Hungary’s economic prospects

There is a financier of Hungarian origin who left with his mother for the United States in 1956. He was fourteen years old at the time. He finished high school in Washington and went on to get a degree in economics at the University of Pennsylvania. That was in 1964. He then continued his studies at Oxford University, earning a law degree. Subsequently he spent most of his time in England. First he worked at the Bank of England, and later he became head of an investment bank. He has been living in Hungary since 1992 and, since he is financially secure, seems to be doing what he enjoys: he teaches at a university, writes interesting articles about economics and finance, and gives interviews. His name is Péter Róna.

I have always been impressed by Róna’s analyses. He talks about the low employment figures, about the fact that 2,8 million people support 10 million citizens. Or, as he put it, while in Hungary one employed person maintains himself and two and half other persons, in the United States one employed person takes care of himself plus one and a quarter others. In France, these figures are even lower. He points out that two hundred thousand people live on assistance which on the average amounts to 55,000 Ft per person. That comes to 200 billion forints a year. Most of these people work on the side (and, of course, below the radar of the tax and assistance offices). It is perhaps not surprising that according to the latest study by the statistical office, 90 percent would be unwilling to work on the books if given the opportunity. The number of people employed in the public sector is very high. Something like 800,000. The local governments are also too big and therefore too expensive.

Róna’s remedy is to my mind less incisive. Basically what he is saying is that Hungary should face the fact that it doesn’t have the population with which to catch up to the more developed west. So rather than imitate the west, Hungary should be more modest and try to find some way to build an economy that does not require a well educated, sophisticated populace. Róna proposes that Hungary should be satisfied with the status of an agricultural country. There is a great opportunity here, he believes. With global warming there is a water shortage almost everywhere, but in the Carpathian basin water pours in from everywhere. Every spring and fall the government makes great efforts to get rid of all the water. Instead, they should build huge reservoirs that could be used for irrigation. Hungary could be a paradise with wonderful vegetables. And the uneducated masses could find employment. According to him at least 500,000 people could be employed in this agricultural industry.

Well, I don’t believe that this is the way forward, though Hungary could certainly do a better job with agriculture than it does now. But Róna is an astute analyst who understands Hungary’s economic woes. And so I’m passing on his comments on the economic results of the referendum. Yesterday he phoned György Bolgár (Megbeszéljük!/Klubrádió) and gave the following assessment of the situation. The Hungarian people voted down co-payment, hospital fees, and tuition. So Hungarians who use these services "saved" about 80 billion forints. But on the other side of the ledger Standard & Poor’s announced a downgrade of its economic outlook for Hungary. That will mean that Hungary will have to pay higher interest rates on government bonds in order to make them more attractive to foreign buyers. According to Róna, Hungary will lose about 100 billion forints as a result of this downgrade. Thus, someone ought to explain to those Fidesz voters who voted with "yes" on the three questions of the referendum that what they took away from their doctors and institutes of higher education they gave to foreign speculators. They ought to love this: they hate foreigners, they hate speculators, and they especially hate foreign speculators.

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kincs
Guest

Eva: I take that by “2,800 million people” you mean 2.8 million, or 2,800,000. The reference to “200 thousand milliard” is a bit confusing also.

Sandor
Guest
I am not enamored by the analysis, nor by the remedy. It doesn’t seem to be sound judgement to suggest developing the agricultural sector, meanwhile the Union is paying farmers to reduce their output. Although it is true that the supply of food stuffs has difficulty to catch up with the demand and it seems to be a long term trend, but the Hungarian agriculture is hopelessly backward and fragmented, therefore, it wouldn’t have any prospects of competing with the large, industrialized producers of the West. Nor does the country have distribution systems to reach the available markets. For example, China is buying any food available anywhere, especially meat, and at the same time Hungarian pork producers are drastically cutting production, because they are unable to compete with the import products, even in the domestic market. However the real problem is rather structural in nature. In most of the advanced agricutural ecomomies the population necessary to operate the production is 2-5% and is still declining. The productivity of such national agriculture is so high that it simply is unable, or what is worse unwilling, to employ any larger population. In Hungary the agriculturally occupied population is around 25-30%, far too… Read more »
Varangy
Guest

Róna’s ‘analysis’ and prescription are horrific. I sense that it is partially based on a false and fatalistic Magyar folk-belief that many people, including some in my family, subconsciously subscribe to.
One of my uncles has been trumpeting a variant of this for the last 15 years:
Namely, Hungary’s past was in agriculture, it will never be a ‘rich country’ for X, Y, and Z reasons — and therefore, its future is agriculture.
Nonsense for the reasons stated by Sanyi above.
As far as: Global warming is causing water shortages except for within the Carpathian basin, and we then capture all this water and grow a veritable Magyar garden of Eden while employing an additional .5m people….
That is not even nonsense. That is moronic and insane supposition based on fantasy with no basis in reality or markets. I don’t know how anyone can take him seriously.
*****According to Róna, Hungary will lose about 100 billion forints as a result of this downgrade.*****
As ‘vtballs’ has pointed out elsewhere on this site, the referendum was the medium by which Hungary’s populace communicated its feelings on quasi marketbased healthcare. S&P merely modified its rating with the advent of this new information.

