Can Hungary Compete?

There are only five months before 10 more countries become full members of the EU. How well prepared these countries are for the challenges of the membership, and how ready the EU is for handling the unexpectedly emerging problems and potential shocks of enlargement? There are quite many warning signs of unpreparedness by both sides. In this article –using the example of Hungary – I should like to focus the attention on some of the problem areas, and their consequences for the future.

Hungary is a country of ten million mostly frustrated and pessimistic people, who do not believe any longer in the idea that the transformation which started in 1990 have brought a genuine change in the country. They are equally skeptical about hoping for any positive developments from the EU membership. These feelings are fostered by their everyday experiences. There is a general slogan around here which goes like this: the „system change only means that those who once had been the devoted followers of Karl Marx have changed to become those of the liberal capitalism, but managed to preserve the „capital” for themselves. The changes have been imposed on the people, and also the price of changes is being paid by them in the form of job losses, high unempolyment, lack of opportunities to live a decent life, poverty and growing gap between the new rich and the many poor. And they are also very cynical about the argument that in spite of all the problems at least they have now democracy and Hungary is a functioning market economy. The average citizen feels otherwise. We could just remember the well known notion of what the real merits of democracy can be for the unemployed, the homeless and the low-paid people? And Hungary has enough of these people thanks to the ways the „transformation” has been managed. But there are other, everyday problems with democracy, too. It is still quite typical in Hungary that those who dare to voice opinions different from those of the „rulers” are silenced, threatened or economically ruined. The majority of the media speaks with one voice, which is the voice of the government leaders. No questions may be asked. As a typical example we could mention the EU election last year. Those who opposed or just questioned that Hungary should now become a member of the EU were perfectly excluded from the campaign. They received neither money nor media time to express their doubts. Only the very positive messages of the politicians were communicated very aggressively to the population. It should have been a warning sign for the EU politicians about the status of democracy in Hungary, but instead they seemed to be quite satisfied about the situation. Actually they warmly congratulated to the leaders and the „people of Hungary” on the very successful and very positive election. Just how successful and positive it really was? Less than 40 percent of the potential voters said „yes”. The others said „no” or simple did not vote. The misled population will be quite surprised experiencing that there are no blue skies neither gold mines waiting for them in the EU. I wonder how the consequences of the many false and unfair „EU-positive messages” will be handled later, when the unprepared peasants and small and medium-sized businesses will go bankcrupt by the thousands? So democracy and fairness are still items in great shortage in Hungary. But not so is corruption: it is alive and growing. Hungary is the 33rd on the list of the 2002 Report by the Transparency International, in one group with Trinidad & Tobago and Malaysia. And as we all know corruption and democracy do not go hand in hand. Neither is corruption a good vehicle for developing a functioning market economy. By the way: how is market economy really functioning in Hungary? Before the changes in 1990 the Hungarian economy was dominated by a few large „socialist enterprises” subsidised by the government at the expense of the population. Now the economy is dominated by a few huge global companies subsidised by the government at the expense of the population and the Hungarian SMEs. What subsidies am I talking about? I refer to the tax holidays, the cheap, sometimes free land offered to foreign businesses, and also to the wages kept low in order that they can establish a low cost location. I can also mention a very typical subsidy these companies force out of the government: the devaluation of the national currency with the argument that it will help increase the competitiveness of the economy. Of course one need not to be a Nobel-prize winner economist to find out how incorrect and hypocritical this argument is. The undervalued national currency has never made an economy more competitive. As M. Porter wrote in one of his latest reports ( M.E.Porter: Can Japan Compete: New Findings from the Global Competitiveness Report 2002/03. Harvard Business School) : „Devaluation does not make a country more competitive.” It only helps the exporters to make more money without further efforts. In the case of Hungary, about 80% of the export is produced by a few large foreign companies. How can we describe Hungary as a functioning market economy when the big players receive significant amount of subsidies while the rest gets none? This is rather a distorted market situation with unfair conditions for competition. It is also worth mentioning that the foreign companies have established fully owned and absolutely headquarters-dependent subsidiaries in Hungary with mostly low value-added screwdriver operations. These places require diligent, disciplined and well-trained implementers rather than creative, original thinkers. Therefore the majority of those people, who have been spending a longer time in these circumstances will never be able to become an entrepreneur, a new idea creater: in other words an independent person. And more than 50% of the working population works in these screwdriver operations in Hungary! Beyond high unemployment this is one major reason why the knowledge base of the society is rapidly deteriorating. The other determining factor is of course the low level investment into R&D and education. But let us examine a few typical figures from the European Innovation Scoreboard 2003 publication!

