• Kester Eddy

Hungary Forges its Own Path

16.01.2015
Surrounded by fairy lights and fir trees, and with strains of 'White Christmas' crooning in the background, the crowd at Arena Plaza, a modern, Budapest shopping mall, makes for brisk trade just a fortnight before the big holiday.

 Yet amidst the tinsel trappings, Gyorgy Csjef, 41, feels let down by 25-years of capitalism.

“The hopes were for a much better life back then, but we haven’t been so successful,” says Mr Csjef, who works for an auto parts dealer in the Hungarian capital. “Those hopes weren’t realistic, at least not for me,” he laments.

Red-star nostalgia is not limited to Hungary, but such downbeat assessments seem especially widespread among Magyars, despite today’s vast array and availability of modern consumer goods – the stuff of dreams in 1989.

People like Mr Csjef are not wrong to feel that something is amiss. Economic progress in Hungary has  stagnated since the turn of the millennium, says Andras Vertes, chairman of GKI, a Budapest-based economic research company. He points to developments in GDP per capita in central and Eastern Europe, which at the demise of communism stood at 40% of the European Union average.

“By 2000, this had climbed to around 50%, and now it’s close to 60%. But in Hungary we began at 53%, and by 2000 had reached 62%. Yet we are still around that same level. We’ve achieved much much less progress than our peers in the last 14-15 years,” he told.

Given that Hungary was seen as a regional leader in terms of political and economic reforms – it had even established a two-tier banking system in 1988 – it begs the question: what’s gone wrong?  Hungary certainly had a head start in the transformation: by 1960 the communist leadership began to ease political and economic controls, leading to the age of “goulash communism” of the 1980s. However, repaying the loans which financed this relative luxury heavily burdened the democratic governments of the 1990s, already weighed down with the cost of restructuring the outmoded  industries of the communist era.

Still, in 1990 Hungary was a leader. It was attracting foreign investment, boasted a stock exchange and had huge goodwill from western Europe. Although progress under the first centre-right democratic government was stuttering, ironically it was a Socialist-led coalition which pushed through the largest privatisations. While this laid the foundations for sustainable development – GDP growth averaged around 4.5% from 1996 to after the millennium – later austerity and the perception that the country had “sold the family silver” to foreign investors proved fertile ground for a populist-nationalist, anti-privatisation backlash.

In 1998, Viktor Orban, the Fidesz party leader and anti-communist student dissident from the 1980s, won elections to head an ostensibly centre-right coalition. Mr Orban moved ahead with Hungary’s integration towards the west, continuing to attract foreign investment and joining Nato in 1999, but he turned against further privatisation and reneged on pricing agreements with the energy utilities.

It was a sign of things to come. Although the Socialists surprisingly returned to power in 2002, further  privatisations were restricted by concerted criticism from the right-wing opposition. Meanwhile government spending raised the budget deficit to the brink of disaster in 2006, before a second austerity package managed to restrict it to 9.3% of GDP.  In 2008, as the recession hit, Hungary needed an IMF bailout.

The resultant contraction of 6.8% of GDP in 2009 paved the way for Mr Orban to return to power in 2010 with promises of change. His Fidesz party won a “super majority” in parliament, allowing it to take control of most state institutions. Mr Orban moved swiftly, introducing a new constitution and laws regulating everything from the central bank and judiciary to churches and media – all with minimal consultation.

The opposition accused Mr Orban of removing checks and balances on democratic rule, prompting inconclusive European Union probes.  Meanwhile on the business front, his moves to introduce special, retroactive taxes on financial institutions, telecoms, utilities and and large retailers – mostly affecting foreign-owned companies – was the stuff of nightmares for CFOs.

Most importantly, his efforts to rid the banking sector of foreign-currency loans, taken out at seemingly attractive interest rates over the previous decade by householders, proved popular with the electorate but a disaster for the banks – who took (and are taking) huge losses as a result. Along the way, the government confiscated the mandatory private pension funds and began to buy back various energy and water utilities.

To the frustration of his opponents, Mr Orban’s unorthodox policies have actually produced some positive results. The budget deficit is within the 3% ceiling laid down by the Maastricht criteria, a strong manufacturing sector produces a balance of payments surplus, and a huge inflow of European Union funds has boosted investment. Mr Orban boasts that the economy – expected to grow by around 3.2% this year – is one of the best performing in Europe.

April elections saw Fidesz returned to power with another two-thirds majority, although again the actual percentage of votes taken by the party – 45% – was offset by changes in the electoral law.

Any notion that life would become less tumultuous was quickly dashed: within days the government was accusing Norway of funding a batch of NGOs for political subversion. It quickly introduced a new advertising tax structured on revenues which was widely seen as aimed at crippling RTL Klub, the most popular, but foreign-owned, television channel. And by October the government was embroiled in a bizarre row with the US after pro-Fidesz media revealed Washington had banned entry to six government employees on suspicion of complicity in corruption. US Senator John McCain added to the souring in relations by calling Mr Orban a “neo-fascist dictator”.

Although relatively small in size, street protests against Mr Orban – and the alleged corruption of his government – have been increasing since October. His popularity has slumped in opinion polls, but with a divided opposition and overwhelming majority in parliament, his government looks safe until 2018.

As one west European diplomat put it to CEFO: “Being in Hungary is like a World Cup penalty shoot-out every day.”

Kester Eddy is a freelance journalist, originally from the UK, who first moved to Hungary in 1986. He has written on Hungary and the region for publications such as the Financial Times, Economist Intelligence Unit and Business New Europe.

 

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