Government
Hungary's Turbulent Transformation to Capitalism
by Magdolna Csath
Corruption, mismanagement exemplify "new" Europe's challenges.
Hungary is a country of 10
million mostly frustrated and pessimistic people, who no longer believe that the
post-communism transformation begun in 1990 has brought genuine change. They are equally
skeptical about the possibilities of any positive developments from Hungary's membership
in the European Union. These feelings are fostered by their everyday experiences. A
general sentiment is that the system change only means that those who once had been
devoted followers of Karl Marx have transformed themselves into neoliberal capitalists and
kept all the capital for themselves.
In Hungary's transformation to capitalism, changes have been imposed on
the people, who pay the price in job losses, high unemployment, lack of opportunities to
live a decent life, poverty, and a growing gap between the new rich and the many poor.
Hungarians are very cynical about the argument that, in spite of all the problems, they at
least have democracy and a functioning market economy. The average citizen feels
otherwise, thanks to the ways the "transformation" has been managed.
Hungarians who dare to voice opinions different from those of the
"rulers" are still silenced, threatened, or economically ruined. The majority of
the media speaks with one voice, which is the voice of the government leaders. No
questions are allowed to be asked. Hungary's election into the European Union is a typical
example. Those who opposed or merely questioned Hungary's proposed membership were
excluded from the campaign, silenced; they received neither money nor media time to
express their doubts. This should have been a warning sign about the status of democracy
in Hungary. The result of the referendum was that actually fewer than 40% of the potential
voters were in favor; the others rejected EU membership or simply did not vote.
Corruption vs. Democracy
Corruption is alive and growing. Hungary ranked just 33rd on Transparency International's
2002 Corruption Perception index, tied with Malaysia and Trinidad and Tobago. (Finland was
"least corrupt," and Bangladesh placed at the bottom of the list.) In 2003,
Hungary slipped back to the 40th position. Now, Kuwait, Estonia, Bahrain, Oman, and
Botswana are considered less corrupt than Hungary is. Corruption and democracy do not go
hand in hand, and corruption is a poor vehicle for developing a functioning market
economy.
The economy in Hungary has shifted from a few large socialist
enterprises subsidized by the government at the expense of the population to a few huge
global companies subsidized by the government at the expense of the population. These
subsidies include tax holidays, cheap (sometimes free) land offered to foreign businesses,
and wages that are kept low so new enterprises can be established in a low-cost location.
Companies also typically force the government to devalue the national currency by arguing
that it will help increase economic competitiveness. But an undervalued national currency
has never made an economy more competitive; rather, it only helps exporters make more
money. About 80% of Hungary's exports are produced by a few large foreign companies.
Hungary cannot be described as a functioning market economy when the big players receive
significant subsidies while the rest get none. This distorted market situation is unfair
and uncompetitive.
Another defect of Hungary's "new" economy is that foreign
investment is largely in low value-added "screwdriver" operations--plants
requiring diligent, disciplined line workers rather than creative, original thinkers. More
than half of Hungary's working population works in these screwdriver operations and have
no opportunity to become independent entrepreneurs and new-idea creators. This is one
major reason why the knowledge base of the society is rapidly deteriorating.
Hungary has relatively few young graduates in science and engineering
compared with the rest of the European Union. But without high-quality professionals in
science and engineering, no country can become a leader in innovation, nor can it build a
dynamic and prosperous economy and society. So instead of being a member of the so-called
"first economy" countries, as promised by EU membership, Hungary will become a
follower or, even worse, slide down to the periphery of economic development.
Meanwhile, just 3.3% of Hungarians aged 25-64 participate in any type of
education or training, compared with nearly 19% for Finland. (The EU average is 8.4%.)
This lack of investment in continuing, lifelong learning and training bodes for a very
poor future for Hungary unless there are drastic changes in government policies very soon,
such as increased investment in R&D to develop new industries--and jobs--in medium-
and high-tech manufacturing.
After Accession
At the beginning of Hungary's transformation in 1990, MIT economist Lester Thurow wrote
enthusiastically that Hungary would be in the best position to catch up with the developed
world if it would base its development strategy on the knowledge and entrepreneurial
spirit of its people and efficiently use the nation's strong educational and R&D
institutions to develop competitive products and services. Instead, Hungarian politicians
have chosen a different path: to compete using cheap resources, especially low-waged
workers, and to attract as much foreign direct investment as possible by offering a very
favorable business environment, including many different types of subsidies to them.
In Hungary, many people believe that EU leaders know very well what is
happening in Hungary and do not care. This indifference strengthens Hungarians' suspicions
that they are only wanted or needed for their markets, geographic location, cheap labor,
reasonably clean environment, and land. So Hungarians have become increasingly resentful
about EU membership.
In addition, citizens painfully feel the squeeze of new taxes to pay for
Hungary's required contributions to the EU budget. The people also believe that Hungary
will be a net contributor, because the country is not prepared to draw on the EU resources
that will open up for the new member states.
The biggest sin the government committed against the people was to
impose a 25% value-added tax (VAT) on non-accredited training and education activities.
This will tremendously increase the costs of further education and training, including
language training, where Hungarians already have a poor record. This government decision
was a typical sign of short-term thinking and a lack of vision and strategy. Similarly,
the increase of VAT on solar-energy collectors (from 12% to 25%) punished those people who
would like to use alternative energy sources.
Hungary in the European Community
There are tremendous uncertainties about what will happen in Hungary and other new member
states after accession to the European Union. If the EU cannot or will not handle current
and emerging problems, it will definitely be unable to achieve the ambitious goal to
become the world's most competitive and dynamic knowledge-based economy by 2010. Instead,
it may actually slide further behind the United States in innovation, competitiveness, and
economic growth.
To improve the chances of achieving its goals for 2010, the EU should
strongly encourage its new members, including Hungary, to:
- Invest more in R&D and education.
- Correct the distortions of the economic environment.
- Develop real market economies by securing the conditions for fair
competition.
- Create an environment supportive of innovation, creativity, and cluster
formation.
- Improve the governance system.
- Seriously decrease corruption.
- Develop a vision and a strategy for handling uncertainties and
capitalizing on opportunities of enlargement.
These strategies could help the new member states avoid drastic
economic, social, and political shocks hitherto unknown in the recent history of the
European Union. Such shocks would render the new Europe decidedly weaker than its economic
competitors and undermine its long-term goals.
About the Author
Magdolna Csath, a doctor of the Hungarian Academy of Sciences, is a
professor of economics and management at the Saint Stephan's University of Gödöllö,
Hungary. She is also a member of the editorial board of Futures Research Quarterly.
Her e-mail address is madgacsath@axelero.hu.