The average proportion of the S&E (science and engineering) grads as a percentage in the 20-29 years age group in the EU is 11.3%. This number is 21.7% for Ireland, 19.6% for France, 13.1% for Lithuania and 3.7% for Hungary. We have to note that the value for Hungary was higher in 2002: it was 4.49%. These numbers can be interpreted from two points of view. Firstly, it looks like the interest of young people in these disciplines is declining. Why? Probably because there are not enough attractive jobs available. We can agree on that supervising people working at assembly lines is not really a very exciting job for these types of specialists. The second possible reason can be the decreasing level of support for these educational areas by the government. Research prove however, that without enough high quality professionals in science and engineering a country can not be among the „first movers”, the innovators. It can not build a dynamic and prosperious economy and society. So instead of being a member of the so called „first economy” countries, it will become a follower, even worse it can slide down to the periphery of economic development.

This assumption can also be supported by another striking number, which is the proportion of population in the age range of 25-64, participating in any type of education or training. This number is 3.3% for Hungary, while it is 18.9% for Finland and 18.4% for Sweden. The EU average is 8.4%. Among the accession countries Hungary and Lythuania produce this very low number. The value of this indicator is 6% for the Czech Republic, 9% for Slovakia and 8.4% for Latvia. Hungary also has a very unfavourable number for the proportion of people having tertiary education between age 25-64. It is only 14.1% compared to 29.6% in Estonia, 19.6% in Latvia, 44% in Lythuania or 25.4% in Ireland. The EU average for this indicator is: 21.5%. Considering the very low value of these three important indicators we can forecast a very poor future for Hungary, unless there will be drastic changes in the government policies very soon! One of those changes necessary to be implemented is related to money spent on R&D. In accordance with the EU Report Hungary spends only 0.95% of the GDP on R&D. Out of this the proportion spent by business is less than 40%. This is in harmony with the fact mentioned before, that the majority of foreign operations in Hungary is low value-added assembly-line operation. The average number for money spent on R&D in the EU is 1.99% of the GDP, 4.27% in Sweden, 3.49% in Finland with 77.5% and 70% business participation. After analysing these numbers it is easy to understand why only 8.5% of the workforce is employed in medium-high and high-tech manufacturing in Hungary, compared for example to the 9.28% in Slovenia or to the 11.36% in Germany. What are than the chances for Hungary not to fall back dramatically after accession? How can it contribute to the Lisbon goal to turn the EU into the most dynamic and competitive knowledge-based economy by 2010? Or will it rather be a drag along the way to achieving this objective? At the beginning of the transformation in 1990 Lester Thurow, the Nobel prize winner MIT professor enthusiastically declared in one of his writings that Hungary was in the best position to catch up with the developed world if it would only base its development strategy on the knowledge and entrepreneurial spirit of its people, and also if it would efficiently use the strong educational and R&D institutions to develop competitive products and services. This of course would have needed a strong, deliberate development strategy and an attractive, positive and energy-releasing vision for the population. Instead, as Porter pointed out in his Global Competitiveness Report 2002/03, the Hungarian politicians have chosen a different path: to compete with cheap resources, especially low-waged people, and to attract as many FDI as possible by offering a very favourable business environment, including many different types of subsidies to them. This policy has gained new impetus with the incoming government in 2002. In the meantime however our innovation indicators are becoming more and more serious obstacles of our economic development. By now it is also evident how unhealthy the structure of the Hungarian economy is. First of all it is dominated by large foreign firm, while the home-based economy – including the SMEs and the small agricultural businesses – is weak and uncompetitive. The country is still a low cost production site of the foreign firms. In Porter’s opinion – what is shared with other specialists, too – with such an economic structure and such economic policies a country can not develop itself into a knowledge-based society. Instead it will continuously lag behind as a server-follower of other nations. In Hungary many people believe