John Hunyadi
Guest

Well, I’m just glad that no one is suggesting that Hungary’s future is in the manufacturing sector!
I agree with the above comments that agriculture in Hungary is inefficient and would need major reform (not least in the laws on land ownership) before it could hope to realise its potential. If, somehow, it could be revitalised and become a major employer then that would not solve Hungary’s employment problem – many of the workers would, no doubt, come from Ukraine (which already supplies Poland with much of its seasonal agricultural workforce).
Sandor is right that Hungary’s future probably lies mainly in the service sector. There are problems even there, because competition from other countries is strong. Hungary has a relatively small pool of IT professionals and employment costs here are higher than in many other countries in Central and Eastern Europe, let alone Asia. Even within the EU, Hungary must compete with the likes of Bulgaria and Romania. As for tourism, Hungary has potential in niche areas such as health spas, gastronomy/wine and nature tourism but needs investment in infrastructure, in education (not least foreign language skills which are comparatively poor) and in marketing.

Lia
Guest

I think it is premature to discuss what Hungary’s future is in, be that agriculture, wellness or the service sector. Until Hungary follows the advice Lajos Bokros gave to the other emerging markets of Eastern Europe (and which they wisely followed) and adapts a flat tax system, investors will go elsewhere and Hungarians will continue to be taxed to death. Entrepreneurism cannot and will not flourish under the current, archaic, complicated, blood-sucking tax system. The Cato Institute in Washington, DC recently wrote an interesting piece on the flat tax in Eastern Europe and cannot fathom why Hungary is the only country in the region not to go this route. The benefits of the flat tax are available online for anyone who is interested, for example here http://www.adamsmith.org/pdf/flattax.pdf

Sandor
Guest

About the flat tax.
The Cato Institute and their hairbrained economic schemes have been ” often depricated but seldom duplicated.”
The problems of flat tax are manyfold and it is no accident that not one single self-respecting country of any importance has ever introduced it. Not even the Mecca of monetarism, Hong Kong.
Amongs others, the main problems of the flat tax are that it reduces the governments ability to redistribute and the other is that it penalizes the poor and favours the rich.
But, of course, it also severely curtails the government in applying monetary policy to direct the economy.
The flat tax is a political adventure, equivalent of climbing the Mount Everest: a few try it, some die trying it, and almost nobody makes a habit of it.

Varangy
Guest

@Sanyikám
******Amongs others, the main problems of the flat tax are that it reduces the governments ability to redistribute******
That is not a problem, that is partially the point.
******and the other is that it penalizes the poor and favours the rich.******
Please expound.
******But, of course, it also severely curtails the government in applying monetary policy to direct the economy.******
Again, please expound.

Lia
Guest
Sandor — I assume from your comments that you were educated during the Communist regime and/or you never lived in a true, free market society, in which case it will be difficult for you to understand simple economics. But I will try anyway. Read this: http://www.heritage.org/Press/Commentary/ed041405c.cfm Here is the money quote: “Other countries certainly seem to realize the importance of “tax competition.” Eight nations in Eastern Europe have adopted flat taxes, for instance, including a 13 percent flat tax in Russia. Two of the countries, Romania and Georgia, adopted the flat tax this January, and Poland just announced that it will be hopping on the flat-tax bandwagon. All of these former Soviet-Bloc countries recognized that it was very difficult to overcome the legacy of communism while burdened with high tax rates and discriminatory taxes on saving and investment. Leaders from these nations understand that a flat tax draws job-creating capital. They understand that a low tax rate rewards productive activity. Other nations have cut tax rates deeply. Ireland doesn’t have a flat tax, but it has slashed its corporate tax rate from 50 percent to 12.5 percent. Combined with other tax cuts, this helped turn the “Sick Man of Europe”… Read more »
Adrian
Guest

Ireland’s abundant supply of well educated anglophone professionals and its postion in the European Union preceded in fact enabled its tax regime.

Adrian
Guest

Eva,
It’s off-topic I know, but do you have any evidence of ‘forced’ linguistic assimilation? I’m aware of anti-Welsh laws, but not of anti-Irish.

