‘State dependence’ of Hungarians is a major block to economic growth
The first, unfavorable experiences about market economy after the fall of Communism, the cyclic character of budgetary spending, “stop-and-go” politics[1], as well as the populist, demagogic and paternalist rhetoric of the political elite created a strong aversion to the market economy in Hungarian society. The Hungarian population has a typically self-contradictory relation to the state and competition. The voters expect the state to provide a high level of services, yet they advocate the reduction of taxes. They clearly favour market competition in areas where, as consumers, they can enjoy its benefits, but they turn against the market when they themselves are expected to compete in it. Although Hungarians consider competition at the workplace important in principle, they reject it when it threatens their own career opportunities, or when immigrants are allowed to join in the competition. They expect more care and paternalism from the state, but at the same time they believe that there is too much intervention by the state in the people’s lives. The key conclusion from these attitudes is that nearly 20 years after the change of regime, the acceptance of market competition still has not become an integral part of political culture.
A substantial part of the political elite tries to meet the voters’ self-contradictory expectations toward the state, instead of trying to educate and transform their way of thinking. Political Capital’s Risk Forecast Division warns that for investors and other economic players this translates into a number of risks that operate in the short, medium and long terms.
Short-term risks
1) Politics interferes with the economy. Among the nations that joined the EU in 2004, Hungarians show the lowest level of support for free competition. This tendency, already inherent in Hungarian politics, was amplified by the outcome of the 9 March 2008 referendum, held about issues that are rarely decided by referendum in market economies: the abolition of the doctor visitation fee, the university tuition fees, and hospital care fees. The result (80 percent supported the ideas) did not surprise analysts, and was interpreted by the political elite as a symbolic civic protest against reforms.
Illustrative of the political opposition to the strengthening of free competition is the full agreement in which the factions of MSZP and Fidesz, Hungary’s two leading political parties, have recently blocked the plans about the transformation of the Hungarian Power Companies Ltd. (Magyar Villamos Művek), which primarily aimed at breaking up the company’s monopoly. Short-term risks include the government’s intervention into market processes through specific instruments like price control (energy, public utilities), or, yielding to voters’ aversion to private ownership, the maintenance of state or semi-state monopolies in areas that should otherwise be controlled by the market.
2) A widespread opposition to reforms. Lessons learned in the past years leads politicians to the conclusion that the transformation of the state redistributive systems is the third rail of Hungarian electoral politics, and touching it amounts to political suicide.
In the past few years (between 2000 and 2007) public sentiment in Hungary[2] has shown a steady or even increasing demand for governmental paternalism, particularly in the fields of job creation, welfare expenditures and education. The anti-competition public attitude translates into sometimes peculiar forms in the political arena. Paternalism was amplified not only by the spending policy of the leftist government, which stretched budget perilously deep into the red, but also by the majority of the opposition parties that succeeded to transform the mindset of their voters: right now the rate of those who prefer stronger governmental activity instead of self-reliance and the test of the market is highest among Fidesz supporters, the parliamentary party currently in opposition but a towering leader in the opinion polls. This suggests that if Fidesz took office, they will be unlikely to engage in pro-reform and pro-market policy, since this would immediately cause a loss of popularity, which would be very risky politically. Furthermore, this socio-political self-contradiction does not make state budget reforms any easier, and also reduces the chances of transforming the healthcare, education and pension systems in the years to come. Following the referendum of 9 March, anti-reformist political forces have gathered strength not only within Fidesz, but also within MSZP, in line in keeping with the logic described above.
Mid-term risks
3) Growth-hindering budgetary policy as a cause and effect of paternalistic policy. Over the past twenty years governments generally tried to achieve balanced budgets only by increasing the public burdens, and, due to the paternalist logic, the political elite did not have the courage to address the structure of the spending side. The now unprecedentedly high taxes on labour (the 2nd highest in OECD countries, according to OECD data from 2007) the party-political price of deeper and economy-strengthening budgetary and tax reforms, and voters’ cumulative historical experience since the change of regime in periodical cycles of intensive overspending, followed by drastic restrictions, are three factors that will constrain in the mid-term any Hungarian government’s scope for action, together with their chances of breaking the vicious circle of populist-paternalist policies and eliminating the growth-hindering effects of the current taxation system and budgetary policy.[3] Instead of these much-needed reforms and short-term sacrifices in order to secure long-term competitiveness,it is more probable that governments will continue in the mid-term the present practice of trying to make up for lost revenue by borrowing and budgetary deficits.
