report or the major share of the international media reports that continuously attack “maverick” Hungary. A growing number are arriving and making developments. Doesn’t this alone discredit these reports?

FH: TI’s report thoroughly condemns Hungary in two diagrams: the level of corruption and economic performance, as well as the rule of law and the investment rate. What is your analysis of this?

IF: My objection is related not to these principles but to their application to present-day Hungary. Both propositions, oversimplified as they are, apply here: an increase in corruption brings about declining economic performance and a decline in the rule of law, resulting in falling foreign investment and capital flight. Of course, the opposite is also true. But what does the TI report claim? It states that both the performance of the economy and the investment rate are declining and therefore corruption is spreading and the rule of law is weakening. This is more than a misrepresentation, it is factually untrue, and an absurdity in terms of economic theory. The IMF has exited Hungary and the large global rating institutions (S&P, Fitch, Moody’s), along with the EU, all recognise the above-average performance of the Hungarian economy over the past years. Furthermore, the rate of investments has broken its annual record in 2009. Applying TI’s principle, the conclusion should be reversed: corruption is contracting and the rule of law is strengthening. It is impossible that TI’s authors and evaluators are unaware of these events. What kind of attitude is required to portray the opposite of reality as a fact?

FH: Against this background, what is your opinion on the TI report’s claim stating that [b]etween 2012 and 2017, Hungary’s CPI (Corruption Perception Index) score fell from 55 to 45, corresponding to the greatest regression in the assessment of anti-corruption performance in the region over the past six years”?

IF: My first reaction would be to ask TI’s leaders to name the country which did more against corruption than Hungary in the region and the current period. I would ask if there is sufficent knowledge of the governmental measures and facts listed above under dozens of headings in Berlin, at TI’s assessment centres and the various organisations forming the basis of evaluation. Within TI’s network, whose task was it to raise awareness on these? It is remarkable that the corruption perception index of three in four Visegrád countries has worsened according to the TI report prepared in Berlin. Considering the recent unanimous opposition of the V4 countries to certain policies of the European Commission it is hard to miss a political bias behind the TI report.

FH: Following your work in the Committee of Wise Men, did you think that such a situation will develop ten years later around this subject and you will give this interview?

IF: Not at all. Back then, we believed we were holding up a mirror to the situation at that time and assisting, or perhaps accelerating, the process of recovery with a number of proposals. I am happy to see that significant progress has been made in several fields, as referred to in this conversation. This process has not ended and never will. However, it distresses me to see that the very organisation that considers itself the flagship of struggle against corruption continues to treat corruption as a political issue instead of a professional one. Transparency International and its Hungarian organisation reduced this topic to a political campaign exercise ahead of parliamentary elections in the country and thus discredited its anti-corruption mission.

 

* This interview was originally published on the Friends of Hungary webpage in April 2018, and rewritten by the editors of Hungarian Review and István Fodor.

 

Note: For Transparency International’s corruption analysis methodology see https:// transparency.hu/wp-content/uploads/2018/02/CPI-2017-FAQs-English.pdf




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