Lia
Guest

No offense, but what does the fact that the Irish speak English have to do with anything? So do the Brits, but it was the Irish who slashed their corporate tax rates from 50 to 12.5%, which encouraged growth and investment. The Scandinavians are excellent English speakers thanks to their education system which encourages learning English from a very early age, but their tax systems suck, which is why so many Scandinavians (and Scandinavian companies for that matter) leave Scandinavia to work in the U.K. and the U.S. Why? To increase their take home pay, by paying less taxes, pure and simple. And Scandinavia’s loss is the U.S.’s gain.

Adrian
Guest
Lia, OK this will have to be from memory rather than reliable sources, but the story goes something like this…. During the mid 1980’s the Economist ran a survey on Ireland under the headline “The poorest of the rich”. One of the questions it raised was how on earth such a poor country could afford such a lavish education system. In the short-term it did seem ridiculous, a significant number of those well educated professionals that Ireland had paid to train were working alongside me in London paying British taxes. Then in 1992 came the single European market. No great shakes in itself, in 1994 those same Irish professionals were working alongside me in Budapest, as Beckett’s Irish bar bares witness to. But in the late 1990s came the internet fueled American tech boom, and those American companies were looking for a low labour cost base within the EU that spoke their language: Ireland. The Irish government were quick to know a good thing when they saw one and lowered their corporate tax rates as an incentive to further FDI. By the late 1990s the Irish government were begging all those expat professionals to come back home, they’d even take… Read more »
Eric
Guest

While all for flat taxes and the logic, I’d like to point out one other interesting point from Rona’s analysis – and see your reactions… We’ve got nearly 10M people here, 2.8M work (and I guess at least 1/3 actually pay all the tax)… The fees would have squarely hit the users of the services; however, the extra costs that come out losing world investor confidence will only be picked up by that small percentage of people actually paying the majority of the taxes.
Couple that with the tax regime in general, and would anybody agree with the following… Hungary is not a caring society; but rather one that is happy to stick it to the weak?
(I’m not defending this position, just positing it).

Sandor
Guest
Dear Varangy and Lia, The assumption that I am an archeological find from the communist era and also a country bumpkin from the boondocks is charming, but not completely correct. Most of my life I lived in Toronto and finished university here in economics. I am also professionally occupied in matters of economy and finance. That all doesn’t mean that I must be right, it only means that I have a reason to sound my opinion. So, first let me address the flat tax. To Varangy, the tax regimen is often used by governments to influence the economy, by applying incentives, or penalties to certain economic activities in order to encourage, or discourage them. Most recently for example, the US government introduced generous incentives for those investing in methanol production. If there were a flat tax all those incentives and penalties would become unavailable. Similarly, a government, when trying to address social problems, may tax the wealthier stratum and redistribute the proceeds to the needy. This is a fundamental role the government must play and those countries where this functions well, like for example India, even the poorest people receive sustenance thanks for the redistribution. This also helps the poor… Read more »
Odin's lost eye
Guest
There are several huge ‘fault lines’ in the Hungarian system. These include taxation policies, lack of internal capitalization, the marketing structures for the farm products are monopolistic and without true competition. There is a gross lack of true mechanical skills. The is the ‘brown envelope’ syndrome amongst officials. The worst of all is the traditional Hungarian ideas of ‘make your pile and move to Vienna/Paris to spend it’ and ‘cheat whenever you can’. The lack of internal capitalization means that it is foreigners who take the profits and leave behind only the ‘wages earned’ A monopolistic marketing structure for the farm products leads to abuses by the buyers of those products. Several local Junker farmers have not been paid for their milk for over a year, but as they say “Where else can we sell it? They have us under contract!” I have an old friend Seb who is an arable farmer (no animals), with some 200 Hectars of land, in the UK. Late last year –the quiet time in an arable farmer’s year- he came over to visit me. We visited some ‘Junker farmer’ in the southern Great Plains. Seb managed to avoid the worst of the ‘palinka’ etc… Read more »
Varangy
Guest
@Sanyikám *****Most of my life I lived in Toronto and finished university here in economics. I am also professionally occupied in matters of economy and finance. That all doesn’t mean that I must be right, it only means that I have a reason to sound my opinion.***** It_doesn’t_mean_that_you_must_be_right? Thank you for such condescending faux-humility. *****To Varangy, the tax regimen is often used by governments to influence the economy, by applying incentives, or penalties to certain economic activities in order to encourage, or discourage them. Most recently for example, the US government introduced generous incentives for those investing in methanol production. If there were a flat tax all those incentives and penalties would become unavailable.***** Thank you, Captain Obvious. As I pointed out in a comment above, “That is not a problem, that is partially the point.” Government bureaucrats regularly distort the economy by creating tax incentives exactly like the one you mentioned. Why doesn’t the government give me generous tax breaks for, say, producing chocolate covered bananas? They certainly taste great and everybody loves them. I would only buy organic fair trade cocoa, if given a tax break. And everyone would be better off, no? Me. My customers. The cocoa… Read more »
Viking
Guest
Varangy – I do not get it (Yeahh I know you cannot decide if I am “willfully thick or just painfully ignorant?” as you write on your monologue (http://frappansklise.tumblr.com/) on March 3), but excuse a dyslexic Swedish 9 year Primary School dropout. Earlier in this thread (March 21, 2008 at 02:07 AM), you posted: —————— *****According to Róna, Hungary will lose about 100 billion forints as a result of this downgrade.***** As ‘vtballs’ has pointed out elsewhere on this site, the referendum was the medium by which Hungary’s populace communicated its feelings on quasi marketbased healthcare. S&P merely modified its rating with the advent of this new information. ——————- Do we agree on that S&P adjusted its rating after the referendum, based on the outcome of the referendum? The statement “Hungary’s populace communicated its feelings” means that they participated (and the part that did not participate) in the referendum. Is that not the reason why you have a referendum? Is not the main problem that – Can you have a reform in Hungary without pissing people off? Does this not mean = If you do (piss people off), the S&P-types should lower their ratings? Ergo, no reforms then the people… Read more »
Sandor
Guest
*****Most of my life I lived in Toronto and finished university here in economics. I am also professionally occupied in matters of economy and finance.
That all doesn’t mean that I must be right, it only means that I have a reason to sound my opinion.***** It_doesn’t_mean_that_you_must_be_right? Thank you for such condescending faux-humility. The only kind I know. Without it I might seem reasonable. You must be a very angry young man. It’s OK. 
*****To Varangy, the tax regimen is often used by governments to influence the economy, by applying incentives, or penalties to certain economic activities in order to encourage, or discourage them. Most recently for example, the US government introduced generous incentives for those investing in methanol production.
If there were a flat tax all those incentives and penalties would become unavailable. ———— Thank you, Captain Obvious. As I pointed out in a comment above, “That is not a problem, that is partially the point.” Government bureaucrats regularly distort the economy by creating tax incentives exactly like the one you mentioned. Why doesn’t the government give me generous tax breaks for, say, producing chocolate covered bananas? They certainly taste great and everybody loves them. I would only buy organic fair… Read more »
Varangy
Guest