4) Political opposition to the introduction of a linear system of taxation. In spite of an unbalanced tax environment, public sentiment does not support political attempts aimed at a radical transformation of the taxation system. Data from a 2006 survey show that out of 20 European countries Hungary ranked third after Bulgaria and the Ukraine in terms of voters’ agreement with the statement that "the government should reduce differences in incomes". Statistics, however, do not support the popular misconception that there is a huge difference in wages in Hungary, as compared with other countries of Europe.[4] Voters’ demand for equalising policies in turnforces the political elite to hold off from economically desirable endeavours aimed at the simplification of the taxation system and the reduction of its progressivity. The main political and economic risk posed by this effect is that Hungary will continue to fall behind in the regional tax competition, and that the political elite will preserve or, under better-case scenarios, merely patch up the current over-complicated, competitiveness-restraining tax regime, rather than risk the political consequences of a radical tax reform.
Source: European Social Survey, 2006
Long-term risks
5) National protectionism and civic chauvinism. International experiences show that “brain-drain”, i.e. the entry of high-skilled employees into the economy from other countries, can play a key role in boosting a country’s competitiveness and innovativeness. The potential benefits of this natural market process are reduced by the ambivalent attitude to competition in Hungary, since the average Hungarian voter has misgivings about immigrants who may become competitors in the labour market. Data from the 2002 European Social Survey show that out of 22 European countries, Hungary ranked second in agreeing with the statement that immigrants can deprive them of jobs. The majority of Hungarian respondents also expected employers to favour Hungarians over immigrants, when jobs are scarce.
The most recent Eurobarometer survey on this issue also shows that Hungary has the most intolerant attitude to economic immigration, disagreeing with its necessity even in just ‘certain sectors of our economy’. While Hungarians are among the most appreciative of EU nations of the cultural benefits of immigration, their fear of unemployment and consequent demand for state intervention currently outweigh these sentiments. Thus the anti-competition political culture has a “civic chauvinism” component, which in the future may cause considerable tension between the immigrants and Hungarian citizens, further amplifying counter-selective forces in the labour market and the economy. Furthermore, it also raises the dangerous prospect of political forces deciding to play on to the fear of immigrants jeopardising jobs, and thereby further exacerbate the population’s aversion to foreigners.
6) Envy of success and the “hiding elite”. Hungarian society has fairly unfavourable views about wealth and rich people in general. It is a common belief and a stereotype fuelled by social envy that successful people who accumulated great wealth must have used dishonest ways (fraud, crime, bribery) in addition to – or possibly instead of – their talent and diligence to acquire their possessions. The elite’s strong ’inclination to hide’[5] is a partial consequence of this belief. The stereotype becomes self-reinforcing, since the only segment of the wealthy that remains visible to the general public is the minority that enjoys showing off with flashy lifestyle and behaviour; while the larger – and wealthiest – part of the elite is characterised by a kind of ‘shy richness’. This complex phenomenon may lead to the loss of the role-model, value-creating, norm-creating and social integration role of the economic-political elite, prolonging considerably Hungary’s learning process in democracy and market economy and amplifying the generally felt uncertainty about value orientation.
7) “Unfair competition” as a national sport. The envy of success is supported ideologically by a belief that in Hungary only unfair means can bring about success in the fight for possessions, and the majority of the members of the society use these means. This belief, however, gives confirmation to the members of the society to seek ways for prosperity through unfair ways, and to use means otherwise deemed immoral in the competition against rivals. While every now and then and on the short run these factors may in fact be efficient means of advancement, if they evolve into a nationwide, collective game, then their aggregate effect will definitely be detrimental.
8) General anti-system attitudes. Among post-socialist countries Hungary holds the second most favourable opinion about the former political system, and holds largely unfavourable views of the current democracy, according to surveys conducted at the turn of the millennium. Unpleasant memories about the change of regime are still taking their toll on the policies of Hungarian parties – and not only outside Parliament. Criticisms of free market mechanisms, plutocracy and the change of regime are gaining more and more ground in the increasingly vocal rhetoric of the parliamentary opposition. This may consolidate and further enhance the anti-system sentiments in some of the voter groups. The key political risk here is that extremist political movements may gather strength. The other associated long-term political risk is that the self-corrective mechanisms of democracy and capitalism, which rely on a flow of reliable information both for the market and for politics, are greatly hampered by general, wide-spread and endemic distrust in official statistics.
Source: European Values Survey, 1999
[1] See the risk warning of Risk Forecast Division published after the referendum:http://www.politicalcapital.hu/pressroom/20080312politicalriskin.html
[2]“Köz, teher, elosztás”. Tárki’s Monitor Report on households, 2008.http://www.tarki.hu/hu/research/hm/monitor2007_megallap.pdf
[3] See figures in http://www.politicalcapital.hu/pressroom/20080312politicalriskin.html
[4] The income per capita in the upper tenth of the Hungarian society was HUF 1,824,000, which is 5.7 times higher than the income level measured among the poorest, while the rate of income difference may be much higher than that in some of the developed countries, according to a 2006 survey of the Hungarian Central Statistics Office.
[5] It is also reflected in a survey of Tárki showing that three-quarters of the wealthiest put themselves in the middle class. http://www.tarki.hu/adatbank-h/kutjel/pdf/a405.pdf