that the EU leaders know very well, what is happening in Hungary, but they do not seem to care about it. This strengthens the bad feelings that this ignorance can only indicate one thing: we are only needed in the EU for our remaining resources: our market, geographic location, cheap labour, reasonably clean environment and our land. That was one reason why the turnout was so low at the EU referendum, and also why there is a growing resentment against our EU membership in the society. It is also annoying what one can read in the 2003 EU Country Report on Hungary. The report states that Hungary is a „functioning market economy” and therefore it should be able „to cope with competitive pressures and market forces in the Union.” As I tried to prove, this is only true for the foreign companies operating in Hungary, but definitely not relevant to the majority of Hungarian businesses. In other words: the „real Hungarian economy” is definitely not prepared for the liberalised circumstances of the membership. Therefore, facing the much stronger, and in the case of the agriculture, the much more heavily supported competitors will push them into a one way street of disappearance. The professionals also can not expect a fair competiton, because of their low salary, which is one fifth to one tenth of that of their counterparts in the EU. Their chances to get access to new knowledge, like to participate in professional conferences or to buy professional books will be in proportion to their salaries. It was therefore very displeasing when Romano Prodi during his very short visit to Budapest on the 15th of January declared in the media that Hungary „was well prepared for the EU membership”. Further analysing the economic situation from the 1st of January there are huge price increases in Hungary. Also many new taxes are being introduced, while –in accordance with the intentions of the goverment- the wages will be kept under the inflation rate. In 2003 in many areas the wages were frozen. This means for many people a dramatic decline in their living standards for two consecutive years. Many feel like the reason why the people are squeezed is our coming membership with all the payments we have to make into the EU budget. The people also believe that we will be net contributors, because we are not prepared to draw on the EU sources which will open up for Hungary. The VAT is also dramatically increased from the 1st of January. This will push the inflation rate even higher and further deteriorate the chances for the Hungarians to become competitive. The biggest sin the government committed against the people was to raise the previously 0% VAT of the non-accredited training and education activities to 25%. This will tremendeously increase the costs of further education and training, including language training where Hungarians have a bad record anyway. A further decline can be expected in the number of people trying to upgrade their knowledge not already relevant for the new circumstances. This is extremely dangerous when Hungary –as pointed out earlier- produces very bad results in this field already. This government decision was a typical sign of short term thinking, lack of vision and strategy. This is the case with the increase of VAT on the elements of the sun-collectors from 12%-to 25%. This is an act against those people who would like to use alternative energy sources. The environmental record of the present government is very bad in the mirror of the rating produced by the IMD World Competitiveness Report 2003, too. Considering sustainable development as a government priority Hungary occupies the 27th position out of 29 countries!

To conclude: there are trmendeous uncertainties about what will happen in Hungary after accession. How the probable social and political problems can be handled? Is the EU prepared to cope with a potential crisis in Hungary or in any other new member state? Why the EU leaders are not more determined to push the Hungarian government to better prepare the country for the membership including the modernisation of the entire governance system? It is worth remembering that for Germany even 13 years have not been long enough to close the development gap of the former Eastern Germany, which was the most economically advanced country of the CMEA! It would also be urgent to demand from the Hungarian government to prepare an active, dynamic, „stretch” strategy, which could swing the country into the right direction by energising, revitalising business and population simultaneously. It would be also vital to build trust and repair the social capital badly damaged by the consequences of „system change” since 1990. Unfortunately, right now there are no signs of good intentions by the government to act upon these problems. Maybe there is a role for the EU to play in these circumstances.