@Sándor
It is frightening that you claim any sort of familiarity with ‘economy and finance’.
I am stupid, but at least I know exactly how ignorant I am.
You on the other hand, have no idea.

Varangy
Guest

@Sándor
I want to formulate a cogent response to your comment, but I find it impossible due to the myriad non sequiturs, logical errors and erroneous economic assumptions composing your comment.
@Lars/Viking
I have no idea what point you are trying to make in your comment — but I urge you to re-read vtballs’ comment. Namely,
“Stating that the referendum itself is the cause of the downgrade goes against the fundamental logic of financial markets as well as democratic principles. Referendums occur in democracies just as elections and financial results and statements for governments and business entities. Timely and accurate information is the key input to solid risk assessment. The referendum just made the information official, and it is in fact an report of the underlying performance.”
In other words, the referendum didn’t cause the downgrading — it merely provided insight into the true mental state of the Hun. people.

Sandor
Guest

Lars,
I wish you would do that.
My latest answer was admittedly scattered, because I directed it to the scattered claims I was trying to refute.
Varangy,
I didn’t mention the referendum at all. Nor the down grading. The subject was mostly the flat tax and policy in general.
By the way, If you admit stupidity, (which may not be necessary) add to your sins temerity as well. How could you judge my credentials while admitting ignorance?

Varangy
Guest

*****By the way, If you admit stupidity, (which may not be necessary) add to your sins temerity as well. How could you judge my credentials while admitting ignorance?*****
@Sándor
Take the time to learn a bit of history.
“I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser to this small extent, that I do not think I know what I do not know.”(Plato 44)

Adrian
Guest
Sandor
Guest

Varangy, I take your advise to heart and suggest that you do the same.
So, stop telling me what an idiot I am, while masquerading in the “superior” disguise of the ignorant.

Viking
Guest

Varangy,
To put it simple:
1) Which other OECD-country allows referendums on active parts of the State Budget during a period of austerity measurements?
2) Do you believe that it is good to have referendums on the popularity of the austerity measures?
3) Do you believe that International Rating Agencies should base their evaluation on the popularity of the austerity measurements, or on the Government’s effectiveness to implement them?
Simple questions makes for simple answers.

Sandor
Guest

Varangy, I invite you to take your own advise to heart, just like I do.
Consequently, as long as you are volunteering to admit ignorance, at least don’t knock my humble credentials.
In general, address the issue at hand instead of complaining about me personally.
You may consider me as an ignoramus, but neither a gentleman, nor Plato would use that as an argument.
So far all you offered was ideology, but you ignored even my simple arithmetic.
Bad form.

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